FONAR CORPORATION

       Preliminary Proxy - Annual Meeting of Stockholders - April 16, 2007

           THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned,  a stockholder of Fonar  Corporation  (the  "Company"),  hereby
revoking any proxy  heretofore  given,  does hereby appoint Raymond V. Damadian,
David B. Terry, and Kurt Reimann,  and each of them,  proxies with full power of
substitution,  for and in the  name of the  undersigned  to  attend  the  Annual
Meeting of the  Stockholders of the Company to be held at the Double Tree Hotel,
Wilmington Downtown, 700 King Street, Wilmington,  Delaware on April 16, 2007 at
10:00 a.m.,  local time, and at any  adjournment(s)  thereof,  and there to vote
upon all matters  specified in the notice of said meeting,  as set forth herein,
and upon such other  business  as may  properly  and  lawfully  come  before the
meeting,  all  shares of stock of the  Company  which the  undersigned  would be
entitled to vote if personally present at said meeting.

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

No. 1.  Election of Directors

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

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


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

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

The Board of Directors recommends a vote FOR the following proposals.

No. 2. To grant the Board of Directors the authority to amend our certificate of
incorporation  to effect a reverse  stock  split of our issued  and  outstanding
Common Stock,  Class B Common Stock,  Class C Common Stock and Class A Nonvoting
Preferred  Stock at a specific  ratio to be determined by the Board of Directors
within a range of one for ten and one for twenty-five.

               FOR               AGAINST               ABSTAIN

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


No. 3.   To grant the Board of Directors the authority to amend our certificate
of incorporation to effect a reverse stock split of our authorized number of
shares of Common Stock, Class B Common Stock, Class C Common Stock, Preferred
Stock and Class A Nonvoting Preferred Stock at a specific ratio to be
determined by the Board of Directors within a range of one for three and one
for ten.

               FOR                 AGAINST             ABSTAIN

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


No. 4.  To ratify the selection of Marcum & Kliegman LLP as the Company's
independent auditors for the fiscal year ended June 30, 2007.

               FOR                 AGAINST             ABSTAIN

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


No. 5. In their  discretion,  the Proxies are authorized to vote upon such other
business as may properly come before the meeting.

              AUTHORITY                              AUTHORITY
              GRANTED                                WITHELD
           +-------------+                        +-------------+
           /             /                        /             /
           /             /                        /             /
           +-------------+                        +-------------+

The Board of Directors recommends a vote AGAINST the following proposal.

No. 6.  To limit certain management compensation.

               FOR                 AGAINST             ABSTAIN

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


                          Dated:  ______________________, 2007


                          __________________________________
                          Signature


                          __________________________________
                          Signature if jointly held

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

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


                            SCHEDULE 14A INFORMATION

Proxy Statement  Pursuant to section 14(a) of the Securities and Exchange Act of
1934 (Amendment No.   )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[X]  Preliminary Proxy Statement

[ ] Confidential,  for  Use of the  Commission  Only (as  permitted by Rule 14a-
    6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to  240.14a-12


                                Fonar Corporation
                     ......................................
                (Name of Registrant as Specified In Its Charter)

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

Payment of Filing Fee (Check the appropriate box):

[X] No fee required

[ ] Fee computed on table below per Exchange Act Rules 14-6(i) (1) and 0-11.

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

                                       N/A

     ..................................................

     2)   Aggregate number of securities to which transaction applies:

                                       N/A

     ..................................................

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

     ..................................................

     4)   Proposed maximum aggregate value of transaction:

                                       N/A

     ..................................................

     5)   Total fee paid:

                                      N/A

     ..................................................

[ ] Fee paid previously with preliminary materials.

[ ]  Check box if any part of the fee is offset as provided by Exchange Act Rule
     0-11(a) (2) and identify the filing for which the  offsetting  fee was paid
     previously.

          1) Amount Previously Paid:

          2) Form, Schedule or Registration Statement No.:

          3) Filing Party:

          4) Date Filed:


                                FONAR CORPORATION
                                110 MARCUS DRIVE
                            MELVILLE, NEW YORK 11747
                                 (631) 694-2929

                    NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
                                 April 16, 2007


To The Stockholders:

The Annual Meeting of the stockholders of Fonar  Corporation will be held at the
Double Tree Hotel,  Wilmington Downtown, 700 King Street,  Wilmington,  Delaware
19801  (302-655-0400),  on April 16,  2007,  at 10:00  a.m.  local  time for the
following purposes:

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

2. To  consider  and act upon a  proposal  to grant the Board of  Directors  the
authority to amend our  certificate of  incorporation  to effect a reverse stock
split of our issued and outstanding  Common Stock, Class B Common Stock, Class C
Common  Stock and Class A Nonvoting  Preferred  Stock at a specific  ratio to be
determined  by our Board of Directors  within a range of one for ten and one for
twenty-five.

3. To  consider  and act upon a  proposal  to grant the Board of  Directors  the
authority to amend our  certificate of  incorporation  to effect a reverse stock
split of our authorized number of shares of Common Stock,  Class B Common Stock,
Class C Common Stock, Preferred Stock and Class A Nonvoting Preferred Stock at a
specific ratio to be determined by our Board of Directors  within a range of one
for three and one for ten.

4. To ratify the  selection of Marcum & Kliegman LLP as the  Company's  auditors
for the fiscal year ended June 30, 2007.

5. To consider and act upon a stockholder proposal described in the accompanying
proxy statement to limit certain management compensation.

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

Only  stockholders  of  record  at the  close of  business  on March 1, 2007 are
entitled to notice of, and to vote at, this meeting. A list of such stockholders
will be available for  examination by any stockholder for any purpose germane to
the meeting,  during  normal  business  hours,  at the  principal  office of the
Company, 110 Marcus Drive, Melville, New York, for a period of ten days prior to
the meeting.

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


                                       BY ORDER OF THE BOARD OF DIRECTORS

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


                                   PRELIMINARY
                                 PROXY STATEMENT
                              FOR ANNUAL MEETING OF
                     STOCKHOLDERS TO BE HELD APRIL 16, 2007


This proxy  statement,  which is first being mailed to  shareholders on or about
March 1, 2007, is furnished in connection  with the  solicitation  of proxies by
the Board of Directors of Fonar Corporation (the "Company"),  to be voted at the
annual  meeting of the  stockholders  of the Company to be held at 10:00 a.m. on
April 16, 2007 and any adjournment(s)  thereof for the purposes set forth in the
accompanying Notice of Annual Meeting of Stockholders.  Stockholders who execute
proxies retain the right to revoke them at any time prior to the exercise of the
powers conferred  thereby,  by delivering a signed statement to the Secretary of
the  Company at or prior to the annual  meeting or by  executing  another  proxy
dated as of a later date. The cost of  solicitation of proxies is to be borne by
the Company.

Only  stockholders  of record at the close of  business on March 1, 2007 will be
entitled to vote at the meeting. Shares of Common Stock are entitled to one vote
per share,  shares of Class B Common  Stock are  entitled to ten votes per share
and shares of Class C Common Stock are entitled to twenty-five  votes per share.
At the close of business on January 31, 2007,  there were issued and outstanding
121,559,660 shares of Common Stock held of record by 4,567  stockholders,  3,953
shares of Class B Common Stock held of record by 10  stockholders  and 9,562,824
shares of Class C Common Stock held of record by 4  stockholders.  The shares of
Class A  Nonvoting  Preferred  Stock,  7,836,287  shares held of record by 3,910
stockholders  at the close of business on January 31, 2007,  are not entitled to
vote, but are being mailed copies of this proxy  statement and proxies to enable
them to cast  non-binding  votes.  Except  for the  shares of Class A  Nonvoting
Preferred Stock, there are no shares of Preferred Stock issued and outstanding.

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

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


1. ELECTION OF DIRECTORS AND MANAGEMENT INFORMATION

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

DIRECTORS AND OFFICERS

Raymond  V.  Damadian,  M.D.  (age 70),  a nominee  for  Director,  has been the
Chairman of the Board and  President of FONAR since its  inception and Treasurer
since February,  2001. Dr. Damadian  received an M.D. degree in 1960 from Albert
Einstein  College of Medicine,  New York, and a B.S. degree in mathematics  from
the University of Wisconsin in 1956. In addition,  Dr. Damadian  conducted post-
graduate work at Harvard University,  where he studied extensively in the fields
of physics, mathematics and electronics. Dr. Damadian is a 1988 recipient of the
National  Medal  of  Technology  and in 1989  was  inducted  into  the  National
Inventors Hall of Fame, for his  contributions  in conceiving and developing the
application of magnetic resonance technology to medical  applications  including
whole body scanning and diagnostic  imaging.  Dr. Damadian is also the director,
President  and  Treasurer  of  the  Company's   subsidiary,   Health  Management
Corporation of America ("HMCA").

Claudette  J.V.  Chan (age 69), a nominee for  Director,  has been a Director of
FONAR since October 1987. Mrs. Chan has been employed since 1992 by HMCA and its
predecessor,  Raymond V. Damadian,  M.D. MR Scanning Centers Management Company,
as "site  inspector," in which capacity she is responsible  for  supervising and
implementing  standard  procedures and policies for MRI scanning  centers.  From
1989  to 1994  Mrs.  Chan  was  employed  by St.  Matthew's  and  St.  Timothy's
Neighborhood  Center,  Inc.,  as the  director  of  volunteers  in the "Meals on
Wheels" program, a program which cares for the elderly.  She received a bachelor
of science degree in nursing from Cornell  University in 1960.  Mrs. Chan is the
sister of Raymond V. Damadian.

Robert J. Janoff (age 79), a nominee for Director,  has been a Director of FONAR
since  February,  1989.  Mr.  Janoff  has been a  self-employed  New York  State
licensed private  investigator for more than thirty-five  years and was a Senior
Adjustor in Empire  Insurance  Group for more than 15 years until  retiring from
that position on July 1, 1997.  Mr.  Janoff also served,  from June 1985 to June
1991,  as President of Action Data  Management  Strategies,  Ltd., a supplier of
computer  programs  for use by  insurance  companies.  Mr.  Janoff is a Director
Emeritus  of  Harmony  Heights of Oyster  Bay,  New York,  which is a  nonprofit
residential school for girls with learning disabilities.

Charles N. O'Data (age 70), a nominee for Director, has been a Director of FONAR
since  February,  1998. From 1968 to 1997, Mr. O'Data was the Vice President for
Development  for  Geneva  College,  a liberal  arts  college  located in western
Pennsylvania.  In that  capacity,  he acted as the  College's  chief  investment
officer.  His  responsibilities  included  management of the College's endowment
fund and fund  raising.  In July 1997,  Mr. O'Data  retired from Geneva  College
after 36 years of service to assume a position of National  Sales  Executive for
SC Johnson Company's  Professional Markets Group (a unit of SC Johnson Wax), and
specialized  in  healthcare  and education  sales,  a position he held until the
spring of 1999. Mr. O'Data presently acts an independent financial consultant to
various  entities.  He  founded  The  Beaver  County  Foundation,   a  Community
Foundation,  in 1992,  and  serves  as its  President.  Mr.  O'Data  served as a
director of Heritage  Valley Health System,  The Medical  Center,  Beaver for 25
years,  three years as  Chairman.  Mr.  O'Data is a graduate of Geneva  College,
where he received a B.S. degree in Economics in 1958.

Robert  Djerejian  (75),  a nominee for  Director,  has been a Director of Fonar
since June, 2002. Since 1996 Mr. Djerejian has served as a senior consultant for
Haines,  Lundberg & Waehler International,  (HWL International) an architecture,
design and engineering firm, which among other specialties designs hospitals and
laboratories. Prior to that time he was the Senior Managing Partner of the firm.
Mr.  Djerejian  serves on the Board of Trustees of Pratt  Institute,  as Trustee
Emeritus and was one of the founding  directors of the Board of Directors of the
Delaware  College of Art and Design.  Mr.  Djerejian is a Member Emeritus of the
American Institute of Architects. He is a graduate of The School of Architecture
of Pratt Institute, where he received a B.A. in Architecture in 1955.

David B. Terry (60) is the Senior Vice  President  and Secretary of the Company.
Mr.  Terry  has  been  serving  as Vice  President  since  December  1998 and as
Secretary since May, 1990.  Previously,  he served as Treasurer from May 1990 to
December,  1998, as Secretary  from July 1978 through June 1987 and as Treasurer
from August 1981  through June 1987.  From July 1978  through June 1987,  he was
also a Director  of the  Company.  Mr.  Terry is a brother  in-law of Raymond V.
Damadian.

INFORMATION REGARDING THE BOARD AND ITS COMMITTEES

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

During the year ended June 30, 2006 the Board of Directors unanimously consented
to take action in lieu of a meeting on four  occasions,  and the audit committee
met four times.

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

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

In accordance with the Nasdaq  Marketplace Rules, the Board of Directors adopted
a written  charter for the audit  committee  which took effect in June, 2001 and
was revised on November 17, 2004.  All of the  directors on the audit  committee
are independent.

AUDIT COMMITTEE

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

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

AUDIT COMMITTEE REPORT

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

Based on the foregoing review and discussions,  the audit committee  recommended
to the Board of Directors that the audited  financial  statements be included in
the  Company's  Annual  Report on Form 10-K for the  fiscal  year ended June 30,
2006.

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


VOTE REQUIRED AND BOARD RECOMMENDATION

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


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

The following table sets forth information regarding the beneficial ownership of
the Company's  common shares by the nominees for directors,  the Company's Chief
Executive  Officer,  and the directors  and executive  officers as a group as of
January 31, 2007.


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                2,588,274                   2.13%
    Class C Stock               9,561,174                  99.98%
    Class A Preferred             477,328                   6.09%


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


Robert J. Janoff
Director
    Common Stock                   90,000                    *
    Class A Preferred               1,999                    *


Charles N. O'Data
Director
    Common Stock                      700                    *


Robert Djerejian
Director
    Common Stock                        0                    *

All Officers, Directors and Nominees
as a Group (6 persons) (2) (3)
    Common Stock                2,703,287                   2.22%
    Class C Stock               9,561,174                  99.98%
    Class A Preferred             480,165                   6.13%
___________________________
*   Less than one percent


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

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

3.  Includes  options  to  purchase  21,372  shares of Common  Stock  held by an
officer.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See Item 13, "Certain  Relationships and Related  Transactions" of the Company's
Annual  Report on Form 10-K for the fiscal  year  ended  June 30,  2006 which is
specifically  incorporated  by  reference  herein.  A copy of the  Form  10-K is
included  in the  Annual  Report  to  Stockholders  which is  being  sent to the
Company's stockholders with this Proxy Statement.)

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

COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.

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

As noted above,  the Company's  compensation  policy is primarily based upon the
practice of  pay-for-performance.  Section  162(m) of the Internal  Revenue Code
imposes a limitation on the deductibility of  nonperformance-based  compensation
in excess of $1 million paid to the Chief Executive  Officer.  No officer of the
Company  received  compensation in excess of $1 million in fiscal 2006 or in any
previous  fiscal year. The Board  currently  believes that the Company should be
able to continue to manage its executive  compensation  program for others so as
to preserve the related federal income tax deductions.

The following  table discloses  compensation  received for the three years ended
June 30, 2006 by the Company's Chief Executive Officer.

Name and                       Annual Compensation   Long-Term
Principal Position             -------------------   Compensation   All Other
Position              Year     Salary        Other   Awards         Compensation
-------------------   ----     ----------    -----   ------------   ------------
Raymond V. Damadian   2006     $93,059.68      0           0             0
Chairman of the;      2005     $86,799.98      0           0             0
Board; President;
Chief Executive
Officer;              2004     $86,799.99      0           0             0
Director

COMPENSATION PURSUANT TO STOCK OPTIONS AND SAR GRANTS

No stock  options or stock  appreciation  rights were  granted to the  Company's
Chief Executive Officer during fiscal 2006.

OPTION/SAR EXERCISES AND YEAR END VALUES

No options or stock  appreciation  rights were exercised by the Company's  Chief
Executive  Officer during fiscal 2006. The Company's Chief Executive Officer did
not hold any unexercised stock options or stock  appreciation  rights at the end
of fiscal 2006.

PERFORMANCE GRAPH

The following graph compares the annual change in the Company's cumulative total
shareholder  return on its Common Stock during a period  commencing  on June 30,
2001 and ending on December 29, 2006 (as measured by dividing (i) the sum of (A)
the cumulative amount of dividends for the measurement period, assuming dividend
reinvestment and (B) the difference between the Company's share price at the end
and the  beginning  of the  measurement  period;  by (ii) the share price at the
beginning of the  measurement  period) with the cumulative  total return of each
of: (a) the CRSP Total Return Index for Nasdaq U.S.  companies  ("Nasdaq");  (b)
the CRSP Total  Return  Index for Nasdaq  Medical  Device  Manufacturers  ("Nas-
MDM");  and (c) the CRSP Total Return Index for Nasdaq Health  companies  ("Nas-
Hea.")  during such period,  assuming a $100  investment  on June 29, 2001.  The
stock price  performance  on the graph below is not  necessarily  indicative  of
future price performance.

                   6/30/01  6/29/02  6/28/03  6/30/04  6/30/05  6/30/06 12/29/06
                   -------  -------  -------  -------  -------  -------  -------
Fonar Common Stock $100.00  $100.02  $ 67.01  $ 65.98  $ 61.86  $ 28.35  $ 14.43
NASDAQ-US          $100.00  $ 68.12  $ 75.63  $ 95.33  $ 96.36  $102.46  $113.84
NAS-MDM            $100.00  $ 90.84  $ 97.30  $138.81  $142.68  $151.00  $192.77
NAS-Hea.           $100.00  $ 98.18  $103.34  $153.47  $193.93  $222.45  $222.88


2.   APPROVAL OF AMENDMENT TO CERTIFICATE OF  INCORPORATION  TO EFFECT A REVERSE
     STOCK SPLIT

On January 2,  2007,  our board of  directors  unanimously  adopted  resolutions
declaring the advisability of and approving,  subject to a stockholder approval,
the  amendment of our  certificate  of  incorporation  to effect a reverse stock
split of our issued and outstanding  Common Stock, Class B Common Stock, Class C
Common Stock and Class A Nonvoting  Preferred  Stock,  at a specific ratio to be
determined  by the board of directors  within a range of one-for ten and one-for
twenty-five.  Our  board  of  directors  has  deemed  it  advisable  and  in our
stockholders' best interests to amend our certificate of incorporation to effect
a reverse  stock split of our common stock at a specific  ratio to be determined
by the  board  of  directors  within  a range  from  one-for  ten and  one-  for
twenty-five.  Our board of directors'  intent is to effect a reverse stock split
as soon as practical after our annual meeting.

If this  Proposal 2 is  approved  and after our board of  directors  selects the
exchange  ratio  for  the  reverse  stock  split,  then  all of the  issued  and
outstanding  shares of all class of our capital stock on the date of the reverse
stock split will be automatically  converted into a smaller number of shares, at
the reverse stock split ratio selected by the board of directors. The ratio will
be no greater than one-for ten, and no less than one-for twenty-five.  The ratio
will be the same for each class of our capital stock so that the relative voting
and economic rights of the different  classes will remain the same as before the
reverse  split.  In  determining  the reverse  stock split  ratio,  our board of
directors will consider numerous factors, including the historical and projected
performance  of our common  stock  before  and after the  reverse  stock  split,
prevailing  market  conditions  and  general  economic  trends,  as  well as the
projected  impact of the reverse  stock split on the  trading  liquidity  of our
common stock and our ability to continue to maintain our common stock's  listing
on the Nasdaq market.

We are proposing that our board of directors have this  discretion,  rather than
proposing that  stockholders  approve a specific ratio at this time, in order to
give the board the  flexibility  to  implement a reverse  stock split at a ratio
that  reflects  the board's  then-current  assessment  of the factors  described
above,  including our  then-current  stock price.  The reverse stock split would
become  effective  upon  the  filing  of  a  Certificate  of  Amendment  of  our
Certificate  of  Incorporation  with the  Secretary  of  State  of the  State of
Delaware.  The form of the  Certificate of Amendment to effect the reverse stock
split is attached to this proxy statement as Appendix A.

PURPOSE OF REVERSE STOCK SPLIT

The board of directors  believes  that the proposed  reverse  stock split,  at a
ratio ranging from one-for-ten and one-for-twenty-five, is necessary to maintain
our  listing  on the Nasdaq  Market by  reducing  the number of our  outstanding
common  shares in order to increase the trading  price of such shares on Nasdaq.
In order to remain listed on the Nasdaq Market,  our common shares must meet the
continued  listing  requirement  of a minimum  bid price of $1.00 per share.  In
December of 2005,  we received  our first notice from Nasdaq that we were not in
compliance  and giving us 180 days to come into  compliance.  Because we were in
compliance with the other requirements for continued listing, we were granted an
additional 180 days to regain  compliance in June,  2006.  Since we failed to do
so, the Nasdaq Staff  recommended  delisting in December,  2006.  We requested a
hearing at which we must  convince  the panel that we have a viable plan to meet
the minimum bid price requirement. We have been advised the only plan which will
be acceptable  at this point is a reverse stock split on a short term basis.  It
is  anticipated  that the  increase in the per share  market price of our common
stock will prevent our stock from being delisted from the Nasdaq Market.

DETERMINATION OF RATIO

The ratio of the reverse stock split,  if approved and  implemented,  will be an
integral number between and including ten and twenty-five,  as determined by our
board of directors in its sole  discretion.  In  determining  the reverse  stock
split ratio, our board of directors will consider numerous factors including:

*    the  historical  and projected  performance  of our common stock and volume
     level before and after the reverse stock split,

*    prevailing market conditions,

*    general  economic and other related  conditions  prevailing in our industry
     and in the marketplace generally,

*    the projected  impact of the selected  reverse stock split ratio on trading
     liquidity  in our  common  stock and our  ability  to  continue  our common
     stock's listing on Nasdaq,

*    our  capitalization  (including  the number of shares of our  common  stock
     issued and outstanding),

*    the  prevailing  trading  price for our common  stock and the volume  level
     thereof, and

*    potential devaluation of our market capitalization as a result of a reverse
     stock split.

The purpose of asking for  authorization  to implement  reverse stock split at a
ratio to be determined by our board of directors, as opposed to a ratio fixed in
advance,  is to give our board of directors the flexibility to take into account
then-current  market conditions and changes in our stock price and to respond to
other developments that may be deemed relevant, when considering the appropriate
ratio.

EFFECTS OF REVERSE STOCK SPLIT

A reverse stock split refers to a reduction in the number of outstanding  shares
of a class of a corporation's  capital stock,  which may be accomplished,  as in
this case, by reclassifying and combining all of our outstanding  shares of each
class of our  capital  common  stock into a  proportionately  smaller  number of
shares.  For example,  if our board decides to implement a  one-for-ten  reverse
stock split,  then a stockholder  holding 1000 shares of our common stock before
the reverse  stock split would  instead  receive 100 shares of our common  stock
afterwards. Each stockholder's proportionate ownership of our outstanding shares
of common stock would remain the same.

The primary  purpose of the  proposed  reverse  stock split of is to combine the
issued  and  outstanding  shares of our common  stock  into a smaller  number of
shares so that the shares of our common  stock will trade at a higher  price per
share than their recent  trading  prices.  Although we expect the reverse  stock
split will result in an increase in the market  price of our common  stock,  the
reverse  stock split may not  increase  the market  price of our common stock in
proportion  to the  reduction  in the  number  of  shares  of our  common  stock
outstanding  or result in a  permanent  increase in the market  price,  which is
dependent upon many factors,  including our  performance,  prospects and general
market conditions.  The history of similar reverse stock splits for companies in
like  circumstances  is varied.  If the reverse  stock split is effected and the
market price of our common stock declines, the percentage decline as an absolute
number and as a percentage of our overall market  capitalization  may be greater
than would occur in the absence of a reverse stock split.

In addition to increasing  the market price of our common stock, a reverse stock
split will also affect the presentation of  stockholders'  equity on our balance
sheet.  Specifically,  because the par value per share of our capital stock will
not change,  the reduction in the number of outstanding  shares of capital stock
will cause our stated capital account to be reduced,  and our additional paid-in
capital to be increased by an equivalent amount. Total stockholders' equity will
remain unchanged.

EFFECT ON OUTSTANDING OPTIONS AND WARRANTS

The reverse stock split, when implemented,  will affect the outstanding  options
and  warrants  to  purchase  our  common  stock,  which  contain   anti-dilution
provisions.  All of our equity  incentive  plans  include  provisions  requiring
appropriate  adjustments  to the number of shares of common stock covered by the
plans and by stock options and other grants under those plans, as well as option
exercise prices. For example, if we implement a one-for-ten reverse stock split,
each of our  outstanding  stock options would  thereafter  evidence the right to
purchase one-tenth as many shares of our common stock and the exercise price per
share would be ten times the previous  exercise  price.  Further,  the number of
shares of our common stock reserved for issuance under our existing stock option
plans and stock bonus  plans will be reduced by the same ratio as  selected  for
the reverse stock split.

FRACTIONAL SHARES

If the effect of the reverse stock split results in some stockholders  receiving
fractional shares, fractional shares will be issued. No cash payments in lieu of
the issuance of fractional shares will be made.

ACCOUNTING MATTERS

The par value of the shares of our capital  stock is not changing as a result of
the  implementation  of the  reverse  stock  split.  Our stated  capital,  which
consists  of the sum of the par  value per  share of each  class of our  capital
stock  multiplied by the aggregate number of shares of each class of our capital
stock issued and outstanding,  will be reduced  proportionately on the effective
date  of the  reverse  stock  split.  Correspondingly,  our  additional  paid-in
capital,  which  consists of the  difference  between our stated capital and the
aggregate  amount  paid to us upon the  issuance  of all  currently  outstanding
shares of our capital stock, will be increased by a number equal to the decrease
in stated capital.  Further, net loss per share and book value per share will be
increased  as result of the  reverse  stock  split  because  there will be fewer
shares of capital stock outstanding.

IMPLEMENTATION OF REVERSE STOCK SPLIT; CERTIFICATE OF AMENDMENT

If our  stockholders  approve this Proposal 2, we will file the  Certificate  of
Amendment  included  as  Appendix A to this proxy  statement  (as  completed  to
reflect the reverse  stock split ratio as  determined by the board of directors,
in its  discretion,  within the range of  1-for-ten to 1-for-25 in order to give
effect to the reverse stock split).  The  Certificate  of Amendment  will become
effective when it is filed with the Secretary of State of the State of Delaware.

POSSIBLE DISADVANTAGES OF REVERSE STOCK SPLIT

Even though our board of directors  believes that the potential  advantages of a
reverse stock split outweigh any  disadvantages  that might result,  the reduced
number of shares of our common stock  resulting from a reverse stock split could
adversely affect the liquidity of our common stock.

EXCHANGE OF STOCK CERTIFICATES

If this proposal  authorizing the board of directors to amend our certificate of
incorporation to effect a reverse stock split of our common stock is approved by
our stockholders, and after our board of directors determines the exchange ratio
for a reverse  stock split,  we will  instruct our transfer  agent to act as our
exchange  agent and to act for  holders  of  common  stock in  implementing  the
exchange of their certificates.

Commencing on the effective date of a reverse stock split,  stockholders will be
notified and requested to surrender their  certificates  representing  shares of
our common stock to the exchange agent in exchange for certificates representing
post-reverse split common stock. One share of new common stock will be issued in
exchange for the number of presently issued and outstanding  pre-split shares of
our common stock  determined by the board of directors in the range  approved by
the stockholders. Beginning on the effective date of a reverse stock split, each
certificate  representing  shares of our  common  stock  will be deemed  for all
corporate  purposes to evidence  ownership of shares of our  post-reverse  split
common stock. Holders of warrants and other securities exercisable for shares of
our  common  stock  will  not be  requested  to  exchange  those  securities  in
connection with a reverse stock split. STOCKHOLDERS SHOULD NOT DESTROY ANY STOCK
CERTIFICATE(S)  AND SHOULD NOT SUBMIT ANY  CERTIFICATE(S)  UNTIL REQUESTED TO DO
SO.

FEDERAL INCOME TAX CONSEQUENCES

The following  summary of the federal income tax consequences of a reverse stock
split is based on current law,  including the Internal  Revenue Code of 1986, as
amended, and is for general information only. The tax treatment of a stockholder
may  vary  depending  upon  the  particular  facts  and  circumstances  of  such
stockholder,  and the discussion  below may not address all the tax consequences
for a  particular  stockholder.  For  example,  foreign,  state  and  local  tax
consequences are not discussed below.  Accordingly,  notwithstanding anything to
the  contrary,  each  stockholder  should  consult  his or her  tax  advisor  to
determine  the  particular  tax  consequences  to him or her of a reverse  stock
split,  including the  application  and effect of federal,  state,  local and/or
foreign income tax and other laws.

Generally,  a reverse stock split will not result in the  recognition of gain or
loss for federal  income tax purposes.  The adjusted  basis of the new shares of
our common  stock  will be the same as the  adjusted  basis of our common  stock
exchanged  for such new shares of our common  stock.  The holding  period of the
new,  post-split shares of our common stock resulting from implementation of the
reverse stock split will include the  stockholder's  respective  holding periods
for the pre-split shares of our common stock exchanged for the new shares of our
common stock.

NO DISSENTERS' RIGHTS

The  holders of shares of our common  stock will have no  dissenters'  rights of
appraisal  under Delaware law, our certificate of  incorporation  or our by-laws
with respect to the Certificate of Amendment effectuating a reverse stock split.

The  affirmative  vote of shares holding a majority of the votes  represented at
the meeting is required to adopt  Proposal 2 respecting the reverse stock split.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL.

3. REDUCTION OF NUMBER OF AUTHORIZED SHARES

Concurrently  with the  adoption of  resolutions  relating to the reverse  stock
split,  the Board of Directors  adopted  resolutions  to authorize  the Board of
Directors to amend our certificate of  incorporation to reduce the number of our
authorized  shares  of  capital  stock  by  effecting  a  reverse  split  of our
authorized  number  of shares of Common  Stock,  Class B Common  Stock,  Class C
Common  Stock,  Preferred  Stock and Class A  Nonvoting  Preferred  Stock,  at a
specific ratio to be determined by our Board of Directors  within a range of one
for three and one for ten. Except for shares of the Class A Nonvoting  Preferred
Stock, there are no issued and outstanding shares of Preferred Stock.

The reduction of authorized shares was intended to enable the Board of Directors
to protect the stockholders  from the dilution which could  conceivably occur if
the authorized  number of shares of Common Stock,  for example,  remained at its
current  level  of  150,000,000   shares  following  the  reverse  stock  split.
Nevertheless,  the range of ratios is  different  in order to leave the  Company
with the  flexibility  to  utilize  shares of stock  for  business  purposes  in
appropriate cases,  including  transactions such as acquisitions,  if a suitable
opportunity  arises.  Presently,  we have more than 121,000,000 shares of Common
Stock  outstanding  of  150,000,000  authorized.   In  addition  to  the  shares
outstanding,  additional  shares are reserved for  options,  the  convertibility
features of the Class B Common and Class C Common Stock and warrants. If we were
to reduce the  authorized  shares by the same ratio as the  reverse  split,  for
example  one for ten,  we would  have only 15  million  shares  of Common  Stock
authorized of which  approximately 12.1 million would be issued and outstanding.
We do not  believe  this  would  leave  us with  sufficient  flexibility  in any
possible  transaction.  At  the  present  time,  however,  we do  not  have  any
acquisition or similar transaction pending or planned.

To the extent the ratio of reducing  authorized shares is less than the ratio of
reducing outstanding shares, some stockholders may construe this as creating the
possibility  of  diluting  their  positions.  It may be  construed  as having an
anti-takeover effect, since shares could be issued to persons who would oppose a
hostile take-over or change of control.  It should be noted that in any case, by
virtue of his holding of over 99% of the outstanding  Class C Common Stock,  Dr.
Damadian  has and after any  reverse  stock  split will  continue to have voting
control of the Company.

The  affirmative  vote of shares holding a majority of the votes  represented at
the meeting is required to ratify the adoption of the Proposal 3 respecting  the
reduction  of the number of  authorized  shares of capital  stock.  THE BOARD OF
DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL.


4. RATIFICATION OF SELECTION OF AUDITORS

The Board of Directors  has  selected  Marcum & Kliegman  LLP, as the  Company's
independent  auditors for the fiscal year ending June 30, 2007. The stockholders
will be asked to ratify this action by the Board. Marcum & Kliegman LLP were the
Company's  auditors for the fiscal years ended June 30, 2004,  June 30, 2005 and
June 30, 2006.

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

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

AUDIT FEES

The  aggregate  fees  billed  by  Marcum  &  Kliegman  LLP for the  audit of the
Company's  annual  financial  statements for the fiscal year ended June 30, 2006
and the reviews of the financial  statements included in the Company's Forms 10-
Q for the fiscal year ended June 30, 2006 were $628,206.

The  aggregate  fees billed by Marcum & Kliegman for the audit of the  Company's
annual  financial  statements  for the fiscal  year ended June 30,  2005 and the
reviews of the financial statements included in the Company's Forms 10-Q for the
fiscal year ended June 30, 2005 were $542,643.

All work on the audits in each of the last two  fiscal  years was  performed  by
full-time permanent employees of Marcum & Kliegman LLP.

AUDIT-RELATED FEES

No audit-related fees were billed by Marcum & Kliegman LLP for the fiscal years
ended June 30, 2006 and June 30, 2005.

TAX FEES

The  aggregate  fees  billed by Marcum & Kliegman  LLP for tax  compliance,  tax
advise and tax  planning  in the fiscal  years  ended June 30, 2006 and June 30,
2005 were $221,681 and $149,793, respectively.

ALL OTHER FEES

The  aggregate  fees  billed by  Marcum &  Kliegman  LLP for all other  services
rendered by them  during the fiscal  years ended June 30, 2006 and June 30, 2005
were $62,644 and $264,646,  respectively,  which included services in connection
with the  registration  of securities and the accounting  consequences  of other
possible corporation transactions.

Since January 1, 2003, the audit  committee has adopted  policies and procedures
for  pre-approving  all non-audit work performed by its auditors.  Specifically,
the committee  must  pre-approve  the use of the auditors for all such services.
The audit committee has  pre-approved  all non-audit work since that time and in
making its determination  has considered  whether the provision of such services
was compatible with the independence of the auditors.

No fees were billed by Marcum & Kliegman LLP for the fiscal years ended June 30,
2006 or June 30, 2005 for designing, operating,  supervising or implementing any
of our financial information systems or any hardware or software systems for our
financial information.

The Company's audit  committee  believes that the provision by Marcum & Kliegman
LLP of  services  in  addition  to audit  services  in fiscal 2006 and 2005 were
compatible with maintaining their independence. The services to be performed are
presented by Marcum & Kliegman LLP to the committee or its chairman.  The matter
is then evaluated and a decision made.

5. SHAREHOLDER PROPOSAL TO LIMIT CERTAIN MANAGEMENT COMPENSATION

Mr. Robert D. Morse, of 212 Highland Avenue,  Moorestown,  New Jersey 08057-2717
has  notified the Company  that he intends to submit the  following  proposal at
this year's Annual Meeting:

The  remuneration  to any of the top five persons named in Management be limited
to $500,000  per year,  plus any nominal  perks.  This  program is to be applied
after any existing programs now in force for options, bonuses, SAR's, etc., have
been completed, and severance contracts should be discontinued, as they are also
a part of remuneration programs.

This  proposal  does not affect any other  personnel  in the  company  and their
remuneration programs.

                                     REASONS

The limit of one half million  dollars in  remuneration is far above that needed
to enjoy an elegant life-style.

Throughout Corporate history, only a few persons whom have created a corporation
now remain in Management.  Some descendents have inherited top positions,  while
most have  attained them through  recommendations,  ability,  or influence,  not
necessarily  providing  increased  earnings  for a company.  These come from the
product or services, its public acceptance, advertising and the workforce.

Due to an unfair removal of the word:  "Against" since about Year 1975, and ONLY
in the "Vote for Directors"  column,  Management  nominees for that position are
rarely  defeated,  as receiving only as little as one vote guarantees  election,
and in turn, Directors re-elect management and reward them. The term was devised
and  incorporated in 6 or 8 states of high company  registrations as a state and
corporate  "Rule".  "Right of Dissent" is denied,  and  shareowners may not vote
"No" or "Against" and counted as such.

This unfairness has yet to be corrected by the Commission as requested.

The Ford Motor  Company  reinstated  "Against"  several  years ago,  showing the
American Way of proper corporate proxies presentations. Exxon-Mobil has reverted
to a majority vote for election of Directors, a fine decision for shareowners!

Thank you, and please vote "YES" for this Proposal. It is for YOUR benefit!

Robert D. Morse

The  affirmative  vote of shares holding a majority of the votes  represented at
the  meeting  is  required  to adopt the  shareholder's  proposal.  THE BOARD OF
DIRECTORS RECOMMENDS A VOTE AGAINST THE PROPOSAL.

We  presently  are not paying any  member of  Management  at a rate of more than
$500,000 per year nor did we do so in fiscal 2006 or fiscal 2005. We do not have
any present plans to do so.

Nevertheless,  the proposal is too rigid,  too broad and indefinite in duration.
The  compensation  companies must pay is determined by market forces.  There may
well be situations where hiring highly compensated individuals would be helpful,
if not essential, to achieving market penetration,  profitability and ultimately
enhanced stockholder value. The complexity of evaluating the talents of a person
and that person's expected and actual contributions to the Company, and reaching
a  mutually  agreeable  compensation  package  may not  always  fall  within the
parameters of the stockholder  proposal.  We believe our Company would be better
served by permitting Management and the Board of Directors to evaluate each case
on its own merits.

PROPOSALS OF STOCKHOLDERS

Proposals of stockholders intended to be presented at the 2008 annual meeting of
stockholders  must be received by the Company no later than  December 7, 2007 to
be included in the Company's  proxy  statement and form of proxy related to that
meeting.

SOLICITATION OF PROXIES

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

VOTING TABULATION

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

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

OTHER MATTERS

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

DATED: Melville, New York, March 1, 2007

A COPY OF THE  COMPANY'S  FORM 10-K  REPORT  FOR FISCAL  YEAR  2006,  CONTAINING
INFORMATION ON OPERATIONS, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, IS
AVAILABLE UPON REQUEST. PLEASE WRITE TO:

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


                                    [FORM OF]

                            CERTIFICATE OF AMENDMENT
                                       OF
                          CERTIFICATE OF INCORPORATION
                                       OF
                                FONAR CORPORATION


     FONAR Corporation, a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware (the "Corporation") does
hereby certify:

     First:   The name of the Corporation is FONAR Corporation.

     Second:  In  accordance  with the  provisions of Section 242 of the General
Corporation Law of the State of Delaware, Section "A" of Article "FOURTH" of the
Certificate of Incorporation has been amended to read as follows:

"A.   Classes and Number of Shares.

     The total  number of shares of stock which the  Corporation  shall have the
authority to issue is ________  shares.  The classes and the aggregate number of
shares of stock of each class which the Corporation  shall have the authority to
issue are as follows:

     1. __________________________  million (___________) shares of Common Stock
with a par value of $.0001 per share.

     2.  ____________________  million  (___________)  shares  of Class B Common
Stock, having a par value of $.0001 per share.

     3.  _________________  million  (_____________)  shares  of  Class C Common
Stock, having a par value of $.0001 per share.

     4. ________________  (________________) shares of Preferred Stock, having a
par value of $.001 per share. The Preferred Stock shall have such voting powers,
full or limited,  or no voting powers,  and such  designations,  preferences and
relative,  participating,  optional or other special rights and  qualifications,
limitations or  restrictions  as shall be stated and expressed in the resolution
or resolutions  providing for the issuance of such stock adopted by the board of
directors of the Corporation.

     5.  _____________   million  (__________)  shares  of  Class  A  Non-voting
Preferred Stock, having a par value of $.0001 per share."

      Third:  Sections "B",  "C" and "D" of Article  "FOURTH" are  unchanged and
shall remain full force and effect.

     IN WITNESS  WHEREOF,  FONAR  Corporation has caused this  Certificate to be
signed by its President and attested by its Secretary, this ___ day of February,
2007.

                                           FONAR Corporation

                                           By:

                                           ___________________________
                                           Raymond V. Damadian
                                           President

ATTEST:

______________________________
David B. Terry, Secretary


           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, 2006

                                       OR

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

                           Commission File No. 0-10248
                           ___________________________

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

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

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

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

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

          Securities registered pursuant to Section 12(g) of the Act:
                                     None
   ________________________________________________________________


Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act.
Yes ____  No __X__

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes ____  No __X__

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.
Yes ___X___      No _______

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

Indicate by check mark  whether  the  registrant  is an  accelerated  filer,  as
defined in Rule 12b-2 of the Act.
Yes [X} No {}

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large  accelerated  filer" in Rule 12b-2 of the Exchange  Act.  (Check
one):

Large accelerated filer ____  Accelerated filer __X__
Non-accelerated filer ____

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes ____ No __X__

As of August 30, 2006, 119,359,660 shares of Common Stock, 3,953 shares of Class
B Common Stock, 9,562,824 shares of Class C Common Stock and 7,836,287 shares of
Class A Non-voting  Preferred  Stock of the  registrant  were  outstanding.  The
aggregate market value of the 116,667,745 million shares of Common Stock held by
non-affiliates  as of such date based on the  closing  price per share on August
30, 2006 as reported on the NASDAQ System, was approximately $43.8 million.  The
other outstanding classes do not have a readily determinable market value.

DOCUMENTS INCORPORATED BY REFERENCE
None

PART I
ITEM 1.  BUSINESS
GENERAL

Fonar  Corporation,  sometimes  referred to as the  "Company"  or "Fonar",  is a
Delaware corporation which was incorporated on July 17, 1978. Our address is 110
Marcus  Drive,  Melville,  New York 11747 and our  telephone  number is 631-694-
2929. Fonar also maintains a WEB site at www.Fonar.com.

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

Fonar's iron frame  technology made FONAR the originator of "open" MRI scanners.
We introduced the first "open" MRI in 1980. Since that time we have concentrated
on  further  application  of our  "open"  MRI,  introducing  most  recently  the
Upright(TM)   Multi-positional(TM)   MRI  scanner  (also   referred  to  as  the
"Upright(TM)" or "Stand-Up(TM)" MRI scanner) and the Fonar 360(TM) MRI scanner.

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

Health  Management  Corporation  of America,  formerly  U.S.  Health  Management
Corporation, which we sometimes refer to as "HMCA", was formed by Fonar in March
1997 as a  wholly-owned  subsidiary  in order to enable  us to  expand  into the
business of providing  comprehensive  management  services to medical providers.
HMCA  provides  management  services,  administrative  services,  office  space,
equipment,  repair,  maintenance  service and  clerical  and other non-  medical
personnel  to medical  providers.  Since July 28,  2005,  following  the sale of
HMCA's physical therapy and rehabilitation business, HMCA has elected to provide
its services solely to diagnostic imaging centers.

See Note 21 to the  Consolidated  Financial  Statements  for separate  financial
information  respecting  our medical  equipment  and  physician  and  diagnostic
management services segments.

FORWARD LOOKING STATEMENTS.

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

RECENT DEVELOPMENTS AND OVERVIEW.

Our products and  works-in-progress  are intended to  significantly  improve our
competitive position. Our current products are the Upright(TM) MRI and the Fonar
360(TM).

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

More recently a new  application of the FONAR  Upright(TM)  technology is in the
evaluation and diagnosis of patients with the Arnold-Chiari syndrome believed to
affect  from  200,000  to  500,000  Americans.   In  this  syndrome  brain  stem
compression  and entrapment of the brain at the base of the skull in the foramen
magnum,  which is the  circular  bony opening at the base of the skull where the
spinal cord exits the skull. Classic symptoms of the Chiari syndrome include the
"drop  attack",  where the erect patient  unexpectedly  experiences an explosive
rush or nervous discharge at the base of the brain which rushes down the body to
the  extremities,  causing the patient to collapse in a transient  neuromuscular
paralysis which then subsides when the patient is in a horizontal position.

The  FONAR  Upright(TM)  MRI has  recently  demonstrated  its key  value  on two
patients with Chiari syndrome  establishing  that the conventional  lie-down MRI
scanners  cannot  make an  adequate  evaluation  of their  pathology  since  the
patient's pathology is most visible and symptoms are most acute when the patient
is  upright.  It is  critical  to have an image  of the  patient  in an  upright
position so that the  neurosurgeons  can fully  evaluate the extent of the brain
stem  compression  which is  occurring  so they can choose the most  appropriate
surgical approach for the operative repair.

Another milestone in the sale and utilization of FONAR's Upright(TM)  technology
is the sale in  September,  2006 of an  Upright(TM)  MRI  scanner to the largest
orthopedic   hospital  in  the  Netherlands,   the  St.   Maartenskliniek.   St.
Maartenskliniek has over 300 in-patient beds and an extensive  outpatient clinic
program that  diagnosis and treats  25,000  patients  with  orthopedic  problems
annually. In placing their order, St.  Maartenskliniek  announced from the point
of view of their internationally recognized "Spine Center" that "once FONAR made
available upright weight-bearing MRI imaging technology,  owning one for the St.
Maartenskliniek "Spine Center" was not optional but mandatory.  For our hospital
to continue  to engage in spine  surgery  without  it, once this new  technology
became  available,  was  unacceptable.  Once the means  were  available  to make
certain we were getting the complete  picture of the patient's  spine  pathology
before undertaking  surgery,  so that we could be certain we were not performing
surgery  based on a wrong  diagnosis  and  running  the risk of doing  the wrong
surgery,  we did not regard the  utilization  of this new  technology,  from our
patient's perspective as optional. It was mandatory."

We are vigorously  promoting sales of the Upright(TM) MRI which we regard as our
most promising  product.  The market for the Upright(TM)  shows strong progress.
During  the  fiscal  year  ended  June  30,  2006,  we  received  orders  for 18
Upright(TM)  MRI  scanners  as compared to 30 for the fiscal year ended June 30,
2005.  Revenues  recognized from the sale of Upright(TM) MRI scanners,  however,
decreased  in fiscal  2006 by 85.4% over fiscal  2005 from  approximately  $71.7
million in fiscal 2005 to approximately $10.5 million in fiscal 2006,  following
a 68% increase  from fiscal 2004 to fiscal 2005,  when revenues from the sale of
Upright(TM) MRI scanners increased from $42.7 million to $71.7 million in fiscal
2005. The following chart shows the revenues attributable to our different model
scanners for the fiscal  years ended June 30, 2005 and June 30, 2006.  Note that
we recognize revenue on a percentage of completion basis.  Accordingly,  revenue
is recognized as each  sub-assembly of a scanner is  manufactured.  Consequently
the revenues for a fiscal period do not  necessarily  relate to orders placed in
that period.

     Model                       Revenues Recognized
                             Fiscal 2005      Fiscal 2006
                             -----------      -----------
     Upright(TM)             $71,666,053      $10,452,069
     Fonar 360(TM)           $   764,031      $   383,589
     Other                   $         0      $         0

The Fonar 360(TM) includes the Open Sky(TM) MRI. We received our first order for
a Fonar 360(TM) scanner in the first quarter of fiscal 2005. The magnet frame is
incorporated into the floor, ceiling and sidewalls of the scan room and is open.
Consequently,  physicians  and  family  members  can walk  inside  the magnet to
approach  the  patient.  The  Open  Sky(TM)  version  of the  Fonar  360(TM)  is
decoratively  designed so that it is incorporated  into the panoramic  landscape
that  decorates the walls of the scan room.  The ability of the Fonar 360(TM) to
give physicians direct 360 degree access to patients and the availability of MRI
compatible  interventional  instruments  such  as  needles,  catheters,  probes,
scalpels  and forceps,  will also enable the Fonar  360(TM) to be used for image
guided interventions.

Our earlier primary product,  the QUAD(TM) MR scanner,  utilized a electromagnet
and was  accessible  from four  sides.  The  QUAD(TM)  was the first  "open" MRI
scanner at high field.

FONAR's  showcase  installation  of the first FONAR  360(TM) MRI scanner sold is
progressing  very  successfully  at the  Oxford  Nuffield  Orthopedic  Center in
Oxford, United Kingdom.  Oxford-Nuffield had two objectives in the choice of the
FONAR 360(TM) MRI. The first was to have an open  mid-field MRI imaging  scanner
to meet their medical imaging needs. The second was to have an open scanner that
would enable  direct image guided  surgical  intervention.  The  Oxford-Nuffield
scanner is now installed and carrying a full diagnostic imaging load daily.

Additionally,  development  of the  works-in-progress  FONAR  360(TM)  MRI image
guided  interventional  technology  is  actively  progressing.   FONAR  software
engineers have completed and installed their 2nd generation tracking software at
Oxford-Nuffield  which is designed to enable the surgeons to insert needles into
the patient and  accurately  advance them under direct visual image  guidance to
the target tissue,  such as a tumor, so that therapeutic agents can be injected.
The software is now  installed  and being tested by  Oxford-Nuffield's  surgical
teams.  Proceeding to the next step of injecting test substances and therapeutic
agents into target tissues is expected to commence in the near future.

Health  Management  Corporation  of America,  formerly  U.S.  Health  Management
Corporation,  a  wholly-owned  subsidiary  of FONAR,  currently  is  managing 12
diagnostic imaging centers located  principally in New York and Florida.  During
the  beginning  of fiscal  2006 HMCA  also  managed  six  physical  therapy  and
rehabilitation  practices  located  in New York.  HMCA sold the  portion  of its
business  engaged in the  management  of  physical  therapy  and  rehabilitation
practices in July of 2005.

PRODUCTS

Fonar's principal products are the Upright(TM) MRI and the Fonar 360(TM).

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

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

Recently,  this capability of the FONAR Upright(TM)  technology has demonstrated
its key value on patients with the Arnold-Chiari syndrome,  which is believed to
affect 200,000 to 500,000  Americans.  In this syndrome,  brain stem compression
and  subsequent  severe  neurological  symptoms  occur in these  patients,  when
because of  weakness  in the support  tissues  within the skull,  the brain stem
descends and is compressed at the base of the skull in the foramen magnum, which
is the  circular  bony  opening at the base of the skull  where the spinal  cord
exits the skull.  Conventional  lie-down  MRI  scanners  cannot make an adequate
evaluation  of the pathology  since the patient's  pathology is most visible and
the   symptoms   most  acute  when  the   patient  is  scanned  in  the  upright
weight-bearing position.

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

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

The Upright(TM) MRI will also be useful for MRI guided interventional procedures
as  the  physician  would  have  unhindered   access  to  the  patient  with  no
restrictions in the vertical direction.

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

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

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

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

We also  expect to  enable  the  Fonar  360(TM)  to  function  as an MRI  guided
interventional   scanner,   for  the  purpose  of  performing   intra-operative,
interventional and therapeutic procedures with MR compatible instrumentation. In
this  capacity,  the  enlarged  room sized  magnet and 360 degree  access to the
patient afforded by the Fonar 360(TM) would permit full-fledged support teams to
walk into the magnet and perform MRI guided  interventions on the patient inside
the magnet.  Most importantly,  the exceptional quality of the MRI image and its
exceptional  capacity to exhibit  tissue  detail on the image,  by virtue of the
nuclear resonance signal's  extraordinary capacity to create image contrast, can
then be  obtained  real  time to  guide  the  physician  during  the MRI  guided
intervention.  Thus MRI compatible instruments,  needles, catheters,  endoscopes
and the like can be  introduced  directly  into the human body and guided to the
malignant  lesion  or other  pathology  by means  of the MRI  image.  Surgically
inoperable  lesions could be accessed  through MRI guided  catheters and needles
making it possible  to deliver  the  treatment  agent  directly to the  targeted
tissue.

The first FONAR 360(TM) MRI scanner, installed at the Oxford-Nuffield Orthopedic
Center in Oxford,  United  Kingdom,  is now carrying a full  diagnostic  imaging
caseload.  In addition,  however,  development  of the  works-in-progress  FONAR
360(TM) MRI image  guided  interventional  technology  is actively  progressing.
FONAR  software  engineers  have  completed and installed  their 2nd  generation
tracking software at Oxford-Nuffield which is designed to enable the surgeons to
insert needles into the patient and accurately advance them, under direct visual
image  guidance,  to the target  tissue,  such as a tumor,  so that  therapeutic
agents can be injected.  The  software is now being tested by  Oxford-Nuffield's
surgical  teams.  Proceeding to the next step of injecting  test  substances and
therapeutic  agents into the target  tissues is expected to commence in the near
future.

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

The presence of the MRI image during treatment will would enable the operator to
make assessments  during treatment whether the treatment is being effective.  In
addition  to the  patient  comfort and new  applications,  such as MRI  directed
interventions,  made possible by our scanners' open design,  the Upright(TM) and
Fonar 360(TM) scanners are designed to maximize image quality through an optimal
combination of  signal-to-noise  (S/N) and  contrast-to-noise  (C/N) ratios. The
technical   improvements   realized  in  these   scanners'   design  over  their
predecessors  also  include  increased  image-processing  speed  and  diagnostic
flexibility.

MRI directed  interventions are made possible by the scanners' ability to supply
images to a monitor  positioned  next to the  patient,  enabling the operator to
view in process an interventional  procedure from an unlimited number of angles.
The  openness of Fonar's  scanners  would  enable a physician  to perform a wide
range of interventional procedures inside the magnet.

In the case of breast imaging the access by a physician  permits an image guided
biopsy to be performed  easily which is essential  once  suspicious  lesions are
spotted by any diagnostic  modality.  In addition to being far superior to x-ray
in  detecting  breast  lesions  because of the MRI's  ability to create the soft
tissue contrast  needed to see them,  where x-ray is deficient in its ability to
generate the needed contrast between cancer and normal tissue,  there is not the
painful compression of the breast characteristic of X-ray mammography.

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

Like Fonar's previous principal product,  the QUAD(TM) scanner,  the Upright(TM)
MRI and Fonar 360(TM)  scanners  utilize a 6000 gauss (0.6 Tesla field strength)
iron core  electromagnet.  The  QUAD(TM)  was the first open MRI scanner at high
field. The greater field strength of the 6000 gauss magnet, as compared to lower
field open MRI scanners that operate at 3,000 gauss (0.3 Tesla) when enhanced by
the electronics already utilized by Fonar's scanners,  produces images of higher
quality  and  clarity.  Fonar's  0.6 Tesla open  scanner  magnets  are among the
highest field "open MRI" magnets in the industry.

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

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

In  addition  to the  signal-to-noise  ratio,  however,  the factor that must be
considered when it comes to image quality is contrast,  the quality that enables
reading  physicians  to clearly  distinguish  adjacent,  and  sometimes  minute,
anatomical  structures  from their  surroundings.  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
Upright(TM) MRI and Fonar 360(TM)  scanners  operate squarely in the optimum C/N
range.

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

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

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

During  fiscal  2006,  sales  of our  Upright(TM)  MRI  scanners  accounted  for
approximately  31.6% of our total  revenues  and 53.0% of our medical  equipment
revenues,  as compared to 68.3% of total revenues and 88.2% of medical equipment
revenues  in  fiscal  2005 and  59.6% of total  revenues  and  87.7% of  medical
equipment revenues in fiscal 2004. These sales show the market penetration being
achieved by the Upright(TM) MRI scanner.

During  fiscal 2006,  sales of our Fonar 360(TM)  scanner  accounted for 1.2% of
total revenues and 1.9% of medical equipment revenues.  During fiscal 2005 sales
of our Fonar 360(TM)  scanner  accounted for 0.7% of total  revenues and 0.9% of
medical equipment  revenues.  Our principal  selling,  marketing and advertising
efforts  have in the past two years  focused on the  Upright(TM)  MRI,  which we
believe is a particularly  unique  product,  being the only MRI scanner which is
both open and allows for weight  bearing  imaging.  Since we  perceive  that the
Upright(TM) MRI is successfully penetrating the market and enabled us to achieve
profitability in fiscal 2005, we expect to continue our focus on the Upright(TM)
MRI in the immediate future, notwithstanding the losses incurred in fiscal 2006.
We are  optimistic  that  Fonar  360(TM)  and our  other  products  and works in
progress will also contribute materially to increased product sales.

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

WORKS-IN-PROGRESS

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

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

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

We view our  Upright(TM)  MRI as having the  potential for being an ideal breast
examination  machine as it permits the patient to be seated for the examination,
which would allow easy access for an MRI guided breast  biopsy when needed.  The
Fonar 360(TM) MRI scanner would also be ideal for breast examinations.

PRODUCT MARKETING

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

Fonar's  internal sales force is  approximately  19 persons.  Our internal sales
force  handles  the  domestic  market  while  we  continue  to  use  independent
manufacturer's representatives and distributors for foreign markets. In addition
to its  internal  domestic  sales  force,  Fonar and  General  Electric  Medical
Systems,  a  division  of  General  Electric  Company,   have  entered  into  an
arrangement   pursuant  to  which  General  Electric  Medical  Systems  acts  as
independent manufacturer's representative for Fonar's Upright(TM) MRI scanner in
the domestic market as well.  Neither General  Electric nor any of FONAR's other
competitors, however, are entitled to make the Upright(TM) MRI scanner.

In addition,  Fonar's website includes an interactive  product  information desk
for  reaching   customers.   We  plan  to  commence  a  program  for   providing
demonstrations of our products to potential customers on an international basis.
FONAR has exhibited its new products at the annual  meeting of the  Radiological
Society of North America  ("RSNA") in Chicago  since  November 1995 and plans to
attend the RSNA meeting in November 2006 and future  years.  The RSNA meeting is
attended by  radiologists  from all over the world.  Most  manufacturers  of MRI
scanners regularly exhibit at this meeting.

FONAR has targeted  orthopedic  surgeons and  neurosurgeons,  particularly spine
surgeons, as important markets for the Upright(TM) MRI.  Accordingly,  FONAR has
regularly   exhibited  at  the  annual  meetings  of  The  American  Academy  of
Orthopaedic  Surgeons (AAOS) since 2003; the North American Spine Society (NASS)
since 2004; the American Association of Neurological Surgeons (AANS) since 2004;
and the Congress of Neurological Surgeons (CNS) since 2004.

FONAR's  success  in  targeting  this  group was most  evident  in the sale,  in
September 2006, of an Upright(TM) MRI scanner to the largest orthopedic hospital
in the Netherlands,  the St. Maartenskliniek in Nijmegen. In addition to being a
key sale to a prestigious  hospital,  the medical conclusions reached and stated
by the buyer and the buyer's  intention to conduct research and publish articles
concerning  the  Upright(TM)  technology,  are  a  vital  component  to  FONAR's
objective  to prove to the medical  community at large,  insurers,  governmental
agencies and others the benefits,  if not necessity of Upright(TM)  scanning.  A
Director of St.  Maartenskliniek  and the Chairman of Spine Surgery  stated that
"We at St. Maartenskliniek,  the biggest orthopedic hospital in the Netherlands,
are very much  looking  forward to this new  technology  from  FONAR  which will
enable us to evaluate the spine anatomy in the fully weight bearing state and in
multiple positions.  We expect these new multi-position  capabilities to lead to
more accurate  diagnosis  and better  surgery  outcomes for  patients.  Once our
active research program has discovered the benefits of this new FONAR technology
for  patients,  we intend  to  publish  the  results  in a lot of peer  reviewed
scientific  journals."  The  Chairman  stated  further  "that  once  FONAR  made
available upright weight-bearing MRI imaging technology,  owning one for the St.
Maartenskliniek "Spine Center" was not optional but mandatory.  For our hospital
to continue  to engage in spine  surgery  without  it, once this new  technology
became available, was unacceptable".

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

We also will seek to introduce  new MRI  applications  for our scanners  such as
MRI-directed interventions.

Our areas of operations are principally in the United States.  During the fiscal
year ended June 30, 2006,  10.0% of the  Company's  revenues  were  generated by
foreign  sales,  as  compared  to 7.1%  and  1.2%  for  fiscal  2005  and  2004,
respectively.

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

SERVICE AND UPGRADES FOR MRI SCANNERS

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

Income is generated  from the  installed  base in two  principal  areas  namely,
service  and  upgrades.  Service  and  maintenance  revenues  from our  external
installed base were  approximately  $3.2 million in fiscal 2004, $5.8 million in
fiscal  2005 and $8.6  million in fiscal  2006.  We expect  service  revenues to
continue to increase as warranties  expire on previously sold scanners,  and the
customers then enter into service contracts.

We also  anticipate  that our new  scanners  will result in  upgrades  income in
future fiscal years. The potential for upgrades income, particularly in the form
of  new  patient   supporting  upright  imaging  fixtures  and  receiver  coils,
originates in the  versatility and  productivity of the new Upright  Imaging(TM)
technology.  New medical uses for MRI technology are constantly being discovered
and are anticipated for the Upright Imaging(TM) technology as well. New features
can often be added to the  scanner  by the  implementation  of little  more than
versatile new software packages. For example,  software can be added to existing
MRI angiography  applications to synchronize  angiograms with the cardiac cycle.
By doing so the dynamics of blood vessel  filling and emptying can be visualized
with movies.  Such  enhancements are attractive to end users because they extend
the useful life of the equipment and enable the user to avoid  obsolescence  and
the expense of having to purchase new equipment.  At the present time,  however,
upgrade  revenue is not  significant.  We had no upgrade revenue in fiscal 2004,
and upgrade  revenues of  approximately  $40,000 in fiscal 2005.  We had upgrade
revenues of approximately $82,000 in fiscal 2006.

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

RESEARCH AND DEVELOPMENT

During  the fiscal  year  ended  June 30,  2006,  we  incurred  expenditures  of
$7,581,898,  $714,253 of which was capitalized,  on research and development, as
compared  to  $6,752,755,  $745,994  of which was  capitalized  and  $6,079,797,
$588,735 of which was  capitalized,  during the fiscal years ended June 30, 2005
and June 30, 2004, respectively.

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

BACKLOG

Our backlog of unfilled orders at July 1, 2006 was approximately  $24.2 million,
as compared to $13.1  million at July 1, 2005. Of these  amounts,  approximately
$5.5 million and $1.7 million had been paid to FONAR as customer  advances as at
July 1, 2006 and July 1, 2005,  respectively.  Of the backlog amounts at July 1,
2006 and July 1, 2005, $137,000 and $103,000,  respectively,  represented orders
from related parties. It is expected that the existing backlog of orders will be
filled within the current fiscal year. Our 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

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

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

One of the  patents,  issued in the name of Dr.  Damadian  and  covered  by said
license,  was United  States  patent  No.  3,789,832,  Apparatus  and Method for
Detecting  Cancer  in  Tissue,  also  referred  to as  the  "1974  Patent".  The
development of the Beta(TM) 3000 was based upon the 1974 Patent,  and we believe
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.

We have  significantly  enhanced our patent position within the industry and now
possesses a substantial  patent  portfolio which provides us, under the aegis of
United States patent law, "the  exclusive  right to make,  use and sell" many of
the scanner  features which FONAR  pioneered and which are now  incorporated  in
most MRI scanners sold by the industry.  The Company has 118 patents  issued and
approximately  70  patents  pending.   A  number  of  Fonar's  existing  patents
specifically  relate to protecting Fonar's position in the high-field iron frame
open MRI market.  The patents further enhance Dr. Damadian's pioneer patent, the
1974 Patent, that initiated the MRI industry and provided the original invention
of MRI scanning. The 118 issued patents extend to various times up to 2024.

We have a license agreement  granting us a license to utilize the MRI technology
covered by the existing patent  portfolio of a patent holding  company.  We also
have patent cross-licensing agreements with other MRI manufacturers.

PRODUCT COMPETITION

MRI SCANNERS

A majority of the MRI scanners in use in hospitals and outpatient facilities and
at mobile  sites in the United  States  are based on high field air core  magnet
technology  while the  balance are based on open iron frame  magnet  technology.
Fonar's open iron frame MRI scanners are competing  principally  with high-field
air core scanners.  Fonar's open MRI scanners,  however, utilizing a 6,000 gauss
or 0.6 Tesla field strength,  iron core electromagnet,  were the first "open" MR
scanners at high field strength.

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

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

     2. They are more open and quiet.

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

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

FONAR  faces  competition  within  the MRI  industry  from such firms as General
Electric Company,  Philips N.V., Toshiba  Corporation,  Hitachi  Corporation and
Siemens A.G.  Most  competitors  have  marketing and  financial  resources  more
substantial  than those  available to us. They have in the past,  and may in the
future,  heavily  discount the sales price of their scanners.  Such  competitors
sell both high  field air core and iron frame  products.  Based on the Frost and
Sullivan data  contained in their  publication,  FONAR had a 10% market share in
the  low-field  segment of the 2005  market in the United  States.  It should be
noted that  although  Frost and Sullivan  define .6 Tela (the field  strength of
FONAR's magnets) as "low-field",  the market place generally and FONAR define it
as  "mid-field"  and in the  category  of open MRI  scanners,  FONAR's  .6 Tesla
magnets are among the highest field strength open magnets.  FONAR introduced the
first "Open MRI" in 1980.  "Open MRI" was made possible by Fonar's  introduction
of an MRI magnet  built on an iron  frame.  Thus the  magnetic  flux  generating
apparatus of the magnet, magnet coils or permanent magnet bricks, was built into
a frame of steel.  The steel frame provided a return path for the magnetic lines
of force and  thereby  kept the  magnetic  lines of force  contained  within the
magnet.  This enabled FONAR, from 1980 on, to show that the FONAR magnet was the
only magnet that allowed the patients to stretch out their arms, the only "open"
MRI.

The iron frame,  because it could control the magnetic  lines of force and place
them where  wanted and remove them from where not  wanted,  such as in the Fonar
360(TM) where  physicians and staff are standing,  provide a much more versatile
magnet design than is possible with air core magnets.  Air core magnets  contain
no iron but consist entirely of turns of current carrying wire.

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

The Fonar 360(TM) scanner explicitly  addresses this growing market reception of
MRI guided interventions, and the first of these scanners was sold to a hospital
in England.  Fonar's  Upright(TM)  magnet  also  addresses  the  growing  market
reception   of  MRI  guided   interventions.   Although   not  enabling  a  full
interventional theater as the Fonar 360(TM) does, the iron frame Upright(TM) MRI
design  permits  ready  access  to the  patient  and  enables  a wide  range  of
interventional  procedures  such as biopsies  and needle or  catheter  delivered
therapies  to be  performed  under MRI image  guidance.  The  "tunnel"  air core
superconductive  scanners do not permit  access to the patient while the patient
is inside the scanner.

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

OTHER IMAGING MODALITIES

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

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

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

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

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

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

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

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

GOVERNMENT REGULATION

FDA Regulation

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

Classes of Products

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

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

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

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

We received  approval to market our Beta(TM) 3000 and Beta(TM) 3000M scanners as
Class III devices on September 26, 1984 and November 12, 1985. On July 28, 1988,
the  Magnetic  Resonance  Diagnostic  Device  which  includes  MR Imaging and MR
Spectroscopy  was  reclassified  by the FDA to  Class II  status.  Consequently,
Fonar's  products are now  classified  as Class II  products.  On July 26, 1991,
Fonar  received FDA  clearance  to market the  Ultimate(TM)  Magnetic  Resonance
Imaging Scanner as a Class II device. Fonar received FDA clearance to market the
QUAD(TM)  7000 in April 1995 and the QUAD(TM)  12000 in November  1995. On March
16,  2000,  Fonar  received  FDA  clearance  to  market  the Fonar  360(TM)  for
diagnostic  imaging,  the Open Sky(TM) version,  and on October 3, 2000 received
FDA clearance for the Upright(TM) MRI.

Premarketing Submission

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

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

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

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

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

Quality System Regulation

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

Medical Device Reporting Regulation

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

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

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

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

We have established and maintained  written procedures for implementation of the
MDR regulation. These procedures include internal systems that:

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

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

     provide procedures to insure the timely transmission of complete reports.

These procedures also include documentation and record keeping requirements for:


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

      all medical device reports and information submitted to
      the FDA;

     any   information   that  was  evaluated   during   preparation  of  annual
     certification reports; and

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

FDA Enforcement

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

FDA-Initiated or Voluntary Recalls

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

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

Class I

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

Class II

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

Class III

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

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

Civil Money Penalties

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

Warning Letters

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

Seizure

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

Citation

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

Injunction

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

Prosecution

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

Foreign and Export Regulation

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

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

Foreign governments have differing requirements concerning the import of medical
devices into their respective  jurisdictions.  The European Union, also referred
to as EU, made up of 25 individual  countries,  has some essential  requirements
described  in the EU's Medical  Device  Directive,  also  referred to as MDD. In
order  to  export  to one  of  these  countries,  we  must  meet  the  essential
requirements  of the  MDD  and  any  additional  requirements  of the  importing
country.  The  essential  requirements  are similar to some of the  requirements
mandated by the FDA. In addition the MDD requires that we enlist a Notified Body
to examine and assess our  documentation,  a Technical  Construction  File,  and
verify  that  the  product  has  been   manufactured   in  conformity  with  the
documentation.  The notified body must carry out or arrange for the  inspections
and tests  necessary  to verify that the  product  complies  with the  essential
requirements  of the  MDD,  including  safety  performance  and  Electromagnetic
Compatibility,  also  referred to as EMC.  Also  required  is a Quality  System,
ISO-9001,  assessment  by the  Notified  Body.  We were  approved  for ISO  9001
certification for its Quality Management System in April, 1999.

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

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

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

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

Reimbursement to Medical Providers for MRI Scans

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

Anti-Kickback and Self-Referral Legislation

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

HEALTH MANAGEMENT CORPORATION OF AMERICA
PHYSICIAN AND DIAGNOSTIC SERVICES MANAGEMENT BUSINESS

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

HMCA currently  manages 12 MRI facilities.  In April 2003, HMCA sold the portion
of its business which managed primary care medical practices,  and in July 2005,
HMCA sold the  portion of its  business  engaged in the  management  of physical
therapy and rehabilitation  practices. This was the result of HMCA's decision to
focus on  management  of MRI  facilities,  the  business  in which  HMCA is most
experienced. For the 2006 fiscal year, the revenues HMCA recognized from the MRI
facilities  were $12.7  million and the  revenues  recognized  from the physical
therapy and  rehabilitation  practices were $648,000.  For the 2005 fiscal year,
the revenues HMCA  recognized from the MRI facilities were $14.0 million and the
revenues recognized from the physical therapy and rehabilitation  practices were
$9.7 million.

HMCA GROWTH STRATEGY

HMCA's  growth  strategy   focuses  on  upgrading  and  expanding  the  existing
facilities  it manages and expanding the number of facilities it manages for its
clients.  Our most important  effort in this regard is to promote and facilitate
the  replacement  of existing  MRI  scanners  with new Fonar  Upright(TM)/Stand-
Up(TM)  MRI  scanners  at  the  most  promising  locations.  To  date,  we  have
Upright(TM) MRI scanners at the MRI facilities we manage in Islandia,  New York,
Staten  Island,  New York,  Bensonhurst,  New  York,  Melville,  New York,  East
Elmhurst, New York, East Setauket, New York, Boca Raton, Florida,  Ormond Beach,
Florida, Tallahassee, Florida and Latham, New York.

In connection  with its focus on managing MRI  facilities,  HMCA decided to sell
its business of managing physical therapy and rehabilitation practices. The sale
was completed on July 28, 2005, following the end of the 2005 fiscal year.

The sale was made  pursuant  to an asset  purchase  agreement.  The assets  sold
consisted principally of the management agreements with the physical therapy and
rehabilitation  facilities,  the  assignment  of  other  agreements  and  rights
utilized  in  our  physical  therapy  and  rehabilitation   facility  management
business,  the physical therapy equipment,  a portion of the accounts receivable
and office  furnishings  and  equipment we provided to the physical  therapy and
rehabilitation facilities.

The  sale  was made to  Health  Plus  Management  Services,  L.L.C.  There is no
material  relationship  between  Health  Plus and Fonar,  HMCA,  or any of their
respective subsidiaries, directors or officers or associates of any such person.
The two  principals  of Health Plus were  employed by HMCA up to the time of the
closing  of the  transaction.  In  consideration  for the  termination  of their
employment  agreements,  these two  individuals  each became entitled to receive
$800,000. In addition,  each became entitled to receive $200,000 for billing and
collection  services to be provided on behalf of HMCA with  respect to a portion
of the  accounts  receivable  of certain  physical  therapy  and  rehabilitation
facilities  which arose during the period when we were engaged in the management
of those facilities.  The $1,000,000  payable was paid in shares of Fonar common
stock.

The purchase price under the asset purchase agreement was $6.6 million,  payable
pursuant to a promissory note in 120 monthly  installments  commencing on August
28, 2005. The first twelve  installments are interest only and the remaining 108
payments  will consist of equal  installments  of principal  and interest in the
amount of $76,014  each.  The note is subject to  prepayment  provisions  to the
extent  Health Plus  resells all or part of the assets and  business or utilizes
the assets sold as collateral in any debt financing.


PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES

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

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

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

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

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

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

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

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

     8. Expansion Plans. HMCA assists the clients in developing  expansion plans
including the opening of new or replacement facilities where appropriate.

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

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

In the case of contracts with the MRI facilities, fees are charged by HMCA based
on the number of procedures  performed.  In the case of the physical therapy and
rehabilitation  practices  we  previously  managed,  flat fees were charged on a
monthly  basis.  Fees are subject to adjustment on an annual basis,  but must be
based on mutual agreement. The per procedure charges to the MRI facilities range
from  $250 to $500 per MRI scan.  No MRI  facilities  or  physical  therapy  and
rehabilitation facilities are or were owned by HMCA.

The facilities enter into contracts with third party payors,  including  managed
care  companies.  Neither HMCA's  clients nor HMCA  participate in any capitated
plans or other risk sharing arrangements. Capitated plans are those HMO programs
where the provider is paid a flat monthly fee per patient.

HMCA MARKETING

HMCA's  marketing  strategy is to expand the business and improve the facilities
which it manages.  HMCA will also seek to increase  the number of  locations  of
those  facilities  where  market  conditions  are  promising.  HMCA will seek to
promote growth of its clients' patient volume and revenue through installing new
Upright(TM) MRI scanners at MRI facilities.

DIAGNOSTIC IMAGING FACILITIES AND OTHER ANCILLIARY SERVICES

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

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

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

HMCA COMPETITION

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

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

GOVERNMENT REGULATION APPLICABLE TO HMCA

FEDERAL REGULATION

Stark Law

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

Anti-kickback Regulation

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

In fiscal  2006,  approximately  18.2% of the  revenues of HMCA's  clients  were
attributable to Medicare and 1.1% were attributable to Medicaid. In fiscal 2005,
approximately  9.9% of the  revenues  of HMCA's  clients  were  attributable  to
Medicare and 0.5% were attributable to Medicaid.

State Regulation

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

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

HMCA's clients generate revenue from patients covered by no-fault  insurance and
workers'  compensation  programs.  For the  fiscal  year  ended  June  30,  2006
approximately  43.0% of our clients'  receipts were from patients covered by no-
fault  insurance  and  approximately  4.1% of our  client's  receipts  were from
patients covered by worker's  compensation  programs.  For the fiscal year ended
June 30,  2005,  approximately  59.3% of  HMCA's  clients'  receipts  were  from
patients covered by no-fault insurance and approximately 6.2% of HMCA's clients'
receipts were from patients  covered by workers  compensation  programs.  In the
event  that  changes  in these  laws  alter the fee  structures  or  methods  of
providing service, or impose additional or different requirements, HMCA could be
required to modify its  business  practices  and  services in ways that could be
more costly to HMCA or in ways that  decrease the revenues  which HMCA  receives
from its clients.

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

EMPLOYEES

As of July 1, 2006, we employed 409 persons on a full-time and part-time  basis.
Of such  employees,  45 were engaged in marketing and sales,  51 in research and
development,  77  in  production,  49  in  customer  support  services,  187  in
administration,  including 97 on site at facilities and offices  managed by HMCA
and 54  performing  billing,  collection  and  transcription  services for those
facilities.


ITEM 2.  PROPERTIES

Fonar leases approximately  135,240 square feet of office and plant space at its
principal  offices in Melville,  New York and at two other locations in Melville
and  Farmingdale,  New  York  at a  current  aggregate  annual  rental  rate  of
$1,138,060,  excluding utilities,  taxes and other related expenses. The term of
one of the leases includes options to renew up through 2008 and the terms of the
other  leases  extend to 2013.  Management  believes  that  these  premises  are
adequate for its current needs. HMCA leases approximately 16,850 square feet for
its  headquarters  in  Melville,  New York at a current  annual  rental  rate of
$450,463.  The term of the lease extends through  September,  2009. In addition,
HMCA maintains leased office premises for its clients having an aggregate annual
rental rate of approximately $803,000 under leases having various terms.

ITEM 3. LEGAL PROCEEDINGS

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

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

On June 28, 2006, we held our annual meeting of stockholders. The matters before
the  meeting  were 1. the  election of  directors,  2. the  ratification  of the
Company's  2005  Supplemental  Stock Bonus plan and 3. the  ratification  of the
selection of auditors for fiscal 2006.  All nominees for directors  were elected
and all other  proposals  were  approved,  including  the  selection of Marcum &
Kliegman LLP as the  Company's  auditors for fiscal 2006.  All of the  directors
elected,  Raymond V. Damadian,  Claudette J.V. Chan,  Robert Janoff,  Charles N.
O'Data and Robert Djerejian,  were sitting  directors.  The plan ratified by the
stockholders was the 2005  Supplemental  stock bonus plan. The table below lists
the votes cast for, against or withheld,  as well as abstentions and broker non-
votes.

(1) Election of Directors:

                                      FOR                     WITHHELD
                                 -----------                  ---------
Raymond V. Damadian              322,476,584                  5,682,108
Claudette J.V. Chan              323,356,198                  4,802,493
Robert J. Janoff                 323,405,221                  4,753,470
Charles N. O'Data                323,407,799                  4,735,892
Robert Djerejian                 323,436,150                  4,707,542

(2) Ratification of the Supplemental Stock Bonus Plan

    FOR            AGAINST         ABSTAIN     BROKER NON-VOTES
-----------       ---------        -------     ----------------
254,447,688       6,771,056        781,701        64,667,135

(3) Ratification of Auditors Marcum & Kliegman LLP

    FOR            AGAINST         ABSTAIN     BROKER NON-VOTES
-----------       ---------        -------     ----------------
325,476,534       1,910,132        772,025            0



Part II

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

Our Common Stock is traded in the Nasdaq SmallCap market under the National
Association of Securities Dealers Automated Quotation System, also referred to
as "NASDAQ", symbol FONR.  The following table sets forth the high and low
trades reported in NASDAQ System for the periods shown.

                    Fiscal Quarter               High       Low
             -----------------------------       ----       ----
             January  -  March        2004       1.59       1.15
             April    -  June         2004       1.52       1.13
             July     -  Septembe     2004       1.32       1.00
             October  -  December     2004       1.88       1.02
             January  -  March        2005       1.78       1.19
             April    -  June         2005       1.42       1.14
             July     -  September    2005       1.29       1.01
             October  -  December     2005       1.12        .67
             January  -  March        2006        .85        .57
             April    -  June         2006        .80        .26
             July     -  August 30    2006        .62        .33

On August 30, 2006, we had  approximately  4,616  stockholders  of record of our
Common  Stock,  10  stockholders  of  record  of our  Class B  Common  Stock,  4
stockholders  of record of our Class C Common  Stock and 3,916  stockholders  of
record of our Class A Non-voting Preferred Stock.

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

During  fiscal 2006 we received  notices from NASDAQ that our common stock would
be delisted  unless the market price  recovered  and  increased for at least ten
consecutive  trading days to $1.00 per share.  Originally the date by which this
was required to occur was June 20, 2006,  but since FONAR was then in compliance
with NASDAQ's other listing requirements, an extension of six months to December
20, 2006 was granted.

We paid cash  dividends  in fiscal 1998 and the first  three  quarters of fiscal
1999 on monies we received from the enforcement of our patents. Except for these
dividends,  we have not paid any cash  dividends.  Except  for these  dividends,
however,  we expect that we will retain  earnings to finance the development and
expansion of our business.




Item 6.  SELECTED FINANCIAL DATA

The following selected  consolidated  financial data has been extracted from our
consolidated  financial  statements for the five years ended June 30, 2006. This
consolidated  selected  financial  data should be read in  conjunction  with our
consolidated  financial  statements  and the related notes included in Item 8 of
this form.

              As of and For the Periods Ended June 30,
              ----------------------------------------
                  2006        2005        2004        2003          2002
              ------------  -----------  -----------  ------------  ------------
STATEMENT OF
OPERATIONS

Revenues      $33,076,000 $104,899,000  $71,609,000   $52,892,000   $43,161,000

Cost of
revenues      $26,950,000 $ 67,331,000  $44,945,000   $32,894,000   $24,954,000

Research and
Development
Expenses       $6,868,000 $  6,007,000  $ 5,491,000   $ 5,164,000   $ 5,100,000

Net (Loss)
Income from
continuing
operations   $(29,963,000)  $1,014,000  ($9,494,000) ($15,201,000) ($16,956,000)

Net Gain
(Loss) from
discontinued
operations   $    ---        $ ---       $ ---          $ 194,000   ($5,926,000)

Basic and
Diluted
Net Income
(Loss)
per common
share-
continuing
operations   $      (.27)   $     .01   $     (.10)   $     (.20)   $      (.27)


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

Basic
Weighted
average number
of shares
outstanding   110,403,128  101,591,997   91,027,951    75,816,973    63,511,814

Diluted
Weighted
average number
of shares
outstanding   110,403,128  105,505,705   91,027,951    75,816,973    63,511,814


BALANCE SHEET DATA

Working
capital (1)    14,237,000  $36,224,000  $22,593,000   $13,517,000   $14,107,000

Total
Assets         57,230,000  $76,094,000  $77,201,000   $58,749,000   $73,129,000

Long-term
debt and
obligations
under capital
leases (1)      1,406,000  $ 1,392,000  $ 6,702,000   $ 1,930,000   $ 9,624,000

Stockholder's
equity         30,419,000  $51,869,000  $43,154,000   $32,379,000   $35,695,000

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



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

INTRODUCTION.

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

Fonar's  principal MRI products are its  Stand-Up(TM)/Upright(TM)  MRI and Fonar
360(TM) MRI scanners. The Stand-Up(TM) MRI allows patients to be scanned for the
first time under  weight-bearing  conditions.  The Company has been aggressively
seeking new sales and during fiscal 2006 and 2005,  respectively received orders
for 18 and 30 Stand-Up(TM)  MRI scanners.  The  Stand-Up(TM) MRI is the only MRI
capable of producing images in the weight bearing state.

In fiscal 2005, we received our first order for a 360(TM) MRI scanner,  bringing
the total number of orders for our MRI scanners to 31 in fiscal 2005.

At 0.6 Tesla field  strength,  the Upright(TM) MRI and Fonar 360(TM) magnets are
among the  highest  field  open MRI  scanners  in the  industry,  offering  non-
claustrophobic  MRI together with  high-field  image  quality.  Fonar's open MRI
scanners were the first high field strength MRI scanners in the industry.

HMCA commenced  operations in July,  1997 and generates  revenues from providing
comprehensive  management  services,   including  development,   administration,
accounting, billing and collection services, together with office space, medical
equipment,  supplies and non-medical  personnel to its clients.  Revenues are in
the form of fees  which are  earned  under  contracts  with MRI  facilities  and
physical rehabilitation practices. Since April 2003, HMCA has not engaged in the
management of primary care medical practices.  Since July 2005, HMCA has engaged
only in the  management  of MRI  facilities,  having  sold  the  portion  of its
business  engaged in the  management  of  physical  therapy  and  rehabilitation
practices.

For the  fiscal  years  ended June 30,  2006,  June 30,  2005,  95.2% and 96.2%,
respectively, of HMCA's revenues were derived from contracts with facilities and
practices owned by Dr. Raymond V. Damadian,  the President of FONAR and HMCA and
principal  stockholder of FONAR.  The agreements with the MRI facilities are for
one-year terms which renew  automatically on an annual basis, unless terminated.
The fees are based on the number of procedures  performed  and  currently  range
from  $250 to $500  per MRI  scan.  The fees are  reviewed  and if  appropriate,
adjusted on an annual basis by mutual agreement.

Effective as of June 1, 2005  agreements  were  entered into with new  practices
with the new owners of the physical therapy and rehabilitation practices who had
no affiliation with Dr. Damadian,  Fonar or HMCA. These agreements were assigned
in connection with the sale of the portion of HMCA's business  managing physical
therapy and rehabilitation practices. Historically, adjustments were made on the
basis of changes in HMCA's costs,  plus a percentage of costs.  The monthly fees
under these  contracts with the physical  rehabilitation  practices  ranged from
approximately $110,000 to $205,000.

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

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

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

We record a valuation  allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized.  As of June 30, 2006, we recorded a
valuation  allowance which reduced our deferred tax assets to equal our deferred
tax liability.

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

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

RESULTS OF OPERATIONS. FISCAL 2006 COMPARED TO FISCAL 2005

In fiscal 2006, we  experienced a net loss of $30.0 million on revenues of $33.1
million,  as  compared  to a net income of $1.0  million on  revenues  of $104.9
million for fiscal 2005. This  represents a decrease in revenues of 68.5%.  This
was due mostly to decreased  product  sales and  management  fees.  In addition,
notwithstanding  decreased  revenues,  total cost and expenses decreased by only
39.2%. We have been reluctant to make drastic cuts to date because we anticipate
that our sales  results  will  improve and we will need to have  maintained  our
current capacity.  Our consolidated operating results decreased by $31.4 million
to an  operating  loss of  $29.7  million  for  fiscal  2006 as  compared  to an
operating income of $1.7 million for fiscal 2005.

Discussion of Operating Results of Medical Equipment Segment
Fiscal 2006 Compared to Fiscal 2005
------------------------------------------------------------

Revenues  attributable to our medical  equipment  segment  decreased by 75.7% to
$19.7  million in fiscal 2006 from $81.3  million in fiscal  2005,  reflecting a
decrease in product sales  revenues of 84.8%,  from $73.1 million in fiscal 2005
to $11.1  million in fiscal  2006,  offset by an increase in service  revenue of
47.7%,  from $5.8 million in fiscal 2005 to $8.6  million in fiscal  2006.  This
decline in revenues was  attributable to a reduction in sales of our Upright(TM)
MRI.  Notwithstanding the dramatic decrease in revenues, which are recognized at
certain  benchmarks in the production of the scanner,  the decline in orders was
not as great, decreasing 41.9% from 31 scanners in fiscal 2005 to 18 scanners in
fiscal  2006.  We attribute  this decline  primarily to a concern on the part of
potential  customers  about  MRI scan  reimbursements  from  medical  insurance,
no-fault insurance,  worker's compensation and Federal and State programs,  most
significantly  Medicare  and  Medicaid.  Even  in  our  own  management  of  MRI
facilities by HMCA, we have noticed an increasing resistance to paying claims by
insurers. Also of concern is the Deficit Reduction Act which, if it becomes law,
is expected to reduce Medicare funding available for MRI imaging.

We  anticipate  an  improvement  in  our   Upright(TM)  MRI  sales  because  the
Upright(TM)  MRI is  unique in that it  permits  MRI  scans to be  performed  on
patients  upright in the  weight-bearing  state and in multiple  positions  that
correlate  with  symptoms.  An important  event in our ongoing effort to educate
both the medical community and payors about the benefits,  if not necessity,  of
utilizing  Upright(TM)  MRI scanning,  occurred  subsequent to the end of fiscal
2006 when we sold an Upright(TM) MRI scanner to the largest orthopedic  hospital
in the Netherlands, St. Maartenskliniek. Upon placing the order, the Chairman of
Spine Surgery at St. Maartenskliniek  expressed the view that for their hospital
to  continue  to  engage  in  spine  surgery  without  FONAR's  Upright(TM)  MRI
technology,  now that it was  available was  "unacceptable"  and that owning the
scanner "was not optional,  but  mandatory".  He further stated that "[o]nce our
active research program has discovered the benefits of this new FONAR technology
for  patients,  we intend  to  publish  the  results  in a lot of peer  reviewed
scientific journals".

In addition,  significant progress is being made in developing the FONAR 360(TM)
MRI  scanner  so  that  it can be  used  in  interventional  procedures.  At the
Oxford-Nuffield  site in the United Kingdom,  where we installed the first FONAR
360(TM) MRI,  FONAR  software  engineers  have  completed  and installed our 2nd
generation tracking software, which is designed to enable the surgeons to insert
needles into the patient and  accurately  advance them under direct visual image
guidance to the target tissue,  such as a tumor, in order to inject  therapeutic
agents directly into the tissue.

The increase in service  revenue is a result  primarily of our increase  scanner
base,  as scanners sold in previous  years become  service  customers  after the
warranty period expires.

During the fiscal years ended June 30, 2006 and June 30, 2005, respectively,  we
received  orders for 18 and 30  Upright(TM)  MRI  scanners.  In  addition  to 30
Upright(TM)  MRI  scanners,  we  received  our first  order for a Fonar  360(TM)
scanner in fiscal 2005, the installation of which was completed in fiscal 2006.

Product sales to unrelated  parties decreased by 87.8% in fiscal 2006 from $66.9
million in fiscal 2005 to $8.2 million in fiscal 2006.  Product sales to related
parties  decreased  by 52.0% in fiscal 2006 from $6.2  million in fiscal 2005 to
$3.0 million in fiscal 2006. We believe that one of our principal  challenges in
achieving  greater  market  penetration  is  attributable  to  the  better  name
recognition  and larger sales forces of our larger  competitors  such as General
Electric,  Siemens,  Hitachi, Philips and Toshiba and the ability of some of our
competitors to offer attractive financing terms through affiliates, such as G.E.
Capital.  Nevertheless,  no other competitor  offers a whole body weight bearing
MRI  scanner  such as the  Upright(TM)  MRI,  and the General  Electric  Medical
Systems division of General Electric acts as a manufacturer's representative for
the Stand-Up(TM) MRI.

We believe that our aggregate  product sales to unrelated parties of Upright(TM)
Scanners shows that we are successfully meeting that challenge.

The  operating  results  for the  medical  equipment  segment  declined by $25.5
million from an income of $752,000 in fiscal 2005 to a loss of $24.7  million in
fiscal 2006. This decline is attributable to a decrease in our scanner sales.

We  recognized  revenues of $10.5 million from the sale of our  Upright(TM)  MRI
scanners  and the balance of $383,589  from the sale of our first Fonar  360(TM)
MRI scanner in fiscal 2006.  In fiscal  2005,  we  recognized  revenues of $71.7
million from the sale of Upright(TM)  MRI scanners and $764,031 from the sale of
our first Fonar 360(TM) MRI scanner in fiscal 2005.

Sales  of  MRI  scanners  to  related   parties,   consisting  of   professional
corporations  and other entities in which Dr.  Damadian or members of his family
have  an  interest  represented  approximately  9.0%,  or $3.0  million,  of our
revenues in fiscal 2006, as compared to 5.9%,  or $6.2 million,  of our revenues
in fiscal  2005.  We  believe  concerns  about  payor  reimbursements  adversely
affected these sales as well as sales to unrelated parties.

License and royalty revenue declined to $0.00 in fiscal 2006 from  approximately
$2.3 million in fiscal 2005.

Research and development expenses,  net of capitalized costs, increased by 14.3%
to $6.9 million in fiscal 2006 as compared to $6.0  million in fiscal 2005.  Our
expenses  for fiscal 2006  represented  continued  research and  development  of
Fonar's scanners,  Fonar's new hardware and software  product,  Sympulse(TM) and
new surface coils to be used with the Stand-Up(TM) MRI scanner.

Discussion of Operating Results of Physician and Diagnostic Services Management
Segment.
Fiscal 2006 Compared to Fiscal 2005
-------------------------------------------------------------------------------

Revenues  attributable  to  the  Company's  physician  and  diagnostic  services
management  segment,  HMCA,  decreased by 43.4% to $13.4  million in fiscal 2006
from $23.6 million in fiscal 2005. The decrease in revenues reflected  decreases
resulting  from sale of HMCA's  physical  therapy  and  rehabilitation  facility
management business. HMCA has elected to manage only MRI facilities.  Presently,
ten of the 12 MRI facilities  managed by HMCA have  Upright(TM) MRI scanners and
additional upgrades are planned.

Cost of revenues as a percentage  of the related  revenues for our physician and
diagnostic  services management segment increased from $14.5 million or 61.3% of
related  revenues for the year ended June 30, 2005 to $9.4 million,  or 70.4% of
related  revenue  for the year  ended  June 30,  2006.  This  resulted  from our
inability to benefit from reduced  costs per scanner that would have resulted if
there had been a higher volume of sales in fiscal 2006.

Operating  results of this segment declined from an operating income of $912,000
in fiscal 2005 to operating  loss of $5.0  million in fiscal 2006.  We attribute
the decline to HMCA's sale of its physical therapy and  rehabilitation  facility
management business.

Discussion of Certain Consolidated Results of Operations
Fiscal 2006 Compared to Fiscal 2005
--------------------------------------------------------

We  recognized  interest  income of  $809,691 in 2006 as compared to $546,648 in
fiscal 2005,  representing an increase of 48.1%.  The increase was  attributable
primarily  to an increase in interest  rates on our  investments  in  marketable
securities.

Interest  expense of $281,903 was  recognized  in fiscal 2006,  increasing  from
$232,227 in fiscal 2005 and  representing a increase of 21.4%.  The increase was
attributable primarily to new capital lease obligations.

Notwithstanding   that  revenue  decreased  by  68.5%,   selling,   general  and
administrative  expenses,  exclusive of compensatory element of stock issuances,
decreased by 7.9% to $24.0  million in fiscal 2006 from $26.0  million in fiscal
2005. Essentially, we decided not to cut payroll and other overhead expenditures
since we anticipate  that sales will improve and we will be in a better position
if we maintain our capacity.

The decrease in compensatory  element of stock issuances from approximately $3.1
million in fiscal 2005 to $1.9 million in fiscal 2006  reflected  the  continued
but reduced use of Fonar's stock bonus plans to pay certain  highly  compensated
employees and others in stock rather than in cash.

The higher  provision for bad debt of $1.5 million in fiscal 2006 as compared to
$164,000 in fiscal 2005,  reflected an increase in reserves  and  write-offs  of
certain  indebtedness  by  our  physician  and  diagnostic  services  management
segment.  This  reflected a higher  level of concern  over the ability of HMCA's
clients to pay past  management  fees due to issues and the settlement of issues
with payors.

We are  enthusiastic  about the future of our  Upright(TM) MRI and FONAR 360(TM)
scanners  which  bring a new  plateau  of  openness  to  diagnostic  MRI and are
expected  to bring a new  frontier in  performing  MRI guided  intervention.  We
believe our new products have begun to  successfully  penetrate  the market,  as
reflected  in the dramatic  increase in product  sales from  approximately  $6.1
million in fiscal  2001 to $11.6  million in fiscal  2002,  to $24.9  million in
fiscal  2003,  to $43.0  million in fiscal  2004 and to $73.1  million in fiscal
2005, notwithstanding lower revenues of 11.1 million in fiscal 2006. In addition
to our  success  with our  Upright(TM)  MRI,  we received an order for our first
Fonar 360(TM) in the first quarter of fiscal 2005.

Service  and repair  fees also have  steadily  increased,  as  reflected  by the
increase  in service  and repair  fees from $2.0  million in fiscal 2001 to $2.2
million in fiscal 2002 to $2.5  million in fiscal 2003 to $3.2 million in fiscal
2004 to $5.8 million in fiscal 2005 and to $8.6 million in fiscal 2006.

Continuing  our  tradition  as the  originator  of MRI, we remain  committed  to
maintaining  our  position  as a  leading  innovator  of  the  industry  through
aggressive  investing in research and  development.  In fiscal 2006 we continued
our  investment  in the  development  of our new  MRI  scanners,  together  with
software  and  upgrades,  with an  investment  of  $7,581,898  in  research  and
development,  $714,253 of which was  capitalized,  as  compared  to  $6,752,755,
$745,994 of which was capitalized,  in fiscal 2005. The research and development
expenditures were  approximately  38.5% of revenues  attributable to our medical
equipment  segment,  and 22.9% of total  revenues,  in 2006 and 8.3% of  medical
equipment  segment  revenues,  and 6.4% of total  revenues in fiscal 2005.  This
represented a 12.3% increase in research and development  expenditures in fiscal
2006 as compared to fiscal 2005.

In  summary,  Fonar's  trend of steadily  increasing  MRI  scanner  sales,  most
dramatically  the increase in Upright(TM) MRI scanner sales revenues from fiscal
2001 through  fiscal 2005,  experienced  a setback in fiscal 2006. We anticipate
that scanner  sales  revenues  will improve due to the unique  capability of the
Upright(TM) MRI scanner to scan patients in weight-bearing  positions and future
sales of the  Fonar  360(TM)  for image  guided  interventional  procedures  and
treatments. Service revenues have increased over the past five fiscal years.

The  physician  and  diagnostic  services  management  segment,  HMCA,  revenues
increased,  from $23.0  million in fiscal  2004 to $23.6 in fiscal 2005 and then
decreased to $13.4 million in fiscal 2006.  This is primarily  attributed to the
sale of HMCA's physical therapy and rehabilitation facility management business,
which had generated revenues of $9.7 million in fiscal 2005.

We have been  taking  steps to improve  HMCA  revenues  by closing  unprofitable
facilities  and  continuing our program of replacing the MRI scanners at the MRI
facilities we manage with  Upright(TM)  MRI scanners and opening new  facilities
equipped with Upright(TM) MRI scanners.

Marketing  expenditures  are likely to increase,  as the Company  continues  its
efforts to promote sales.

In the beginning of fiscal 2006,  HMCA sold the portion of its business  engaged
in the management of physical therapy and  rehabilitation  facilities in July of
2005 to Health Plus  Management  Services,  L.L.C.  for a purchase price of $6.6
million, payable pursuant to a promissory note in 120 monthly installments.

The first twelve  installments  are interest only and the remaining 108 payments
will consist of equal  installments  of principal  and interest in the amount of
$76,014 each. The note is secured by a first lien on all of the assets of Health
Plus,  including  its  accounts  receivable.  The note is subject to  prepayment
provisions  to the  extent  Health  Plus  resells  all or part of the assets and
business or utilizes the assets sold as collateral in any debt financing.

HMCA had  recognized  revenue  from  the  management  of  physical  therapy  and
rehabilitation  facilities of approximately $9.7 million during both fiscal 2005
and 2004,  but only  $648,000 in fiscal 2006 due to the sale of this  portion of
HMCA's  business in July,  2005. In connection with this sale, HMCA recognized a
diminimus  loss during the quarter ended  September 30, 2005. In addition,  HMCA
recorded a one time charge to earnings  during the quarter  ended  September 30,
2005 of $1.6 million related to the  termination of the employment  contracts of
the two principal individuals involved in the management of the physical therapy
and rehabilitation facilities.

RESULTS OF OPERATIONS. FISCAL 2005 COMPARED TO FISCAL 2004

In fiscal 2005, we experienced  net income of $1.0 million on revenues of $104.9
million,  as compared to a net loss of $9.5 million on revenues of $71.6 million
for fiscal 2004. This represented an increase in revenues of 46.5%. This was due
in part to the fact that while  revenues  increased  by 46.5%,  total  costs and
expenses increased by only 28.9%. Our consolidated operating results improved by
$10.2 million to operating income of $1.7 million for fiscal 2005 as compared to
an operating loss of $8.5 million for fiscal 2004.

Discussion of Operating Results of Medical Equipment Segment
Fiscal 2005 Compared to Fiscal 2004
------------------------------------------------------------

Revenues  attributable to our medical  equipment  segment  increased by 67.1% to
$81.3  million in fiscal 2005 from $48.6  million in fiscal 2004,  reflecting an
increase in product sales  revenues of 70.2%,  from $43.0 million in fiscal 2004
to $73.1  million in fiscal 2005 and an  increase  in service  revenue of 80.6%,
from  $3.2  million  in  fiscal  2004 to  $5.8  million  in  fiscal  2005.  This
improvement  in  revenues  was  attributable  to an  increase  in  sales  of our
Upright(TM)  MRI. The increase in service revenue was a result  primarily of our
increased  scanner  base,  as scanners  sold in previous  years  became  service
customers after the warranty period expired.

During the fiscal years ended June 30, 2005 and June 30, 2004, respectively,  we
received  orders for 30 and 39  Upright(TM)  MRI  scanners.  In  addition  to 30
Upright(TM)  MRI  scanners,  we received our first order for a Fonar 360(TM) MRI
scanner.

Confirming  our  expectation of increased  demand for our MRI scanners,  product
sales to unrelated  parties increased by 77.7% in fiscal 2005 from $37.7 million
in fiscal 2004 to $66.9 million in fiscal 2005. Product sales to related parties
increased  by 16.8% in  fiscal  2005 from $5.3  million  in fiscal  2004 to $6.2
million in fiscal 2005. No other  competitor  offers a whole body weight bearing
MRI  scanner  such as the  Upright(TM)  MRI,  and the General  Electric  Medical
Systems division of General Electric acts as a manufacturer's representative for
the Upright(TM) MRI.

The operating results for the medical equipment segment improved by $9.5 million
from a loss of $8.8  million in fiscal  2004 to an income of  $752,000 in fiscal
2005.  This  improvement  was   attributable  to  our  continuing   increase  in
recognition of revenues on our scanner sales.

We  recognized  revenues of $71.7 million from the sale of our  Upright(TM)  MRI
scanners  and $764,031  from the sales of a FONAR  360(TM) MRI scanner in fiscal
2005. In fiscal 2004,  we recognized  revenues of $42.7 million from the sale of
Upright(TM) MRI scanners.

Sales  of  MRI  scanners  to  related   parties,   consisting  of   professional
corporations  and other entities in which Dr.  Damadian or members of his family
have  an  interest  represented  approximately  5.9%,  or $6.2  million,  of our
revenues in fiscal 2005, as compared to 7.4%,  or $5.3 million,  of our revenues
in fiscal 2004.

License and royalty revenue  declined by 4.3% to  approximately  $2.3 million in
fiscal 2005 from approximately $2.4 million in fiscal 2004.

Research and development expenses,  net of capitalized costs,  increased by 9.4%
to $6.0 million in fiscal 2005 as compared to $5.5  million in fiscal 2004.  Our
expenses  for fiscal 2005  represented  continued  research and  development  of
Fonar's scanners,  Fonar's new hardware and software  product,  Sympulse(TM) and
new surface coils to be used with the Upright(TM) MRI scanner.

Discussion of Operating Results of Physician and Diagnostic Services Management
Segment.
Fiscal 2005 Compared to Fiscal 2004
-------------------------------------------------------------------------------

Revenues  attributable  to  the  Company's  physician  and  diagnostic  services
management segment, HMCA, increased by 2.8% to $23.6 million in fiscal 2005 from
$23.0  million in fiscal 2004.  The increase in revenues  reflected  anticipated
increases provided by upgraded facilities.

Cost of revenues as a percentage  of the related  revenues for our physician and
diagnostic  services  management  segment increased from $13.8 million or 60% of
related revenues for the year ended June 30, 2004 to $14.5 million,  or 61.3% of
related revenue for the year ended June 30, 2005.

Operating results of this segment improved from an operating loss of $308,000 in
fiscal 2004 to  operating  income of $912,000 in fiscal  2005.  We believe  this
improvement resulted from HMCA's focus on upgrading sites by the introduction of
Upright(TM) MRI scanners at MRI facilities.

Discussion of Certain Consolidated Results of Operations
Fiscal 2005 Compared to Fiscal 2004
--------------------------------------------------------

We  recognized  interest  income of  $546,648 in 2005 as compared to $448,571 in
fiscal 2004,  representing an increase of 21.9%.  The increase was  attributable
primarily  to an increase in interest  rates on our  investments  in  marketable
securities.

Interest  expense of $232,227  was  recognized  in fiscal 2005  decreasing  from
$268,128 in fiscal 2004 and  representing a decrease of 13.4%.  The decrease was
attributable primarily to the repayment of debt and capital lease obligations in
fiscal 2004.

Notwithstanding   that  revenue  increased  by  46.5%,   selling,   general  and
administrative  expenses,  exclusive of compensatory element of stock issuances,
increased  by only 6.2% to $26.6  million in fiscal  2005 from $25.1  million in
fiscal 2004,  accounting  in part for our increase in net income.  This increase
was related to expenses incurred in our medical segment related to marketing and
customer relations  programs,  such as participating in a trade show,  increased
commissions,  and an in-house seminar for all owners of Upright MRI(TM) scanners
and increased  professional  fees. A portion of the increased  professional fees
was related to the engagement of outside consultants to assist us in preparation
of internal  documentation in connection with our compliance with Section 404 of
the Sarbanes-Oxley  Act. In addition we incurred expenses in connection with the
defense of non-material litigation.

The decrease in compensatory  element of stock issuances from approximately $4.1
million in fiscal 2004 to $3.1 million in fiscal 2005  reflected  the  continued
but reduced use of Fonar's stock bonus plans to pay certain  highly  compensated
employees and others in stock rather than in cash.

The lower  provision  for bad debt of  $164,000  in fiscal  2005 as  compared to
$331,000 in fiscal  2004,  reflected a decrease in reserves  and  write-offs  of
certain indebtedness.

The amortization  expense of $634,000 in fiscal 2005 and fiscal 2004,  reflected
the amortization of management agreements attributable to HMCA's acquisitions.

Service and repair fees also increased,  as reflected by the increase in service
and repair fees from $1.7  million in fiscal 2000 to $2.0 million in fiscal 2001
to $2.2 million in fiscal 2002 to $2.5 million in fiscal 2003 to $3.2 million in
fiscal 2004 and $5.8 million in fiscal 2005.

In  fiscal  2005 we  continued  our  investment  in the  development  of our MRI
scanners,  together with software and upgrades, with an investment of $6,752,755
in research and development,  $745,994 of which was capitalized,  as compared to
$6,079,797,  $588,735 of which was capitalized, in fiscal 2004. The research and
development expenditures were approximately 8.3% of revenues attributable to our
medical  equipment  segment,  and 6.4% of total  revenues,  in 2005 and 12.5% of
medical equipment  segment revenues,  and 8.5% of total revenues in fiscal 2004.
This  represented a 11.1% increase in research and  development  expenditures in
fiscal  2005 as  compared  to fiscal  2004 and our  significantly  higher  total
revenues and medical equipment revenues which resulted from our greater emphasis
on marketing and selling.

In summary, in fiscal 2005, Fonar continued the trend of steadily increasing MRI
scanner sales,  most  dramatically the increase in Upright(TM) MRI scanner sales
revenues and in service revenues from fiscal 2001 through fiscal 2005.

The physician and diagnostic services  management  segment,  HMCA, revenues also
continued to increase, from $22.9 million in fiscal 2003 to $23.0 in fiscal 2004
and to $23.6 million in fiscal 2005.

We  also  increased  HMCA  revenues  by  closing  unprofitable   facilities  and
continuing our program of replacing the MRI scanners at the MRI facilities  with
Upright(TM)  MRI scanners and opening new facilities  equipped with  Upright(TM)
MRI scanners.

HMCA sold the  portion of its  business  engaged in the  management  of physical
therapy and rehabilitation  facilities in July of 2005 to Health Plus Management
Services,  L.L.C.  for a purchase price of $6.6 million,  payable  pursuant to a
promissory note in 120 monthly installments.

The first twelve  installments  are interest only and the remaining 108 payments
consist of equal installments of principal and interest in the amount of $76,014
each.  The note is secured by a first lien on all of the assets of Health  Plus,
including its accounts receivable.  The note is subject to prepayment provisions
to the extent  Health  Plus  resells  all or part of the assets and  business or
utilizes the assets sold as collateral in any debt financing.

HMCA had  recognized  revenue  from  the  management  of  physical  therapy  and
rehabilitation  facilities of  approximately  $9.7 million  during both 2005 and
2004.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and marketable  securities  decreased by 36.4% from $14.9
million at June 30, 2005 to $9.5 million at June 30, 2006.

Marketable securities approximated $4.9 million as of June 30, 2006, as compared
to $9.4  million  as of June  30,  2005.  At June 30,  2006,  we  decreased  our
investments in U.S.  Government  obligations from  approximately $3.8 million at
June 30, 2005 to  approximately  $2.4  million,  decreased  our  investments  in
corporate and government  agency bonds from  approximately  $4.0 million at June
30,  2005 to  approximately  $1.8  million  and  decreased  our  investments  in
certificates of deposits,  notes and  equivalents  from $1.6 million at June 30,
2005 to $575,000.

Cash used in operating  activities  for fiscal 2006  approximated  $2.6 million.
Cash used in operating activities was attributable substantially to the net loss
of 30.0 million  offset by a decrease in costs and estimated  earnings in excess
of billings of $7.6 million,  increase in customer  advances of $3.8 million and
increase in billings in excess of costs and estimated earnings of 2.7 million.

Cash provided by investing activities for fiscal 2006 approximated $909,000. The
principal  uses of cash from investing  activities  were purchases of marketable
securities  of $300,000,  purchases of property and  equipment of $2.4  million,
costs of capitalized  software  development of $714,000 and costs of patents and
copyrights  of  $443,000.  The  principal  source of cash  provided by investing
activities was the sale of approximately $4.7 in marketable securities.

Cash provided by financing activities for fiscal 2006 approximated $692,000. The
principal  sources  of cash in  financing  activities  were  proceeds  from  the
exercise of stock options and warrants of $784,000 and proceeds of $555,000 from
long-term  debt,  offset  by the  repayment  of  borrowings  and  capital  lease
obligations of $299,000 and  distributions  to holders of minority  interests of
$865,000.

Total  liabilities  increased by 10.0% during  fiscal 2006,  from  approximately
$23.7 million at June 30, 2005 to approximately  $26.1 million at June 30, 2006.
The increase in total liabilities  reflected  principally a decrease in accounts
payable of 42.3% from $8.5  million at June 30, 2005 to $4.9 million at June 30,
2006 and a increase in customer advances of 234.6% from $1.6 million at June 30,
2005 to $5.5 million at June 30, 2006, resulting from our increased backlog.

Our  obligations  and the periods in which they are  scheduled to become due are
set forth in the following table:


                               Due in
                               Less            Due          Due          Due
                               than 1        in 1-3       in 4-5       after 5
Obligation         Total        Year          years        years        years
----------      ------------  -----------  -----------  -----------  -----------
Long-term debt  $   555,152   $     -      $     -      $     -      $  555,152

Capital lease
Obligation          850,541      233,751      392,619      220,037       4,134

Operating
  leases          9,272,521    2,391,766    4,083,321    1,299,543   1,497,891
                ------------  -----------  -----------  ----------   -----------
Total cash
Obligations     $10,678,214   $2,625,517   $4,475,940   $1,519,580   $2,057,177
                ============  ===========  ===========  ===========  ===========

As at June 30, 2006,  our  obligations  included  approximately  $2.2 million in
various state sales taxes.

Our working capital surplus as of June 30, 2006 approximates  $14.2 million,  as
compared to a working capital surplus of $36.2 million as of June 30, 2005.

In order to conserve our capital  resources,  we have issued  common stock under
our  stock  bonus  and  stock  option  plans to  compensate  employees  and non-
employees for services  rendered.  In fiscal 2006, the  compensatory  element of
stock  issuances  was $1.9  million as compared to $3.1 million for fiscal 2005.
Utilization  of equity in lieu of cash  compensation  has improved our liquidity
since it increases cash available for other expenditures.

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

Capital expenditures for fiscal 2006 approximated $3.6 million and substantially
consisted of leasehold  improvement  costs for new HMCA managed  facilities  and
other equipment,  in the amount of $2.4 million,  capitalized  software costs of
$714,000, and capitalized patent costs of $443,000.

Fonar has not committed to making capital  expenditures  in the 2007 fiscal year
other than its intention to continue  research and  development  expenditures at
current levels.

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

Our business  plan calls for a continuing  emphasis on providing  our  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 our installed base of
scanners were $5.8 million for the year ended June 30, 2005 and $8.6 million for
the year ended June 30, 2006.

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

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Fonar's  investments  in  fixed  rate  instruments.   None  of  the  fixed  rate
instruments  in which we invest extend beyond June 30, 2011.  Below is a tabular
presentation of the maturity profile of the fixed rate instruments held by us at
June 30, 2006.

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

     Date      Investments in Fixed Rate   Weighted Average
               Instruments                 Interest Rate

     6/30/07          $ 300,000                3.50%
     6/30/08          1,350,000                3.92%
     6/30/09          1,398,500                3.82%
     6/30/10          1,845,999                3.25%
     6/30/11            200,000                4.45%

Total:                5,094,499

Fair Value
at 6/30/06            4,858,744

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

See Note 12 to the  consolidated  Financial  Statements for information on long-
term debt.









Item 8.

                             FINANCIAL STATEMENTS

                      FONAR CORPORATION AND SUBSIDIARIES

                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  ON INTERNAL CONTROL OVER FINANCIAL REPORTING

CONSOLIDATED BALANCE SHEETS
  At June 30, 2006 and 2005

CONSOLIDATED STATEMENTS OF OPERATIONS
  For the Three Years Ended June 30, 2006, 2005 and 2004

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
  For the Three Years Ended June 30, 2006, 2005 and 2004

CONSOLIDATED STATEMENTS OF CASH FLOWS
  For the Three Years Ended June 30, 2006, 2005 and 2004

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS






























            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            -------------------------------------------------------

To the Board of Directors and Stockholders
FONAR Corporation and Subsidiaries

We  have  audited  the  accompanying   consolidated   balance  sheets  of  FONAR
Corporation and  Subsidiaries  (the "Company") as of June 30, 2006 and 2005, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three  years in the  period  ended  June 30,  2006.  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 the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated  financial position of FONAR
Corporation  and  Subsidiaries  at June 30, 2006 and 2005, and the  consolidated
results of its  operations and its cash flows for each of the three years in the
period ended June 30, 2006, in conformity with accounting  principles  generally
accepted in the United States of America.

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the effectiveness of the Company's
internal  control over  financial  reporting  as of June 30, 2006,  based on the
criteria  established  in Internal  Control-Integrated  Framework  issued by the
Committee of Sponsoring  Organizations of the Treadway Commission and our report
dated,  September 13, 2006,  expressed an  unqualified  opinion on  management's
assessment of the effectiveness of the Company's internal control over financial
reporting  and an  unqualified  opinion on the  effectiveness  of the  Company's
internal control over financial reporting.

During each of the three years in the period ended June 30, 2006, a  significant
portion of the Company's revenues was from related parties.


/s/Marcum & Kliegman LLP

New York, New York
September 13, 2006










            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            -------------------------------------------------------
To the Board of Directors and Stockholders of
FONAR Corporation and Subsidiaries

We  have  audited   management's   assessment,   included  in  the  accompanying
Management's  Report on Internal Controls over Financial  Reporting,  that FONAR
Corporation and  Subsidiaries  (the  "Company")  maintained  effective  internal
control  over  financial  reporting  as of June 30,  2006 based on the  criteria
established in Internal Control-Integrated  Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining  effective internal control over financial reporting
and for its assessment of the  effectiveness  of internal control over financial
reporting.   Our  responsibility  is  to  express  an  opinion  on  management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain  reasonable  assurance  about whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit included obtaining an understanding of internal control over
financial reporting,  evaluating management's assessment, testing and evaluating
the design and operating  effectiveness of internal control, and performing such
other  procedures as we considered  necessary in the  circumstances.  We believe
that our audit provides a reasonable basis for our opinion.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. A
company's internal control over financial  reporting includes those policies and
procedures  that (1) pertain to the  maintenance  of records that, in reasonable
detail,  accurately and fairly reflect the  transactions and dispositions of the
assets of the company;  (2) provide  reasonable  assurance that transactions are
recorded  as  necessary  to  permit  preparation  of  financial   statements  in
accordance with accounting principles generally accepted in the United States of
America,  and that receipts and  expenditures of the company are being made only
in accordance  with  authorizations  of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could
have a material effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation to
future  periods  are  subject to the risk that  controls  may become  inadequate
because of  changes in  conditions,  or that the degree of  compliance  with the
policies or procedures may deteriorate.

In our opinion,  management's  assessment that the Company maintained  effective
internal control over financial reporting as of June 30, 2006, is fairly stated,
in  all  material  respects,  based  on the  criteria  established  in  Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.  Also in our opinion, the Company maintained, in all
material  respects,  effective  internal control over financial  reporting as of
June 30, 2006, based on the criteria established in Internal  Control-Integrated
Framework  issued by the Committee of Sponsoring  Organizations  of the Treadway
Commission.

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the consolidated balance sheets as
of June 30, 2006 and 2005 and the related consolidated statements of operations,
stockholders'  equity,  and cash flows for each of the three years in the period
ended June 30,  2006 of the  Company  and our report  dated  September  13, 2006
expressed  an  unqualified  opinion on those  financial  statements.  Our report
emphasizes that during each of the three years in the period ended June 30, 2006
a significant portion of the Company's revenue was from related parties.

/s/Marcum & Kliegman LLP

New York, New York
September 13, 2006

                       FONAR CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                                     ------
                                                              June 30,
                                                   -----------------------------
                                                          2006             2005
                                                   ------------     ------------
Current Assets:
  Cash and cash equivalents                         $  4,556,680    $  5,516,603
  Marketable securities                                4,937,842       9,411,231
  Accounts receivable - net of allowances for
    doubtful accounts of $644,087 and $498,452
    at June 30, 2006 and 2005, respectively            3,358,721       1,971,251
  Accounts receivable - related parties - net of
    allowances for doubtful accounts of
    $646,621 at June 30, 2006 and 2005                   498,875         470,388
  Medical receivables                                  6,053,007       9,990,000
  Management fee receivable                                 -            893,419
  Management fee receivable - related medical
    practices - net of allowances for doubtful
    accounts of $3,053,486 and $2,017,163 at
    June 30, 2006 and 2005, respectively               7,322,739       7,826,069
  Costs and estimated earnings in excess of
    billings on uncompleted contracts                  2,957,679      10,538,163
  Inventories                                          7,077,059       9,837,790
  Investment in sales-type lease                         279,028         173,751
  Current portion of advances and notes to related
    medical practices                                     89,824         149,441
  Current portion of note receivable less discount
    for below mark interest                              459,398           -
  Prepaid expenses and other current assets            1,280,648       1,784,935
                                                     -----------    ------------
      Total Current Assets                            38,871,500      58,563,041

Property and Equipment - Net                           6,667,420       7,594,225

Advances and Notes to Related Medical Practices -
  net of allowances for doubtful accounts of
  $364,791 at June 30, 2006 and 2005                     676,421         200,987

Investment in Sales-Type Lease                              -            279,028

Notes Receivable less discount for below market
interest                                               5,718,670         553,000

Management Agreements - Net                                 -          3,991,688

Other Intangible Assets - Net                          4,929,483       4,503,247

Other Assets                                             366,050         409,266
                                                    ------------    ------------
      Total Assets                                  $ 57,229,544    $ 76,094,482
                                                    ============    ============


See accompanying notes to consolidated financial statements.

                       FONAR CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                   LIABILITIES
                                   -----------

                                                             June 30,
                                                   ----------------------------
                                                        2006             2005
                                                    ------------    -----------
Current Liabilities:
  Current portion of long-term debt and capital
    leases                                          $    233,751    $  425,143
  Accounts payable                                     4,886,681     8,468,505
  Other current liabilities                            6,101,835     7,474,090
  Unearned revenue on service contracts                4,238,543     3,305,066
  Unearned revenue on service contracts - related
    parties                                              543,757       525,699
  Customer advances                                    5,463,891     1,632,983
  Customer advances - related party                       41,566        41,566
  Income taxes payable                                     8,088        11,234
  Billings in excess of costs and estimated
    earnings on uncompleted contracts                  2,978,789       301,179
  Billings in excess of costs and estimated
    earnings on uncompleted contracts - related
    party                                                137,409       153,461
                                                    ------------  ------------
      Total Current Liabilities                       24,634,310    22,338,926
                                                    ------------  ------------
Long-Term Liabilities:
  Due to related medical practices                        92,663       127,728
  Long-term debt and capital leases, less
    current portion                                    1,171,943       966,371
  Other liabilities                                      214,971       270,372
                                                    ------------  ------------
      Total Long-Term Liabilities                      1,479,577     1,364,471
                                                    ------------  ------------
      Total Liabilities                             $ 26,113,887  $ 23,703,397
                                                    ------------  ------------
Commitments, Contingencies and Other Matters
















See accompanying notes to consolidated financial statements.


                       FONAR CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS


                              STOCKHOLDERS' EQUITY
                              --------------------

                                                             June 30,
                                                   ---------------------------
                                                      2006            2005
                                                    ------------  ------------
Minority Interest                                   $    696,860  $    522,564
                                                    ------------  ------------
Stockholders' Equity:
  Class A non-voting preferred stock - $.0001
    par value; authorized - 8,000,000 shares;
    issued and outstanding - 7,836,287 shares
    at June 30, 2006 and 2005                                784           784
  Preferred stock - $.001 par value;
    authorized - 10,000,000 shares; issued
    and outstanding - none                                   -             -
  Common stock - $.0001 par value; authorized -
    150,000,000 and 130,000,000 shares at
    June 30, 2006 and 2005, respectively;
    issued - 114,995,094 and 105,043,014 shares
    at June 30, 2006 and 2005, respectively;
    outstanding - 114,704,030 and 104,751,950
    shares at June 30, 2006 and 2005, respectively        11,469        10,474
  Class B common stock (10 votes per share) -
    $.0001 par value; authorized - 4,000,000
    shares; issued and outstanding - 3,953
    shares at June 30, 2006 and 2005                        -             -
  Class C common stock (25 votes per share) -
    $.0001 par value; authorized - 10,000,000
    shares; issued and outstanding - 9,562,824
    shares at June 30, 2006 and 2005                         956           956
  Paid-in capital in excess of par value             168,411,588   159,928,871
  Accumulated other comprehensive loss                  (246,080)     (182,250)
  Accumulated deficit                               (136,332,640) (106,369,283)
  Notes receivable from employee stockholders           (751,890)     (845,641)
  Treasury stock, at cost - 291,064 shares
    of common stock at June 30, 2006 and 2005           (675,390)     (675,390)
                                                    ------------  ------------
      Total Stockholders' Equity                      30,418,797    51,868,521
                                                    ------------  ------------
      Total Liabilities and Stockholders' Equity    $ 57,229,544  $ 76,094,482
                                                    ============  ============







See accompanying notes to consolidated financial statements.


                      FONAR CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                            For the Years Ended June 30,
                                       ----------------------------------------
                                           2006          2005          2004
                                       ------------  ------------  ------------
Revenues
  Product sales - net                  $  8,161,158  $ 66,918,535  $ 37,658,710
  Product sales - related parties - net   2,983,281     6,210,302     5,315,837
  Service and repair fees - net           7,581,674     5,017,478     2,729,352
  Service and repair fees - related
    parties - net                           981,942       780,634       480,556
  Management and other fees                 647,999       893,419        -
  Management and other fees - related
    medical practices - net              12,720,275    22,738,176    22,979,902
  License fees and royalties                 -          2,340,000     2,445,000
                                       ------------  ------------  ------------
      Total Revenues - Net               33,076,329   104,898,544    71,609,357
                                       ------------  ------------  ------------
Costs and Expenses
  Costs related to product sales          9,132,140   43,686,340    23,628,807
  Costs related to product sales
    - related parties                     2,820,472     3,801,424     3,517,664
  Costs related to service and
    repair fees                           4,948,870     4,634,486     3,323,862
  Costs related to service and
    repair fees - related parties           640,954       721,047       688,606
  Costs related to management and
    other fees                              527,392       547,717        -
  Costs related to management and other
     fees - related medical practices     8,879,688    13,939,841    13,786,039
  Research and development                6,867,645     6,006,761     5,491,062
  Selling, general and administrative, inclusive
    of compensatory element of stock issuances
    of $1,895,462, $3,073,134, and $4,125,717
    for the years ended June 30,
    2006, 2005 and 2004, respectively    25,873,719    29,099,756    28,679,037
  Provision for bad debts                 1,472,635       164,293       330,997
  Termination costs paid
    with common stock                     1,600,000          -             -
  Amortization of management agreements      37,300       633,577       633,577
                                       ------------  ------------  ------------
      Total Costs and Expenses           62,800,815   103,235,242    80,079,651
                                       ------------  ------------  ------------
      (Loss) Income from Operations     (29,724,486)    1,663,302    (8,470,294)

Other Income and (Expenses):
  Financing costs due to the change
    in terms of warrants                       -             -         (238,950)
  Interest expense                         (281,903)     (232,277)     (263,803)
  Interest expense - related parties           -             -           (4,325)
  Investment income                         796,517       522,870       403,398
  Interest income - related parties          13,174        23,778        45,173
  Other income - net                        327,000       152,178        16,247
  Minority interests in
    income of partnerships               (1,039,625)   (1,051,401)     (951,940)
                                       ------------  ------------  ------------
  (Loss) Income Before Provision
    for Income Taxes                    (29,909,323)    1,078,450    (9,464,494)

See accompanying notes to consolidated financial statements.


                      FONAR CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS



                                             For the Years Ended June 30,
                                       ----------------------------------------
                                           2006            2005            2004
                                       ------------  ------------  ------------

(Loss) Income Before Provision
   for Income Taxes                     (29,909,323)    1,078,450    (9,464,494)

Provision for Income Taxes                   54,034        64,041        29,889
                                       ------------  ------------  ------------
       Net (Loss) Income                (29,963,357) $  1,014,409    (9,494,383)
                                       ============  ============  ============

Net (Loss)Income Available to
  Common Stockholders                  $(29,963,357) $    943,768  $ (9,494,383)
                                       ============  ============  ============


Basic and Diluted Net (Loss)
  Earnings Per Common Share                 $(0.27)        $ 0.01        $(0.10)
                                            ======         ======        ======
Basic and Diluted (Loss)
  Earnings Per Share - Common C                N/A         $  -            N/A
                                            ======         ======        ======



See accompanying notes to consolidated financial statements.




                       FONAR CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                        FOR THE YEAR ENDED JUNE 30, 2006

                                       Class A
                                      Non-Voting           Common Stock
                                       Preferred     ---------------------------
                                         Stock          Shares       Amount
                                     -------------  -------------  -------------
Balance    -    June   30,   2005        $    784    104,751,950     $   10,474

Net loss                                     -              -              -
Other comprehensive loss, net of tax:
    Unrealized losses on securities arising
      during the year, net of tax            -              -
Exercise of stock options                    -         1,704,824            170
Compensatory element of stock options        -              -             -
Stock issued to employees under stock
  bonus plans                                -         2,930,060            293
Issuance of stock for goods and services     -         4,759,429            476
Issuance of stock for consulting services    -           557,767             56
Payments on notes receivable
  from employee stockholders                 -              -             -
                                     -------------  -------------  -------------


Balance    -   June   30,    2006       $     784    114,704,030     $   11,469
                                     =============  =============  =============


                                                                     Paid-in
                                        Class B        Class C      Capital in
                                        Common         Common       Excess of
                                        Stock          Stock        Par Value
                                     -------------  -------------  -------------
                                       Shares
                                     -------------

Balance   -  June  30,  2005                3,953     $      956   $159,928,871

Net loss

Other comprehensive loss, net of tax:
  Unrealized losses on securities
    arising during the year, net of tax
Exercise of stock options                    -             -          1,206,743
Compensatory element of stock options        -             -            109,936
Stock issued to employees under stock
  bonus plans                                -             -          2,894,012
Issuance of stock for goods and services     -             -          3,780,862
Issuance of stock for consulting services    -             -            491,164
Payments on notes receivable from employee
  stockholders                               -             -               -
                                     -------------  -------------  -------------
Balance  -  June   30,  2006                3,953      $     956   $168,411,588
                                     =============  =============  =============

See accompanying notes to consolidated financial statements.


                       FONAR CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                        FOR THE YEAR ENDED JUNE 30, 2006


                                                        Notes
                                                      Receivable     Accumulated
                                                         From          Other
                                          Treasury     Employee    Comprehensive
                                            Stock    Stockholders       Loss
                                     -------------  -------------  -------------
Balance  - June 30, 2005               $ (675,390)   $  (845,641)   $  (182,250)

Net loss                                     -              -              -

Other comprehensive loss, net of tax:
  Unrealized losses on securities
    arising during the year, net of tax      -              -           (63,830)
Exercise of stock options                    -          (422,673)          -
Compensatory element of stock options        -              -              -
Stock issued to employees under
  stock bonus plans                          -              -              -
Issuance of stock for goods and services     -              -              -
Issuance of stock for consulting services    -              -              -
Payments on notes receivable from
  employee stockholders                      -           516,424           -
                                     -------------  -------------  -------------

Balance -  June  30,  2006             $ (675,390)   $  (751,890)  $   (246,080)
                                     =============  =============  =============



                                      Accumulated                  Comprehensive
                                        Deficit           Total    Income (Loss)
                                     -------------  -------------  -------------

Balance  -  June  30, 2005          $(106,369,283)  $ 51,868,521     $     -

Net loss                              (29,963,357)   (29,963,357)   (29,963,357)

Other comprehensive loss, net of tax:
  Unrealized losses on securities
    arising during the year, net of tax      -           (63,830)       (63,830)
Exercise of stock options                    -           784,240           -
Compensatory element of stock options        -           109,936           -
Stock issued to employees under
  stock bonus plans                          -         2,894,305           -
Issuance of stock for goods and services     -         3,781,338           -
Issuance of stock for consulting services    -           491,220           -
Payments on notes receivable from
  employee stockholders                      -           516,424           -
                                     -------------  -------------  -------------
Balance - June 30,  2006            $(136,332,640)  $ 30,418,797   $(30,027,187)
                                     =============  =============  =============

See accompanying notes to consolidated financial statements.


                       FONAR CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                        FOR THE YEAR ENDED JUNE 30, 2005
                                       Class A
                                      Non-Voting           Common Stock
                                       Preferred     ---------------------------
                                         Stock          Shares       Amount
                                     -------------  -------------  -------------
Balance    -    June   30,   2004      $      784     98,413,873     $    9,840

Net income                                   -              -              -

Other comprehensive loss, net of tax:
    Unrealized losses on securities arising
      during the year, net of tax            -              -              -
Exercise of stock options                    -            49,484              5
Exercise of callable warrants                -           253,250             25
Stock issued to employees under
  stock bonus plans                          -         1,914,177            192
Issuance of stock for goods and services     -         3,418,695            342
Issuance of stock for consulting services    -           523,298             52
Net reduction in notes receivable
  from employee stockholders                 -              -               -
Issuance of stock for notes receivable
  - employee stockholders                    -           178,973             18
Conversion of Class B common stock           -               200            -

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

Balance    -   June   30,   2005       $      784    104,751,950     $   10,474
                                     =============  =============  =============



                                                                     Paid-in
                                        Class B        Class C      Capital in
                                        Common         Common       Excess of
                                        Stock          Stock        Par Value
                                     -------------  -------------  -------------
                                       Shares
                                     -------------

Balance   -  June  30,  2004                4,153     $      956   $152,090,431

Net income                                   -              -              -

Other comprehensive loss, net of tax:
  Unrealized losses on securities arising
    during the year, net of tax              -              -              -
Exercise of stock options                    -              -            54,176
Exercise of callable warrants                -              -           200,042
Stock issued to employees under
  stock bonus plans                          -              -         2,447,829
Issuance of stock for goods and services     -              -         4,288,115
Issuance of stock for consulting services    -              -           625,061
Net reduction in notes receivable
  from employee stockholders                 -              -              -
Issuance of stock for notes
  receivable - employee stockholders         -              -           223,217
Conversion  of  Class B common stock         (200)          -              -
                                     -------------  -------------  -------------
Balance  -  June  30,   2005                3,953      $     956   $159,928,871
                                     =============  =============  =============

See accompanying notes to consolidated financial statements.


                      FONAR CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                       FOR THE YEAR ENDED JUNE 30, 2005


                                                        Notes
                                                      Receivable     Accumulated
                                                         From          Other
                                          Treasury     Employee    Comprehensive
                                            Stock    Stockholders       Loss
                                     -------------  -------------  -------------
Balance  - June 30, 2004              $  (675,390)    $ (842,634)   $   (45,871)

Net income                                   -              -              -

Other comprehensive loss, net of tax:
  Unrealized losses on securities
    arising during the year, net of tax      -              -          (136,379)
Exercise of stock options                    -              -              -
Exercise of callable warrants                -              -              -
Stock issued to employees under
  stock bonus plans                          -              -              -
Issuance of stock for goods and services     -              -              -
Issuance of stock for consulting services    -              -              -
Net reduction in notes receivable
  from employee stockholders                 -           220,228           -
Issuance of stock for notes receivable
  - employee stockholders                    -          (223,235)          -
Conversion of Class B common stock           -              -              -
                                     -------------  -------------  -------------
Balance  -  June 30, 2005              $ (675,390)   $  (845,641)  $   (182,250)
                                     =============  =============  =============



                                      Accumulated                  Comprehensive
                                        Deficit           Total    Income (Loss)
                                     -------------  -------------  -------------

Balance  -  June  30, 2004          $(107,383,692)  $ 43,154,424     $     -

Net income                              1,014,409      1,014,409      1,014,409

Other comprehensive loss, net of tax:
  Unrealized losses on securities arising
    during the year, net of tax              -          (136,379)      (136,379)
Exercise of stock options                    -            54,181           -
Exercise of callable warrants                -           200,067           -
Stock issued to employees under
  stock bonus plans                          -         2,448,021           -
Issuance of stock for goods and services     -         4,288,457           -
Issuance of stock for consulting services    -           625,113           -
Net reduction in notes receivable from
  employee stockholders                      -           220,228           -
Issuance of stock for notes receivable
  - employee stockholders                    -              -              -
Conversion  of  Class B common stock         -              -              -
                                     -------------  -------------  -------------
Balance - June 30,  2005            $(106,369,283)  $ 51,868,521   $    878,030
                                     =============  =============  =============

See accompanying notes to consolidated financial statements.


                       FONAR CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                        FOR THE YEAR ENDED JUNE 30, 2004


                                       Class A
                                      Non-Voting           Common Stock
                                       Preferred     ---------------------------
                                         Stock          Shares       Amount
                                     -------------  -------------  -------------
Balance - June 30, 2003                $      784     82,452,958    $     8,246

Net loss                                     -              -              -

Other comprehensive loss, net of tax:
  Unrealized losses on securities arising
    during the year, net of tax               -             -             -
Exercise of stock options                     -          201,421             20
Exercise of callable warrants                 -        3,551,625            355
Stock issued to employees under stock
  bonus plans                                 -        1,792,648            179
Issuance of stock for goods and services      -        8,927,183            892
Issuance of stock for consulting services     -        1,223,198            122
Net reduction in notes receivable
  from employee stockholders                  -            -              -
Issuance of stock for notes receivable -
  employee stockholders                       -          264,840             26
Financing costs due to change in terms of
  warrants                                    -            -              -
                                     -------------  -------------  -------------
Balance - June 30, 2004                $      784     98,413,873     $    9,840
                                     =============  =============  =============


                                                        Paid-in
                                           Class C     Capital in
                                           Common       Excess of       Treasury
                                           Stock        Par Value         Stock
                                     -------------  -------------  -------------
Balance - June 30, 2003                $      956   $131,519,579     $ (675,390)

Net loss                                     -            -                -

Other comprehensive loss, net of tax:
  Unrealized losses on securities arising
    during the year, net of tax               -          -                 -
Exercise of stock options                     -          219,428           -
Exercise of callable warrants                 -        3,636,789           -
Stock issued to employees under stock
  bonus plans                                 -        2,520,464           -
Issuance of stock for goods and services      -       12,001,820           -
Issuance of stock for consulting services     -        1,676,542           -
Net reduction in notes receivable
  from employee stockholders                  -          -                 -
Issuance of stock for notes receivable -
  employee stockholders                       -          276,859           -
Financing costs due to change in terms of
  warrants                                    -          238,950           -
                                     -------------  -------------  -------------
Balance - June 30, 2004                $      956   $152,090,431     $ (675,390)
                                     =============  =============  =============

See accompanying notes to consolidated financial statements.


                       FONAR CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                        FOR THE YEAR ENDED JUNE 30, 2004


                                         Notes
                                       Receivable   Accumulated
                                          From          Other
                                         Employee   Comprehensive    Accumulated
                                      Stockholders  (Loss) Income      Deficit
                                     -------------  -------------  -------------
Balance - June 30, 2003               $  (654,246)   $    68,672   $(97,889,309)

Net loss                                     -              -        (9,494,383)

Other comprehensive loss, net of tax:
  Unrealized losses on securities arising
    during the year, net of tax              -          (114,543)          -
Exercise of stock options                    -              -              -
Exercise of callable warrants                -              -              -
Stock issued to employees under
  stock bonus plans                          -              -              -
Issuance of stock for goods and services     -              -              -
Issuance of stock for consulting services    -              -              -
Net reduction in notes receivable
  from employee stockholders               88,497           -              -
Issuance of stock for notes receivable
  - employee stockholders                (276,885)          -              -
Financing costs due to change in
  terms of warrants                          -              -              -
                                     -------------  -------------  -------------
Balance - June 30, 2004               $  (842,634)   $   (45,871) $(107,383,692)
                                     =============  =============  =============



                                                                   Comprehensive
                                                        Total          Loss
                                                     ------------  -------------
Balance - June 30, 2003                             $ 32,379,292 $         -

Net loss                                              (9,494,383)    (9,494,383)

Other comprehensive loss, net of tax:
  Unrealized losses on securities arising during
    the year, net of tax                                (114,543)      (114,543)
Exercise of stock options                                219,448           -
Exercise of callable warrants                          3,637,144           -
Stock issued to employees under stock bonus plans      2,520,643           -
Issuance of stock for goods and services              12,002,712           -
Issuance of stock for consulting services              1,676,664           -
Net reduction in notes receivable from employee
  stockholders                                            88,497           -
Issuance of stock for notes receivable - employee
  stockholders                                              -              -
Financing costs due to change in terms of warrants       238,950           -
                                                    -------------  -------------
Balance - June 30, 2004                             $ 43,154,424   $ (9,608,926)
                                                    =============  =============

See accompanying notes to consolidated financial statements.


                       FONAR CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS




                                                     For the Years Ended June 30,
                                          -----------------------------------------------
                                              2006              2005             2004
                                          ------------      ------------     ------------
                                                                   
CASH FLOWS FROM OPERATING ACTIVITIES
  Net (loss) income                       $(29,963,357)    $  1,014,409     $ (9,494,383)

  Adjustments to reconcile net (loss)
    income to net cash (used in) provided
    by operating activities:
      Minority interest in income of
        partnerships                         1,039,625        1,051,401          951,940
      Depreciation and amortization          3,286,865        3,991,752        3,880,898
      Amortization of unearned license fee       -           (2,340,000)      (2,340,000)
      Loss from sale of physical medicine
        management business                    143,598           -                -
      Financing costs due to change in
        terms of warrants                        -               -               238,950
      Gain on sale of equipment                 (2,839)         (28,105)         (21,500)
      Provision for bad debts                1,472,635          164,293          330,997
      Compensatory element of stock
        issuances                            3,495,462        3,073,134        4,125,717
      Stock issued for costs and expenses    3,781,337        4,288,457       12,002,712
  (Increase) decrease in operating
    assets, net:
      Accounts, management fee and
        medical receivable                     659,240       (1,592,559)      (2,938,367)
      Notes receivable                          22,000         (548,000)          -
      Costs and estimated earnings
        in excess of billings on
        uncompleted contracts                7,580,484       (8,714,916)      (1,463,374)
      Inventories                            2,760,731          547,586       (4,528,085)
      Principal payments received on
        sales-type lease - related
        parties                                  -               -                14,285
      Principal payments received on
        sales-type lease                       173,751          153,412          135,456
      Prepaid expenses and other
        current assets                         504,287         (213,385)        (285,689)
      Other assets                              39,716          (17,520)         (37,722)
      Advances and notes to related
        parties medical practices               36,986          256,774          519,181
  Increase (decrease) in operating
    liabilities, net:
      Accounts payable                      (3,569,204)       3,100,044        1,664,772
      Other current liabilities               (420,720)       3,328,598        2,674,269
      Customer advances                      3,830,908       (6,125,756)       2,867,540
      Billings in excess of costs and
        estimated earnings on uncompleted
        contracts                            2,661,558       (2,482,265)      (1,814,534)
      Other liabilities                        (55,401)         (28,544)          (2,768)
      Due to related medical practices         (35,065)         (26,629)          -
      Income taxes payable                      (3,146)         (14,597)          15,430
                                           -----------     ------------     ------------
        NET CASH (USED IN) PROVIDED BY
          OPERATING ACTIVITIES              (2,560,549)      (1,162,416)       6,495,725
                                           -----------     ------------      -----------

See accompanying notes to consolidated financial statements.


                       FONAR CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                      For the Years Ended June 30,
                                           ----------------------------------------------
                                               2006             2005             2004
                                           ------------     ------------     ------------
                                                                   
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of marketable securities       $   (300,000)    $(13,388,404)    $(26,046,021)
  Sales of marketable securities              4,709,559       14,960,935       20,648,354
  Purchases of property and equipment        (2,440,530)      (2,204,290)      (1,935,186)
  Repayment of note receivable from buyers
    of A&A Services                                -                -             150,000
  Costs of capitalized software development    (714,254)        (788,321)        (630,263)
  Proceeds from sale of discontinued
    operations, net                                -                -                -
  Proceeds from sale of equipment                97,466           31,126           21,500
  Cost of patents and copyrights               (443,431)        (464,104)        (572,709)
                                           ------------     ------------     ------------
        NET CASH PROVIDED BY (USED IN)
          INVESTING ACTIVITIES                  908,810       (1,853,058)      (8,364,325)
                                           ------------     ------------     ------------
CASH FLOWS FROM FINANCING ACTIVITIES
  (Repayment of) proceeds from long-term
    debt                                        555,152       (5,500,000)       5,500,000
  Decrease (increase) in restricted cash          -            5,500,000       (5,500,000)
  Repayment of borrowings and capital lease
    obligations                                (298,671)        (444,653)      (1,003,935)
  Net proceeds from exercise of stock
    options and warrants                        784,240          254,248        3,928,182
  Distributions to holders of minority
    interest                                   (865,329)        (909,859)        (916,036)
  Repayment of notes receivable from
    employee stockholders                       516,424          158,352           -
                                           ------------     ------------     ------------
        NET CASH PROVIDED BY (USED IN)
          FINANCING ACTIVITIES                  691,816       (  941,912)       2,008,211
                                           ------------     ------------     ------------
NET (DECREASE) INCREASE IN CASH AND CASH
  EQUIVALENTS                                 (959,923)       (3,957,386)         139,611

CASH AND CASH EQUIVALENTS - BEGINNING OF
  YEAR                                       5,516,603         9,473,989        9,334,378
                                           ------------     ------------     ------------
CASH AND CASH EQUIVALENTS - END OF YEAR    $ 4,556,680      $  5,516,603     $  9,473,989
                                           ============     ============     ============


See accompanying notes to consolidated financial statements.


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 1 - DESCRIPTION OF BUSINESS AND LIQUIDITY AND CAPITAL RESOURCES

Description of Business
-----------------------

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

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

HMCA entered the physician and diagnostic  management  services business through
the  consummation of two acquisitions in fiscal 1997, two acquisitions in fiscal
1998, and one acquisition  consummated in fiscal 1999. The acquired companies in
all cases were actively engaged in the business of managing  medical  providers.
The medical providers are diagnostic  imaging centers,  principally MRI scanning
centers, multi-specialty practices and primary care practices. On April 8, 2003,
HMCA sold all of its issued  and  outstanding  stock of A&A  Services,  Inc.,  a
physician practice management services  organization  engaged in the business of
managing  four primary care  practices.  On July 28, 2005,  HMCA sold the assets
consisting  principally of the management  agreements with the physical  therapy
and  rehabilitation  facilities,  the assignment of other  agreements and rights
utilized  in  the  physical  therapy  and  rehabilitation   facility  management
business,  the physical therapy equipment,  a portion of the accounts receivable
and  furniture   and  fixtures  HMCA  provided  to  the  physical   therapy  and
rehabilitation  facilities  (see Note 3 and 24). As a result of the sale on July
28, 2005, HMCA is only managing diagnostic imaging centers.

Liquidity and Capital Resources
-------------------------------

The  Company's  principal  source of liquidity  has been cash flows  provided by
operations. The Company's management currently expects this to continue. At June
30, 2006,  the Company had working  capital of  $14,237,190.  For the year ended
June 30, 2006, the Company  incurred a net loss of  $29,963,357,  which included
non-cash  charges and  expenses  satisfied  by the  issuance of common  stock of
approximately $12,177,000.

In order to conserve our capital  resources the Company has and will continue to
issue, from time to time, common stock and stock options to compensate employees
and non-employees  for goods and services.  The Company is focusing on increased
advertising and marketing  campaigns and  distribution  programs to increase the


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 1 - DESCRIPTION OF BUSINESS (Continued)

Liquidity and Capital Resources (Continued)
------------------------------------------

demand  for  FONAR's  products.  Management  anticipates  that  FONAR's  capital
resources  will  improve as  Fonar's  MRI  scanner  products  gain wider  market
recognition and acceptance resulting in increased product sales.

Given our June 30, 2006 cash and marketable securities balance of $9,494,522 and
the Company's forecasted cash requirements, the Company's management anticipates
that the Company's existing capital  resources,  funds generated from operations
and funds  expected to be received from note  repayments,  will be sufficient to
satisfy our cash flow requirements  through at least June 30, 2007. Should sales
be less than forecast and expenses higher than anticipated, the Company may need
to seek  alternative  sources of funds  through  the  issuance of equity or debt
financing or other alternatives including streamlining  operations.  There is no
guarantee that such additional financing will be available if needed or that the
Company will be able to significantly streamline operations.


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

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


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Investment in Marketable Securities (Continued)
-----------------------------------

Management  determines the proper  classifications of investments in obligations
with fixed maturities and marketable  equity  securities at the time of purchase
and  re-evaluates  such  designations as of each balance sheet date. At June 30,
2006 and  2005,  all  securities  covered  by SFAS No.  115 were  designated  as
available  for sale.  Accordingly,  these  securities  are stated at fair market
value, with unrealized gains and losses reported in comprehensive income (loss).
Realized gains and losses on sales of  investments,  as determined on a specific
identification  basis,  are included in  investment  income in the  accompanying
Consolidated Statements of Operations.

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

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

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

Property and  equipment  procured in the normal  course of business is stated at
cost.  Property and equipment  purchased in connection  with an  acquisition  is
stated at its estimated fair value,  generally  based on an appraisal.  Property
and equipment is being depreciated for financial  accounting  purposes using the
straight-line method over the shorter of their estimated useful lives, generally
five to seven years,  or the term of a capital lease,  if applicable.  Leasehold
improvements  are being  amortized  over the  shorter of the useful  life or the
remaining lease term. Upon retirement or other disposition of these assets,  the
cost and related  accumulated  depreciation of these assets are removed from the
accounts  and the  resulting  gains or losses are  reflected  in the  results of
operations.  Expenditures for maintenance and repairs are charged to operations.
Renewals  and  betterments  are  capitalized.  Maintenance  and repair  expenses
totaled approximately  $434,000,  $738,000 and $598,000 for the years ended June
30, 2006, 2005 and 2004.

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

Amounts allocated to management agreements,  in connection with two acquisitions
completed  during the period from June 1997 through August 1998,  were amortized
using the  straight-line  method over the 20-year term of the agreements.  These
management agreements were sold on July 28, 2005 (see Notes 3 and 24).


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

1)  Capitalized Software Development Costs

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

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

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

2)  Patents and Copyrights

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

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

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


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Other Intangible Assets (Continued)
-----------------------

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

Revenue on sales  contracts  for  scanners,  included in "product  sales" in the
accompanying  consolidated  statements of  operations,  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   three  to  six  months.  The  percentage  of
completion  is  determined  by the ratio of costs  incurred to date on completed
sub-assemblies  to the total  estimated  cost for each scanner.  Contract  costs
include purchased parts and components,  direct labor and overhead. Revisions in
cost estimates and provisions for estimated losses on uncompleted contracts,  if
any,  are made in the period in which such  losses  are  determined.  The asset,
"Costs and Estimated  Earnings in Excess of Billings on Uncompleted  Contracts",
represents  revenues  recognized  in excess of amounts  billed.  The  liability,
"Billings in Excess of Costs and Estimated  Earnings on Uncompleted  Contracts",
represents amounts billed in excess of revenues recognized.

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

Revenue from sales of other items is recognized upon shipment.

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

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



                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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

Advertising  costs are expensed as incurred.  Advertising  expense  approximated
$936,000,  $1,604,000 and $2,576,000 for the years ended June 30, 2006, 2005 and
2004, respectively.

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

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

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

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

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

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

Minority Interest
-----------------

The  Company records adjustments to minority interest for the allocable portion
of income  or  loss  that the minority interest holders are entitled based upon
their portion of certain  of  the subsidiaries that they own.  Distributions to
holders of minority interests are  adjusted to the respective minority interest
holders' balance.


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Minority Interest (Continued)
-----------------

The Company suspends allocation of losses to minority interest holders when the
minority interest balance for a particular  minority interest holder is reduced
to zero.  Any excess loss above the minority  interest  holders' balance is not
charged  to  minority  interest  as  the  minority  interest  holders  have  no
obligation to fund such losses.

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

Basic earnings  (loss) per share ("EPS") is computed  based on weighted  average
shares  outstanding  and excludes any potential  dilution.  In  accordance  with
Emerging  Issues Task Force ("EITF  03-6"),  "Participating  Securities  and the
Two-Class  Method under FASB Statement No. 128" ("EITF 03-6"),  which  nullifies
EITF  Topic  D-95,  "Effect  of  Participating  Convertible  Securities  on  the
Computation  of Basic  Earnings Per Share," in periods when there is net income,
the Company uses the  two-class  method to calculate the effect of the Company's
participating  convertible  securities  on basic EPS,  which include the Class A
Non-voting  Preferred stock,  Class B common stock and Class C common stock, and
the  if-converted  method  is used to  calculate  the  effect  of  participating
convertible  securities  on  diluted  EPS.  In  addition,   these  participating
convertible securities were not included in the computation of basic EPS for the
years ended June 30, 2006 and 2004 because the participating  securities did not
have a contractual obligation to share in the losses of the Company.

Diluted EPS reflects  the potential dilution from the exercise or conversion of
all dilutive securities  into common stock based on the average market price of
common shares outstanding  during  the  period.  The  number  of  common shares
potentially  issuable  upon  the  exercise  of certain options and warrants  of
approximately  660,000  as  of  June 30, 2005 has  not  been  included  in  the
computation of diluted EPS since  the effect would be anti-dilutive. The number
of common shares potentially issuable upon the exercise of options and warrants
or conversion of the participating  convertible  securities  that were excluded
from the diluted EPS calculation, because they are antidilutive  as a result of
the net losses, was as follows: 7,108,204 and 7,690,392 as of June 30, 2006 and
2004, respectively.


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)




Earnings (Loss) Per Share
-------------------------
                            June 30                  June 30, 2005                 June 30
                          -----------   ---------------------------------------   ----------
                                                                      Class C
                                                         Common        Common
                             2006          Total          Stock         Stock        2004
                          -----------   -----------   -----------   -----------   ----------
                                                                  
Basic
-----

Numerator:
  Net income (loss)      $(29,963,357)   $1,014,409   $   991,855   $    22,554  $(9,494,383)
  Net income attributable
    to preferred
    stockholders                 -           70,641        70,641          -        -
  Net income (loss)
    available to
    common
    stockholders         $(29,963,357)   $  943,768   $   921,214   $    22,554  $(9,494,383)
                          ===========   ===========   ===========   ===========   ==========
Denominator:
  Weighted average
    shares outstanding    110,403,128                 101,591,997     9,562,824   91,027,951
                          ===========                 ===========   ===========   ==========
Basic earnings (loss)
     per common share         $(0.27)        $0.01         $0.01          $ -       $(0.10)
                              =======        =====         =====         =====      ========
Diluted
-------

Weighted average
  shares outstanding      110,403,128   101,591,997   101,591,997                 91,027,951
Stock options                    -          257,961       257,961                       -
Warrants                         -          468,139       468,139                       -
Conversion of Class
  C Common stock                 -        3,187,608     3,187,608                       -
                          -----------   -----------   -----------   -----------   ----------
Denominator for Diluted
  Earnings Per Share:
    Weighted average
      shares outstanding
      of common stock
      and equivalents     110,403,128   105,505,705   105,505,705                 91,027,951
                          ===========   ===========   ===========                 ===========
Diluted earnings (loss)
  per common share         $(0.27)         $0.01         $0.01                      $(0.10)
                            ======         =====         =====                      ======


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

In December 2004, the Financial  Accounting Standards Board ("FASB") issued SFAS
No. 123 (revised 2004), "Share-Based Payment", SFAS 123R. SFAS 123R requires the
compensation cost relating to stock-based payment  transactions be recognized in
financial statements.  That cost will be measured based on the fair value of the
equity or liability  instruments  issued on the grant date of such  instruments,
and will be recognized over the period during which an individual is required to
provide service in exchange for the award (typically the vesting  period).  SFAS
123R  covers a wide range of  stock-based  compensation  arrangements  including
stock  options,   restricted  stock  plans,   performance-based   awards,  stock
appreciation  rights, and employee stock purchase plans. SFAS 123R replaces SFAS
123 and  supersedes APB Opinion 25. The Company has adopted SFAS 123R as of July
1, 2005.  As of June 30, 2006 all options  were fully vested and during the year
ended  June 30,  2006 the  Company  granted  to an  employee  50,000  options to
purchase common stock at an exercise price of $1.00. Accordingly,  no additional
compensation  charge  was  required  because  the  value  of these  options  was
determined to be diminimus  and  therefore  there was no impact on the condensed
consolidated financial statements.

The Company  adopted  SFAS 123R using the modified prospective method, in which
compensation cost is recognized  beginning with the effective date (a) based on
the requirements of SFAS 123R for  all  share-based  payments granted after the
effective date and (b) based on the fair value as measured  under  SFAS 123 for
all awards granted to employees prior to the effective date of SFAS  123R  that
remain unvested on the effective date.

Accordingly,  the  adoption  of SFAS  123R's  fair  value  method did not have a
significant impact on our result of operations. However, had the Company adopted
SFAS 123R in prior periods,  the impact of that standard would have approximated
the  impact of SFAS 123 as  described  in the  following  table.  SFAS 123R also
requires the benefits of tax  deductions  in excess of  recognized  compensation
cost to be reported as a financing  cash flow,  rather that as an operating cash
flow as required under current literature.  It is unlikely that the Company will
have near term benefits from tax deductions.  This  requirement  will reduce net
operating  cash flows and increase  net  financing  cash flows in periods  after
adoption.  The Company cannot  estimate what those amounts will be in the future
because of various factors,  including but not limited to the timing of employee
exercises and whether the Company will be in a taxable  position.  At this time,
there would be not tax impact related to the prior periods since the Company has
a net loss.



                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

For the period  ending prior to July 1, 2005,  as permitted  under SFAS No. 148,
"Accounting  for Stock-Based  Compensation-Transaction  and  Disclosure",  which
amended SFAS No. 123, "Accounting for Stock-Based Compensation", the Company had
elected to continue to follow the intrinsic  value method in accounting  for its
stock-based  employee   compensation   arrangements  as  defined  by  Accounting
Principles  Board  Opinion  ("APB")  No.  25.  "Accounting  for Stock  Issued to
Employees",  and related  interpretations  including FASB Interpretation No. 44,
"Accounting  for  Certain  Transactions   Involving  Stock   Compensation",   an
interpretation  of APB No.  25. No  stock-based  employee  compensation  cost is
reflected  in  operations,  as all  options  granted  under  those  plans had an
exercise price equal to the market value of the  underlying  common stock on the
date of grant.

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

                                                      For the Years Ended
                                                            June 30,
                                                  -----------------------------
                                                       2005           2004
                                                  -------------   -------------
Net Income (Loss) Available to
  Common Stockholders, as Reported                $    943,768    $ (9,494,383)

Deduct:
  Total stock-based employee
    Compensation expense determined
    under fair value based method for                  216,362         438,751
    all awards                                    -------------   -------------

Proforma  Net Income (Loss)                       $    727,406    $  (9,933,134)
                                                  =============   =============

Basic and Diluted Net Earnings (Loss)
  Per Share, as Reported                                 $ 0.01         $(0.10)
                                                         ======         =======

Basic and Diluted Proforma Net Earnings
  (Loss) Per Share                                       $ 0.01          $(0.11)
                                                         ======          =======


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

                                                        For the Years Ended
                                                             June 30,
                                                  -----------------------------
                                                      2005             2004
                                                  -------------   -------------
Expected life (years)                                        3               3
Interest rate                                             2.69%           2.69%
Annual rate of dividends                                     0%              0%
Volatility                                                  40%              55%

The weighted  average fair value of the options at  the date of grant, using the
fair  value  based  method,  for the  years  ended  June  30,  2005 and 2004 was
estimated at $0.74 and $0.75, respectively.

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

Cash: The Company maintains its cash and cash equivalents with various financial
institutions, which exceed federally insured limits throughout the year. At June
30, 2006, the Company had cash on deposit of approximately  $3,536,000 in excess
of federally insured limits.

Related Parties:  Net revenues from related parties  accounted for approximately
50%, 29% and 40% of the  consolidated  net revenues for the years ended June 30,
2006, 2005 and 2004, respectively.

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

The financial  statements  include various  estimated fair value  information at
June 30, 2006,  2005 and 2004, as required by SFAS No. 107,  "Disclosures  about
Fair Value of Financial  Instruments".  Such information,  which pertains to the
Company's financial instruments,  is based on the requirements set forth in that
Statement  and does not purport to represent the aggregate net fair value to the
Company.


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair Value of Financial Instruments (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.

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

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

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

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

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

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

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

In  May  2005,  FASB  issued  SFAS  No.  154,  "Accounting  Changes  and  Error
Corrections  -  a  Replacement of APB Opinion No. 20  and  FASB  No.  3."  This
statement  requires  retrospective  application  of  prior  periods'  financial
statements of changes  in  accounting principles, unless it is impracticable to
determine the period specific  effects, or the cumulative effect of the change.
This pronouncement will be effective  for fiscal years beginning after December
15, 2005. Currently, the Company does not have changes in accounting principle,
the adoption of SFAS No. 154 will not have an impact on the Company's financial
position or results of operations.



                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

In February  2006,  the FASB issued SFAS No. 155,  Accounting for Certain Hybrid
Financial  Instruments-An Amendment of FASB No. 133 and 140. The purpose of SFAS
statement No. 155 is to simplify the  accounting  for certain  hybrid  financial
instruments by permitting  fair value  re-measurement  for any hybrid  financial
instrument  that contains an embedded  derivative  that otherwise  would require
bifurcation.  SFAS No.155 also eliminates the restriction on passive  derivative
instruments that a qualifying  special-purpose  entity may hold. SFAS No. 155 is
effective for all financial  instruments  acquired or issued after the beginning
of any entity's first fiscal year beginning after September 15, 2006. We believe
that the  adoption  of this  standard  on July 1, 2007 will not have a  material
effect on our consolidated financial statements.

In March  2006,  the FASB  issued  SFAS No. 156,  Accounting  for  Servicing  of
Financial  Assets,  an Amendment of SFAS No. 140 SFAS No. 156 requires  separate
recognition of a servicing  asset and a servicing  liability each time an entity
undertakes  an  obligation  to  service a  financial  asset by  entering  into a
servicing  contract.  This  statement  also requires that  servicing  assets and
liabilities be initially recorded at fair value and subsequently adjusted to the
fair value at the end of each reporting  period.  This statement is effective in
fiscal years beginning after September 15, 2006. We believe that the adoption of
this  standard  on  July  1,  2007  will  not  have  a  material  effect  on our
consolidated financial statements.

In June 2006, the FASB issued  Interpretation No. 48, "Accounting of Uncertainty
in  Income   Taxes-an   interpretation   of  FASB   Statement  No.  109".   This
Interpretation  prescribes a recognition threshold and measurement attribute for
the financial  statement  recognition and measurement of a tax position taken or
expected to be taken in a tax return,  and provides  guidance on  derecognition,
classification,   interest  and  penalties,   accounting  in  interim   periods,
disclosure,  and transition.  This  Interpretation is effective for fiscal years
beginning  after  December 15, 2006. The Company is assessing the impact of this
Interpretation on its consolidated financial statements,  but does not expect it
to have a material effect.

Investment At Cost
------------------

The Company has a 20% equity interest in an unconsolidated entity. The income on
this investment is included under other income (expense).

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

Certain prior year amounts have been reclassified to conform to the current year
presentation.  The  reclassifications  did not have any effect on  reported  net
(losses) income for any periods presented.


                      FONAR CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2006


NOTE 3 - MANAGEMENT AGREEMENTS

In  connection  with two  acquisitions  completed  in June of 1997 and August of
1998,  a portion  of the  purchase  price was  allocated  to  various  long-term
management  agreements.  These management  agreements were sold on July 28, 2005
(see Note 24). The cost, accumulated amortization and net carrying value at June
30, 2005 is as follows:
                               As of June 30, 2005
                               -------------------
                            Acquisition              Accumulated    Net Carrying
                                Date        Cost     Amortization     Value
                            -----------  ----------  ------------  -------------
Affordable Diagnostics, Inc.  June 1997  $1,441,684   $ 1,441,684   $       -

Dynamic Health Care
  Management, Inc.
  ("Dynamic")               August 1998   7,124,855     3,133,167      3,991,688
                            -----------  ----------  ------------  -------------
                                         $8,566,539    $4,574,851    $ 3,991,688
                                         ==========    ==========    ===========

Amortization  of management agreements for the years ended June 30, 2006,  2005
and 2004 was $37,300, $633,577 and $633,577, respectively.

On May 23, 2005, HMCA and Dynamic  terminated their  management  agreements with
three related  physical  medicine  practices,  under which HMCA and Dynamic were
managing six physical medicine  facilities.  Commensurate with this termination,
HMCA and Dynamic  entered into new  management  agreements  with four  unrelated
medical  practices  to manage  five of the same  physical  medicine  facilities.
Pursuant to the  Termination  and  Replacement  Agreements,  the related medical
practices assigned to HMCA and Dynamic medical receivables valued at $11,775,000
in  consideration  of management fees  outstanding of $7,669,993 and termination
fees of $4,105,007.  The balance of the medical  receivables as of June 30, 2006
is $6,053,007. The $4,105,007 was accounted for as a recovery of the capitalized
management agreements,  with $2,277,956 allocated to the Affordable Diagnostics,
Inc. capitalized  management  agreements and $1,827,052 allocated to the Dynamic
Healthcare Management, Inc. capitalized management agreements.

The  Termination  and  Replacement  Agreements  required  the  related  physical
medicine practices to replace five of the six management agreements,  which HMCA
and Dynamic were managing.  In the event that the related medical  practices did
not replace the management  agreements,  the related medical  practices would be
obligated  to continue to pay the monthly  management  fees under the  cancelled
agreements  until a total of $4,000,000 was received.  As noted above,  the five
management agreements were replaced on May 23, 2005.

On July 28, 2005, the management agreements,  along with certain related assets,
were sold (see Note 24).


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 4 - MARKETABLE SECURITIES

The following is a summary of marketable securities at June 30, 2006 and 2005:

                                                       June 30, 2006
                                          --------------------------------------
                                                        Unrealized   Fair Market
                                              Cost         Loss        Value
                                          ------------  -----------  -----------
Certificate of deposits                   $    600,000  $  (25,081)  $   574,919
U.S. Government Obligations                  2,494,500     (58,357)    2,436,143
Corporate and government
  agency bonds                               2,000,000    (152,315)    1,847,685
Equities - other                                89,422     (10,327)       79,095
                                          ------------  -----------  -----------
                                           $ 5,183,922  $ (246,080)  $ 4,937,842
                                          ============  ===========  ===========

                                                       June 30, 2005
                                          --------------------------------------
                                                        Unrealized   Fair Market
                                              Cost         Loss        Value
                                          ------------  -----------  -----------
Certificate of deposits                    $ 1,600,000  $  (17,925)  $ 1,582,075
U.S. Government Obligations                  3,781,987     (12,787)    3,769,200
Corporate and government
  agency bonds                               4,100,000    (149,175)    3,950,825
Equities - other                               111,494      (2,363)      109,131
                                          ------------  -----------  -----------
                                          $  9,593,481  $ (182,250)  $ 9,411,231
                                          ============  ===========  ===========

All debt  securities are due within five years.  At June 30, 2006, the amount of
cost due within one year was $300,000.


NOTE 5 - MANAGEMENT FEE RECEIVABLE AND ACCOUNTS RECEIVABLE

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

Management Fee Receivable
-------------------------

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


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 5 - MANAGEMENT FEE RECEIVABLE AND ACCOUNTS RECEIVABLE (Continued)

Collection by the Company of its  management  fee  receivable may be impaired by
the  uncollectibility of PCs medical fees from third party payors,  particularly
insurance carriers covering automobile no-fault and workers  compensation claims
due  to  longer   payment  cycles  and  rigorous   informational   requirements.
Approximately 47%, 66% and 65%, respectively, of the PCs 2006, 2005 and 2004 net
revenues were derived from no-fault and personal injury protection  claims.  The
Company considers the aging of its accounts receivable in determining the amount
of allowance  for  doubtful  accounts and  contractual  allowances.  The Company
generally  takes all  legally  available  steps,  including  legally  prescribed
arbitrations,  to collect its  receivables.  Credit losses  associated  with the
receivables are provided for in the consolidated  financial  statements and have
historically been within management's expectations.

Net revenues from management and other fees charged to the related PCs accounted
for  approximately  38%, 22% and 32%, of the  consolidated  net revenues for the
years ended June 30, 2006, 2005 and 2004, respectively.

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

Audited financial information related to the unconsolidated  related PCs managed
by the Company is not available.  Substantially all of these medical  practices'
books  and  records  are  maintained  on a cash  basis,  they  depreciate  their
equipment on an accelerated tax basis and have a December 31 year end.

Summarized unaudited income statement data for the years ended December 31, 2005
and 2004 related to the unconsolidated  medical practices managed by the Company
are as follows:

                                 (000's omitted)
                                              2005         2004
                                          ------------  -----------
Patient Revenue - Net                     $    17,863   $    33,584
                                          ============  ===========
Income (Loss) from Operations
  (Income Tax - Cash Basis)               $       257   $        74
                                          ============  ===========
Net Loss (Income Tax - Cash Basis)        $      (506)  $      (247)
                                          ============  ===========


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 5 - MANAGEMENT FEE RECEIVABLE AND ACCOUNTS RECEIVABLE (Continued)

Accounts Receivable
-------------------

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



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

1)  Information relating to uncompleted contracts  as of June 30, 2006 and 2005
is as follows:
                                                   As of June 30,
                                             --------------------------
                                                 2006           2005
                                             -----------    -----------

Costs incurred on uncompleted  contracts     $14,034,496    $18,364,046
Estimated earnings                             2,284,685      8,704,477
                                             -----------    -----------
                                              16,319,181     27,068,523
Less: Billings to date                        16,477,700     16,985,000
                                             -----------    -----------
                                             $  (158,519)   $10,083,523
                                             ===========    ===========



                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


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

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

                                                   As of June 30,
                                             --------------------------
                                                 2006           2005
                                             -----------    -----------
               Costs and estimated earnings
                 in excess of billings on
                 uncompleted contracts       $ 2,957,679   $10,538,163
               Costs and estimated earnings
                 in excess of billings on
                 uncompleted contracts -
                 related party                      -            -
               Less:  Billings in excess
                 of costs and estimated
                 earnings on uncompleted
                 contracts                     2,978,789       301,179
               Less:  Billings in excess of
                 costs and estimated earnings
                 on uncompleted contracts -
                 related party                   137,409       153,461
                                             -----------   -----------
                                             $  (158,519)  $10,083,523
                                             ===========   ===========

2)  Customer advances consist of the following:
                                         As of June 30, 2006
                                 ------------------------------------
                                              Related
                                    Total      Parties       Other
                                 -----------  ----------  -----------
      Total advances             $21,983,157  $1,491,566  $20,491,591
      Less: Advances on contracts
              under construction  16,477,700   1,450,000   15,027,700
                                 ----------- -----------  -----------
                                 $ 5,505,457  $   41,566  $ 5,463,891
                                 ===========  ==========  ===========

                                         As of June 30, 2005
                                 ------------------------------------
                                              Related
                                    Total      Parties        Other
                                 -----------  ----------  -----------
      Total advances             $18,659,549 $ 1,541,566  $17,117,983
      Less: Advances on contracts
              under construction  16,985,000   1,500,000   15,485,000
                                 ----------- -----------  -----------
                                 $ 1,674,549 $    41,566  $ 1,632,983
                                 =========== ===========  ===========

                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 7 - INVENTORIES

Inventories included in the accompanying consolidated balance sheets consist of:

                                                   As of June 30,
                                             ------------------------
                                                2006        2005
                                             -----------  -----------
Purchased parts, components and supplies     $ 5,315,368  $ 8,290,077
Work-in-process                                1,761,691    1,547,713
                                             -----------  -----------
                                             $ 7,077,059  $ 9,837,790
                                             ===========  ===========


NOTE 8 - INVESTMENT IN SALES-TYPE LEASE

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

The Company's investment in a sales-type lease as at June 30, 2006 and 2005  is
as follows:

                                                   As of June 30,
                                             ------------------------
                                                2006         2005
                                             -----------  -----------
     Net minimum lease payments receivable    $  291,945   $  512,613
     Less: Unearned income                        12,917       59,834
                                              ----------   ----------
     Net investment in sales-type leases      $  279,028   $  452,779
                                              ==========   ==========
     Current portion                          $  279,028   $  173,751
     Non-current portion                            -         279,028
                                              ----------   ----------
                                              $  279,028   $  452,779
                                              ==========   ==========



                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 9 - PROPERTY AND EQUIPMENT

Property and equipment, at cost, less accumulated depreciation and amortization,
at June 30, 2006 and 2005, is comprised of:

                                                   As of June 30,
                                             ------------------------
                                                2006         2005
                                             -----------  -----------
           Diagnostic equipment under capital
             leases                          $   780,150  $   800,339
           Diagnostic equipment                3,213,259    4,053,198
           Research, development and
             demonstration equipment           9,178,402    8,819,089
           Machinery and equipment             3,582,539    7,393,347
           Furniture and fixtures              2,124,453    3,581,104
           Equipment under capital leases      1,504,123    1,517,441
           Leasehold improvements              5,341,840    6,095,373
           Building                              924,114        -
                                             -----------  -----------
                                              26,648,880   32,259,891
           Less: Accumulated depreciation
                   and amortization           19,981,460   24,665,666
                                             -----------  -----------
                                             $ 6,667,420  $ 7,594,225
                                             ===========  ===========

Depreciation and amortization of property and equipment for the years ended June
30, 2006, 2005 and 2004 was $2,518,116, $2,651,310 and $2,626,849, respectively.

Equipment  under capital leases has a net book value of $689,352 and $995,303 at
June 30, 2006 and 2005, respectively.


NOTE 10 - OTHER INTANGIBLE ASSETS

Other intangible assets, net of accumulated  amortization,  at June 30, 2006 and
2005 are comprised of:

                                                   As of June 30,
                                             ------------------------
                                                2006         2005
                                             -----------  -----------
              Capitalized software
                development costs             $4,512,812  $4,159,882
              Patents and copyrights           3,579,103   3,135,672
                                              ----------  ----------
                                               8,091,915   7,295,554
              Less: Accumulated amortization   3,162,432   2,792,307
                                              ----------  ----------
                                              $4,929,483  $4,503,247
                                              ==========  ==========

                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 10 - OTHER INTANGIBLE ASSETS (Continued)

Information  related to other  intangible  assets  for the years  ended June 30,
2006, 2005 and 2004 is as follows:

         Balance - Beginning of Year    $4,503,247   $3,957,687   $3,375,187
         Amounts capitalized             1,157,685    1,252,425    1,202,972
         Amortization                     (731,449)    (706,865)    (620,472)
                                        ----------   ----------   ----------
         Balance - End of Year          $4,929,483   $4,503,247   $3,957,687
                                        ==========   ==========   ==========

Amortization  of patents and copyrights for the years ended June 30, 2006,  2005
and 2004 amounted to $110,493, $95,613 and $82,429, respectively.

Amortization of capitalized  software development costs for the years ended June
30, 2006, 2005 and 2004 was $620,956, $611,252 and $538,043, respectively.

The estimated  amortization of patents and copyrights and  capitalized  software
development costs for the five years ending June 30, 2010 is as follows:

                                                        Capitalized
                                                         Software
            For the Years                 Patents and   Development
           Ending June 30,      Total     Copyrights       Costs
           ---------------   ----------   -----------   -----------
                2007         $  716,941   $  111,758    $  605,183
                2008            663,364      125,195       538,169
                2009            470,982      142,909       328,073
                2010            381,616      162,034       219,582
                2011            290,431      151,331       139,100
                             ----------   ----------    ----------
                             $2,523,334   $ 693,227     $1,830,107
                             ==========   ==========    ==========

The weighted  average  amortization  period for other  intangible  assets is 9.5
years and has no residual value.





                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 11 - NOTES RECEIVABLE

Notes receivable as of June 30, 2006 and 2005 consist of the following:

                                      June 30,2006       June 30, 2005
                                      ------------       -------------
    Note Receivable - Sale of
      assets (Note 24)                $  6,600,000        $      -
    Note Receivable - (a)                   95,000             180,000
    Note Receivable - (b)                                      368,000
    Note Receivable - Other                  5,000               5,000
                                        ----------       -------------

    Total Notes Receivable               6,700,000             553,000

    Discount of note receivable        (   512,932)              -
                                      ------------       -------------
    Net Notes Receivable              $  6,178,068        $    553,000
                                       ===========       =============
    Current Portion                   $    459,398        $       -
    Long-Term Portion                 $  5,718,670        $    553,000

a) Notes receivable  represents a note due from a customer for the purchase of a
system.  The note is payable over two years. The balance of this note receivable
as of June 30, 2006 and 2005 is $95,000 and 180,000, respectively.

b) Included in notes  receivable at June 30, 2005 are promissory  notes totaling
$368,000.  These notes represented  advances to unrelated PCs, in which HMCA had
entered into management agreements.  These agreements, along with the promissory
notes,  were sold on July 28, 2005 as part of the sale of the physical  medicine
management business (see Note 24).


NOTE 12 - CAPITAL STOCK

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

Cash  dividends  payable on the common  stock shall,  in all cases,  be on a per
share basis,  one hundred twenty percent (120%) of the cash dividend  payable on
shares of Class B common stock and three  hundred  sixty  percent  (360%) of the
cash dividend payable on a share of Class C common stock.

On February 15,  2005,  the Company  amended its  certificate  of  incorporation
increasing the number of authorized shares from 110,000,000 to 130,000,000.

On  July  28,  2005,  the  Company  amended  its  certificate  of  incorporation
increasing the number of authorized shares from 130,000,000 to 150,000,000.

On October 6, 2003 and June 28, 2004, the Company filed Registration  Statements
on Form S-3 to register 10,000,000 shares (5,000,000 shares on each date) of the
Company's  common  stock to be issued  for  various  costs and  expenses  of the
Company.  As of June 30, 2006, no shares of common stock of FONAR were available
for future grant under this plan.

                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 12 - CAPITAL STOCK (Continued)

Common Stock (Continued)
------------

On August 9, 2005,  the Company  filed a  Registration  Statement on Form S-3 to
register  10,000,000  shares of the  Company's  common  stock to be  issued  for
various costs and expenses of the Company. As of June 30, 2006, 6,695,162 shares
of common stock of FONAR were available for future grant under this plan.

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. There were 3,953 of such
shares outstanding at June 30, 2006 and 2005.

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

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

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

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

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

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

                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 12 - CAPITAL STOCK (Continued)

Options
-------

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

FONAR's 1993  Incentive  Stock  Option Plan (the "FONAR 1993 Plan"),  adopted on
March 26, 1993, was intended to qualify as an incentive  stock option plan under
Section 422A of the Internal  Revenue Code of 1954,  as amended.  The FONAR 1993
Plan permitted the issuance of stock options  covering an aggregate of 1,500,000
shares of common  stock of FONAR.  The FONAR 1993 Plan  terminated  on March 25,
2003. No options to purchase shares of common stock remained available for grant
under the FONAR  1993 Plan at that  time.  There are  59,000  options  that were
issued under the FONAR 1993 Plan that remain outstanding.

FONAR's 1997 Nonstatutory Stock Option Plan, adopted on May 9, 1997, permits the
issuance of stock  options  covering an aggregate of 5,000,000  shares of common
stock of FONAR. The options may be issued at such prices and upon such terms and
conditions as are  determined by FONAR.  The 1997 Plan will  terminate on May 8,
2007. As of June 30, 2006, options to purchase 357,900 shares of common stock of
FONAR were available for future grant.  Of the options  granted under this plan,
2,228,943 remain outstanding.

FONAR's 2002 Incentive Stock Option Plan  (the  "FONAR  2002 Plan"), adopted on
July 1, 2002, is intended to qualify as an incentive stock  option  plan  under
Section  422A of the Internal Revenue Code of 1954, as amended.  The FONAR 2002
Plan permits  the  issuance of stock options covering an aggregate of 2,500,000
shares of common stock  of  FONAR.  The options have an exercise price equal to
the fair market value of the  underlying  stock  on  the  date  the  option  is
granted,  are  nontransferable,  are exercisable for a period not exceeding ten
years and expire upon the voluntary  termination of employment.  The FONAR 2002
Plan will terminate on June 30, 2012.  As of June 30, 2006, options to purchase
1,273,572 shares of common stock of FONAR were available for future grant under
this plan and 578,700 shares remain outstanding.

FONAR's 2005 Incentive Stock Option Plan  (the  "FONAR  2005 Plan"), adopted on
February  16, 2005, is intended to qualify as an incentive  stock  option  plan
under Section  422A of the Internal Revenue Code of 1954, as amended. The FONAR
2005 Plan permits  the  issuance  of  stock  options  covering  an aggregate of
2,000,000  shares of common stock of FONAR. The options have an exercise  price
equal to the  fair  market value of the underlying stock on the date the option
is granted, are non-transferable,  are  exercisable  for a period not exceeding
ten years, and expire upon the voluntary termination of  employment.  The FONAR
2005  Plan  will terminate on February 14, 2015. As of June 30, 2006, 2,000,000
shares of common  stock  of  FONAR  were  available for future grant under this
Plan.

                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 12 - CAPITAL STOCK (Continued)

Options (Continued)
-------

Stock option activity and weighted average exercise prices under these plans and
grants for the years ended June 30, 2006, 2005 and 2004 were as follows:

                                                     Weighted
                                                     Average    Aggregate
                                       Number of     Exercise   Intrinsic
                                        Options       Price       Value
                                       ----------   ---------   ---------
          Outstanding, June 30, 2003    3,690,693     $1.38        -
          Granted                         324,183      1.11        -
          Exercised                      (471,788)     0.98        -
          Forfeited                      (496,082)     2.57        -
                                        ---------   ---------   ---------
          Outstanding, June 30, 2004    3,047,006      1.22        -
          Granted                         150,973      1.28        -
          Exercised                      (200,456)     1.23        -
          Forfeited                      (161,875)     1.28        -
                                        ---------   ---------   ---------
          Outstanding, June 30, 2005    2,835,648      1.22        -
          Granted                       1,790,824       .71        -
          Exercised                    (1,704,824)      .71        -
          Forfeited                     (  55,005)     1.14        -
                                        ---------   ---------   ---------
          Outstanding, June 30, 2006    2,866,643     $1.20        -
                                        =========   =========   =========

          Exercisable at:
            June 30, 2004               2,425,311     $1.24
            June 30, 2005               2,287,947     $1.24
            June 30, 2006               2,866,643     $1.20

During the year ended June 30, 2006,  1,790,824 options were granted,  of which,
50,000 were granted to an employee and  1,740,824  were granted to  consultants.
The  compensatory  element of the options granted was $109,936.  During the year
ended June 30, 2006,  1,704,824 of the options  granted in 2006 were  exercised.
The fair value of the options  granted in 2006 to the consultants was calculated
under the Black Scholes  pricing  method  factoring in the  short-term  exercise
period.  The value of the employee  options was  determined to be deminimus,  as
calculated  using the Black Scholes  pricing  method.  The model was based on an
expected life of three years, interest rate of 4% and a 34% volatility.




                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006

NOTE 12 - CAPITAL STOCK (Continued)

Options (Continued)
-------

The range of exercise prices for options  outstanding as of June 30, 2006 was as
follows:

                                                      Weighted
                                                      Average
                                       Number of      Remaining
                                        Options      Contractual
         Range of Exercise    Price   Outstanding   Life in Years
         -----------------   ------   -----------   -------------
         $ .58 - $1.125                2,075,789        4.9
         $1.13 - $1.69                   586,866        4.4
         $1.70 - $1.875                  203,988        5.1
                                       ----------
                                       2,866,643
                                       ==========

On March 10, 1997, HMCA adopted the 1997 Incentive  Stock Option Plan,  pursuant
to which HMCA  authorized  the issuance of up to 2,000,000  shares of the common
stock of HMCA.  Options to purchase 1,600,000 shares at an option price of $0.10
per share  were  granted  on March 10,  1997.  As of June 30,  2006,  options to
purchase  400,000  shares of HMCA common stock were  available  for future grant
under this plan.

On December 16, 1998,  HMCA  adopted the 1998  Non-Statutory  Stock Option Plan,
pursuant to which HMCA  authorized  the issuance of up to 500,000  shares of the
common stock of HMCA.  Options to purchase  400,000 shares at an option price of
$1.00 per share were granted on December  16,  1998.  During the year ended June
30, 2003, the Company issued  1,125,000  shares of FONAR common stock at a value
of $1,226,251 to a related party in exchange for the options  outstanding  under
the HMCA 1997 Incentive and 1998  Non-Statutory  Stock Option Plans.  As of June
30, 2006,  100,000  shares of HMCA common stock were  available for future grant
under this plan.

On December  16,  1998,  HMCA  adopted the 1998  Incentive  Stock  Option  Plan,
pursuant to which HMCA authorized the issuance of up to 2,000,000  shares of the
common stock of HMCA.  Options to purchase  670,000 shares at an option price of
$1.00 per share were  granted  on  December  16,  1998.  470,000 of the  options
granted  will  not  become  exercisable  unless  and  until  such  time  as HMCA
successfully  completes a public offering of its securities,  and 200,000 of the
options will not become exercisable until one year thereafter.  The options will
expire on December 15, 2008.  No options have vested as of June 30, 2006.  As of
June 30, 2006,  options to purchase  1,330,000  shares of HMCA common stock were
available for future grant under this plan.




                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 12 - CAPITAL STOCK (Continued)

Options (Continued)
-------

Stock option share activity and weighted  average exercise prices under the HMCA
plans and grants for the three years ended June 30, 2006,  2005 and 2004 were as
follows:
                                                       Weighted
                                                       Average
                                        Number of      Exercise
                                         Options        Price
                                        -----------    --------
          Outstanding, June 30, 2004       660,000      $1.00
          Forfeited                          -
                                         ----------      -----
          Outstanding, June 30, 2005       660,000      $1.00
          Forfeited                          -
                                        ----------      -----
          Outstanding, June 30, 2006       660,000      $1.00
                                        ==========      =====

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

FONAR's 2003 Stock Bonus Plan,  adopted on November 1, 2002,  permitted FONAR to
issue an  aggregate  of  5,000,000  shares of common  stock of FONAR as bonus or
compensation.  As of June 30,  2006,  no shares of  common  stock of FONAR  were
available for future grant under this plan.

FONAR's 2003 Supplemental  Stock Bonus Plan,  adopted May 1, 2003, permits FONAR
to issue an aggregate  of 5,000,000  shares of common stock of FONAR as bonus or
compensation.  FONAR selects the persons to whom bonus stock will be issued, the
number of shares to be awarded and such other terms and  conditions  as it deems
advisable.  The 2003  Supplemental  Stock Bonus Plan will terminate on April 30,
2013. As of June 30, 2006, no shares of common stock of FONAR were available for
future grant under this plan.

On February 6, 2004, the Company filed a  Registration  Statement on Form S-8 to
register  2,000,000  shares under the  Company's  2004 Stock Bonus Plan that was
adopted on February 4, 2004.  As of June 30, 2006,  no shares of common stock of
FONAR were available for future grant under this plan.

On February 16, 2005, the Company filed a registration statement on Form S-8 to
register  3,000,000 shares under FONAR's 2005 Stock Bonus Plan. As of June  30,
2006, no shares  of common stock of FONAR were available for future grant under
this plan.

On July 18, 2005,  the  Company  filed  a registration statement on Form S-8 to
register 3,000,000 shares under FONAR's 2005  Supplemental Stock Bonus Plan. As
of June 30, 2006, 319,006 shares of common stock  of  FONAR  were available for
future grant under this plan.


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 12 - CAPITAL STOCK (Continued)

Warrants
--------

As of June 30, 2006, 1,050,000 warrants remain outstanding,  which expire on May
24,  2009.  The  exercise  price is $.79.  The holder of the  warrants has anti-
dilution  rights which  provide for  proportionate  adjustments  of the exercise
price and  number of  underlying  shares  in the  event of stock  splits,  stock
dividends or reverse stock splits and sales of the Company's  common stock below
the warrant exercise price.


NOTE 13 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES

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

                                                                  June 30,
                                                        ------------------------
                                                            2006        2005
                                                        -----------  -----------

Capital lease  requiring  monthly  payments of $13,623,
including  interest  at a  rate  of  10.51%  per  annum
through July 2010.  The loan is  collateralized  by the
related equipment.                                       $  540,876  $  625,602

Note  payable  requiring  monthly  payments of $21,083,
including  interest  at a rate of 8% per annum  through
August  31,  2007.  The note is  collateralized  by the
related equipment (see Note 20).                              -         500,834

Capital  lease  requiring  monthly  payments of $2,997,
including interest at a rate of 8.36% per annum through
October 2008. The loan is collateralized by the related
equipment.                                                    75,493    103,616

Note payable  requiring monthly payments of interest at
a  rate  of 7%  until  May  2009  followed  by  monthly
payments of $3,908 through May 2026. A final payment of
$555,152  will  be due on May  29,  2026.  The  loan is
collateralized by the related building.                      555,152      -

Other  (including   capital  leases  for  property  and
equipment).                                                  234,173    161,462
                                                         ----------- -----------
                                                           1,405,694  1,391,514
Less:  Current portion                                       233,751    425,143
                                                         ----------- -----------
                                                         $ 1,171,943 $  966,371



FONAR    CORPORATION   AND   SUBSIDIARIES    NOTES   TO
CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2006


NOTE 13 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)

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

                     Years Ending
                        June 30,
                     ------------
                          2007     $  233,751
                          2008        206,464
                          2009        186,155
                          2010        183,451
                          2011         36,587
                        Thereafter    559,286
                                   ----------
                                   $1,405,694
                                   ==========


NOTE 14 - INCOME TAXES

Components of the current provision for income taxes are as follows:

                              Years Ended June 30,
                      -------------------------------------
                         2006          2005         2004
                      ----------    ----------   ----------

             Current:
               Federal$   33,546    $    -       $   -
               State      20,488        64,041       29,889
                      ----------    ----------   ----------
                      $   54,034    $   64,041   $   29,889
                      ==========    ==========   ==========


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

                                           Years Ended June 30,
                                   ------------------------------------
                                       2006        2005        2004
                                   ----------  ----------  ----------

        Taxes at federal statutory
          Rate                        (34.0)%     34.0%    (34.0)%
        State and local income
          taxes (benefit), net of
          federal benefit               0.2        5.9       0.3
        Permanent differences           1.7        2.5       1.8
        Increase in the valuation
          allowance                    32.3      (36.5)     32.2
                                     ------     ------    ------
        Effective income tax rate       0.2%       5.9%      0.3%
                                     ======     ======    ======


                     FONAR CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                JUNE 30, 2006


NOTE 14 - INCOME TAXES (Continued)

As of June 30, 2006, the Company has net operating loss ("NOL") carryforwards of
approximately  $132,839,000  that will be  available  to offset  future  taxable
income.  The  utilization  of certain of the NOLs is limited by separate  return
limitation year rules pursuant to Section 1502 of the Internal Revenue Code. The
expiration dates of NOL carryforwards are as follows:

                        June 30,
                        --------
                          2012  $  5,500,000
                          2013       845,000
                          2019    15,852,000
                          2020    18,718,000
                          2021    19,657,000
                          2022    19,711,000
                          2023    16,260,000
                          2024     9,257,000
                          2025        44,000
                          2026    26,995,000
                                ------------
                                $132,839,000
                                ============

The Company has, for federal income tax purposes,  research and  development tax
credit carryforwards  aggregating $3,589,295,  which are accounted for under the
flow-through method. The tax credit carryforwards expire as follows:

                          June 30,
                          --------

                          2012    $   70,145
                          2013       402,590
                          2018       432,195
                          2019       378,193
                          2020       448,221
                          2022       441,865
                          2023       444,970
                          2024       440,499
                          2025       285,564
                          2026       245,053
                                  ----------
                                  $3,589,295
                                  ==========

In addition, for New York State income tax purposes, the Company has tax credit
carryforwards, aggregating approximately  $1,178,000,  which  are accounted for
under the flow-through method.  The tax credit carryforwards expire  during the
years ending June 30, 2006 to June 30, 2024.

The Company has capital loss carryforwards of $5,500,000 that expire as of June
30, 2009.


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 14 - INCOME TAXES (Continued)

The  Company  has  charitable  contributions  of  approximately $223,000, which
expire during the years ending June 30, 2007 to June 30, 2010.

Significant components of the Company's deferred tax  assets and liabilities at
June 30, 2006 and 2005 are as follows:

                                                                June 30,
                                                    ---------------------------
                                                         2006            2005
                                                    ------------  ------------
Deferred tax assets:
  Allowance for doubtful accounts                   $ 1,899,465   $ 1,321,784
  Non-deductible accruals                               368,184       551,952
  Net operating carryforwards                        53,135,677    42,107,182
  Tax credits                                         4,692,958     4,536,499
  Inventory capitalization for
    tax purposes                                        288,171        94,461
  Property and equipment and
    depreciation                                      1,021,206         -
  Capital losses carryforwards                          529,412     1,329,528
  Charitable contributions                                4,800        93,987
                                                    ------------  ------------
                                                     61,939,873    50,035,393
Valuation allowance                                 (61,001,305)  (48,610,326)
                                                    ------------  ------------
Net deferred tax assets                                 938,568     1,425,067
                                                    ------------  ------------

Deferred tax liabilities:
  Fixed and intangible assets
  Capitalized software development                        -          (526,409)
    Costs
                                                       (938,568)     (898,658)
Gross deferred tax liabilities                      ------------ -------------
                                                       (938,568)   (1,425,067)
Net deferred tax liabilities                        ------------ -------------
                                                    $    -       $     -
                                                    ============ =============

The net change in the valuation allowance for deferred  tax assets increased by
approximately $12,390,979 and $450,352, respectively, for  the years ended June
30, 2006 and 2005.




                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 15 - OTHER CURRENT LIABILITIES

Included in other current liabilities are the following:

                                     2006         2005
                                 ------------  ----------
Royalties                        $   716,321    $ 903,697
Accrued salaries, commissions
  and payroll taxes                1,146,160    2,092,398
Accrued interest                     535,209      535,209
Litigation judgements                193,349      213,672
Sales tax payable                  2,180,313    2,443,049
Other                              1,330,483    1,286,065
                                 ------------  ----------
                                 $ 6,101,835   $7,474,090
                                 ============  ==========


NOTE 16 - COMMITMENTS AND CONTINGENCIES

Leases
------

The Company rents its operating  facilities and certain  equipment,  pursuant to
operating lease agreements  expiring at various dates through December 2013. The
leases for certain  facilities  contain escalation clauses relating to increases
in real property taxes as well as certain maintenance costs.

In May 2002,  HMCA  entered  into a sub-lease  agreement  (as amended in January
2003) with an entity owned by a relative of Raymond V.  Damadian.  The sub-lease
agreement  expires on September  30,  2009.  Rental  income under the  sub-lease
agreement for the years ended June 30, 2006, 2005 and 2004 amounted to $102,329,
$97,587 and $39,971, respectively. The amount due from the related party at June
30, 2006 was $19,652 and is included in current portion of advances and notes to
related medical practices (see Note 19).

During 2003,  HMCA entered into a sub-lease  agreement  with a third party.  The
sub-lease agreement expires on June 30, 2006. Rental income under the sub- lease
agreement  for the  years  ended  June  30,  2006,  2005 and  2004  amounted  to
approximately $87,000, $129,000 and $130,000, respectively. The rental income is
included in the  consolidated  statements of  operations  under costs related to
management and other fees - related medical practices.



                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)

Future  minimum  operating  lease  commitments,   along  with  sub-lease  income
consisted of the following at June 30, 2006:

                                          Facilities
                                             And
                                           Equipment
                      Year Ending         (Operating   Sub-Lease
                       June 30,              Lease)     (Income)
                      -----------        -----------   ----------
                         2007            $ 2,391,766   $ (84,000)
                         2008              2,378,128     (84,000)
                         2009              1,705,193     (84,000)
                         2010                735,713     (84,000)
                         2011                563,830     (21,000)
                      Thereafter           1,497,891         -
                                         -----------   ---------
              Total minimum obligations  $ 9,272,521   $(357,000)
                                         ===========   =========

Rent  expense  for  operating  leases  approximated   2,922,995,$3,316,000   and
$3,286,000 for the years ended June 30, 2006, 2005 and 2004, respectively.

License Agreements
------------------

The Company has license  agreements with two separate  companies,  which require
the  Company  to pay a royalty on the  Company's  future  sales of  certain  MRI
imaging  apparatus.  Royalty  expense  charged to operations for the years ended
June 30,  2006,  2005 and 2004  approximated  $65,000,  $868,000  and  $802,000,
respectively.

In July 2000, the Company entered into a license agreement, pursuant to which it
licensed  certain  of  its  intellectual   assets  on  a  non-exclusive   basis.
Remuneration  payable to the Company under this agreement was $11.7 million,  of
which $9.0 million was received in September of 2000 and $2.7 million in January
of 2001.  The license fee of $11.7 million was recognized as income ratably over
the five-year period ended June 30, 2005.

Employee Benefit Plans
----------------------

The Company has a non-contributory 401(k) Plan (the "401(k) Plan").  The 401(k)
Plan covers all  non-union  employees  who are at least 21 years of age with no
minimum service requirements.  There were no employer contributions to the Plan
for the years ended June 30, 2006, 2005 and 2004.

The stockholders of the Company approved  the 2000 Employee Stock Purchase Plan
("ESPP") at the Company's annual stockholders' meeting in April 2000.  The ESPP
provides for eligible employees to acquire  common  stock  of  the Company at a
discount, not to exceed 15%.  This plan has not been put into effect as of June
30, 2006.


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)

Litigation
----------

The Company is subject to legal proceedings and claims arising from the ordinary
course  of its  business,  including  personal  injury,  customer  contract  and
employment  claims. In the opinion of management,  the aggregate  liability,  if
any, with respect to such actions,  will not have a material  adverse  effect on
the consolidated financial position or results of operations of the Company.

In March 2005, the Company settled a litigation for $550,000, which arose during
the installation of a scanner when an employee of a customer's subcontractor was
injured. The Company believed that it was not at fault but elected to settle the
case to avoid the cost and  uncertainty  of  litigation.  At June 30, 2004,  the
Company reserved $200,000 in anticipation of a settlement. During the year ended
June 30,  2005,  the Company  recorded  an  additional  $350,000  shown in other
expenses in the accompanying  consolidated  statement of operations,  to reflect
the balance of the settlement (see Note 17).

Certain no-fault  insurers have raised issues  concerning  whether the Company's
clients the "PC's" are in  compliance  with  certain  laws,  including,  but not
limited to, laws governing their corporate  structure  and/or  licensing,  their
entitlement  or standing to seek and/or obtain  no-fault  benefits,  and/or laws
prohibiting the corporate practice of medicine,  fee-splitting  and/or physician
self  referrals.  To the extent any claims are  asserted  against the PC's,  the
settlement  of such claims  could  result in the PC's  waiving  their  rights to
collect certain of their insurance claims.  Management believes that the Company
and the PC's are not in violation of any of the above mentioned laws.  Since the
resolution or settlement of these claims with the insurance companies could have
a material  impact on the collection of management  fees by the Company from its
PC's, the Company has provided reserves for  uncollectable  fees related to this
matter.

Potential Delisting of the Company's Common Stock
-------------------------------------------------

The  Company  received  written  notification  from the Nasdaq  Stock  Market on
December  22,  2005  that the bid  price  of its  common  stock  for the last 30
consecutive  trading days had closed below the minimum $1.00 per share  required
for continued  listing under Nasdaq  Marketplace  Rule  4310(c)(4) (the "Rule").
Pursuant to Nasdaq Marketplace Rule 4310(c)(8)(D), the Company has been provided
an  initial  period of 180  calendar  days,  or until June 20,  2006,  to regain
compliance.  The notice states that the Company has achieved compliance with the
Rule if at any time before June 20, 2006 the bid price of the  Company's  common
stock closes at $1.00 per share or more for a minimum of 10 consecutive business
days.  The Company has been  granted an extension  to achieve  compliance  until
December 20, 2006.

If the Company cannot demonstrate compliance with the bid price rule by December
20,  2006,  than the  Staff  will  provide  written  notice  that the  Company's
securities  will be delisted.  At that time,  the Company may appeal the Staff's
determination to delist its securities to a Listing Qualifications Panel.


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 17 - OTHER INCOME (EXPENSE)

Other income (expense) consists of:

                             For the Years Ended June 30,
                         -----------------------------------
                            2006          2005         2004
                         ----------  ----------   ----------
Income from investment   $  156,000  $  180,000  $  117,000
Other income (expense)      171,000     322,178     131,356
Litigation settlements        -        (350,000)   (232,109)
                         ----------  ----------  ----------
                         $  327,000  $  152,178  $   16,247
                         ==========  ==========  ==========


NOTE 18 - SUPPLEMENTAL CASH FLOW INFORMATION

During the years ended June 30, 2006,  2005 and 2004, the Company paid $281,903,
$225,177 and $264,819 for  interest,  respectively.  During the years ended June
30,  2006,  2005 and 2004,  the Company  paid  $57,180,  $78,638 and $14,459 for
income taxes, respectively.

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

- During the Year Ended June 30, 2006:

a)   The Company acquired equipment of $132,262 under capital lease obligations.

b)   The  Company  received  notes  receivable  from  employee  stockholders  of
     $422,673 in connection with issuance of 674,339 shares of its common stock.

c)   In connection with the Company's sale of its subsidiary in January 2006, an
     equipment loan totaling $374,565 was assumed by the purchaser.


-    During the Year Ended June 30, 2005:

a)   The  Company   acquired   equipment  of  $633,675  under  a  capital  lease
     obligation.

b)   The Company  issued  179,973  shares of common  stock valued at $223,234 in
     connection  with  issuance  of notes and  loans  receivable  from  employee
     stockholders.

-    During the Year Ended June 30, 2004:

a)   The Company acquired equipment of $276,852 under capital lease obligations.

b)   The Company issued 264,840 shares of its common stock,  valued at $276,885,
     to various  employees  in  connection  with the issuance of notes and loans
     receivable pursuant to various exercises of stock options.


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 19 - ADVANCES AND NOTES TO RELATED MEDICAL PRACTICES

During 1994,  Melville MRI, P.C.  ("Melville  Center"),  a New York professional
corporation, of which Raymond V. Damadian is the sole shareholder,  director and
president, purchased an MRI scanner from the Company. The balance due under this
note as of June 30, 2005 was $45,872.  As of  September  9, 2005,  this note was
paid in full.  Interest  income on this note for the years ended June 30,  2006,
2005 and 2004 amounted to $383, $7,148 and $19,649, respectively.

Canarsie MRI Associates ("Canarsie"),  a joint venture partnership, of which MRI
Specialties, Inc. ("Specialties") is an owner, is a party to a service agreement
for its  scanner  with the  Company at an annual fee of  $70,000.  In  addition,
during fiscal 2001, Canarsie purchased a QUAD MRI scanner from the Company,  for
a purchase  price of  $850,000,  payable as follows:  (1)  $400,000  downpayment
(received April 2001); (2) $450,000 in 84 equal monthly installments,  including
interest at 6%,  pursuant to a promissory note to be executed upon acceptance of
the  scanner.  Timothy  Damadian,  the son of Raymond V.  Damadian,  is the sole
stockholder,  Director and President of Specialties.  The balance due under this
note as of June 30,  2006 was  $177,054.  Interest  income  on this note for the
years  ended June 30,  2006,  2005 and 2004  amounted  to  $12,791,  $16,631 and
$20,247, respectively.

The Company has cumulative  advances due from a former  subsidiary,  Tallahassee
Magnetic  Resonance Imaging,  P.A.,  totaling $546,183 as of June 30, 2006. This
balance is payable as follows:  (1) Monthly  payments of interest only of $2,730
until August 2007 (2) $546,183 in 40 monthly installments, including interest at
6%, pursuant to a promissory note.

The maturities of advances and notes to related medical  practices over the next
five years are as follows:

                              Years Ending
                                June 30,
                              ------------
                                  2007    $ 89,824
                                  2008     217,856
                                  2009     212,382
                                  2010     180,000
                                  2011      66,183
                                          --------
                                          $766,245


NOTE 20 - SALE OF SUBSIDIARY

On January 31, 2006, the Company sold 100% of the stock of Tallahassee  Magnetic
Resonance Imaging,  P.A. to Raymond V. Damadian for a deminimus amount since the
liabilities  exceeded the assets.  No gain or loss was  recognized on this sale.
Revenue recognized from this entity totaled $590,883 and $1,272,859 for the year
ended June 30, 2006 and 2005, respectively.


NOTE 21 - SEGMENT AND RELATED INFORMATION

The Company  provides segment data in accordance with the provisions of SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information".

The Company operates in two industry  segments - manufacturing and the servicing
of medical equipment and management of diagnostic imaging services.

The accounting  policies of the segments are the same as those  described in the
summary of significant  accounting policies.  All intersegment sales are market-
based.  The  Company  evaluates   performance  based  on  income  or  loss  from
operations.


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 21 - SEGMENT AND RELATED INFORMATION (Continued)

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

                                                  Physician
                                   FONAR        Management and
                                  Medical         Diagnostic
                                 Equipment         Services         Totals
                                ------------    --------------   -----------
Fiscal 2006:
-----------

Net revenues from external
  customers                     $ 19,708,055    $ 13,368,274     $ 33,076,329
Intersegment net revenues       $    587,465    $    -           $    587,465
Loss from operations            $(24,742,622)   $ (4,981,864)    $(29,724,486)
Depreciation and amortization   $  2,028,332    $  1,258,533     $  3,286,865
Compensatory element of stock
  issuances                     $  1,172,254    $    723,208     $  1,895,462
Termination costs paid with
  common stock                  $    -          $  1,600,000     $  1,600,000
Total identifiable assets       $ 31,264,366    $ 25,965,178     $ 57,229,544
Capital expenditures            $  1,552,275    $  2,045,940     $  3,598,215

Fiscal 2005:
-----------

Net revenues from external
  customers                     $ 81,266,949    $ 23,631,595     $104,898,544
Intersegment net revenues       $    506,955    $     -          $    506,955
Income from operations          $    751,570    $    911,732     $  1,663,302
Depreciation and amortization   $  2,343,146    $  1,648,606     $  3,991,752
Compensatory element of stock
  issuances                     $  1,290,346    $  1,782,788     $  3,073,134
Total identifiable assets       $ 46,265,840    $ 29,828,642     $ 76,094,482
Capital expenditures            $  1,943,091    $  1,513,624     $  3,456,715

Fiscal 2004:
-----------

Net revenues from external
  customers                     $ 48,629,455    $ 22,979,902     $ 71,609,357
Intersegment net revenues       $    474,584    $    -           $    474,584
(Loss) income from operations   $ (8,777,961)   $    307,667     $ (8,470,294)
Depreciation and amortization   $  2,322,363    $  1,558,535     $  3,880,898
Compensatory element of stock
  issuances                     $  2,039,079    $  2,086,638     $  4,125,717
Total identifiable assets       $ 48,891,815    $ 28,309,031     $ 77,200,846
Capital expenditures            $  2,642,212    $    772,799     $  3,415,011




                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 21 - SEGMENT AND RELATED INFORMATION (Continued)

Export Product Sales
--------------------

The Company's  areas of operations are  principally  in the United  States.  The
Company had export sales of medical equipment  amounting to 23.2%, 9.4% and 1.0%
of product  sales  revenues to third  parties for the years ended June 30, 2006,
2005 and 2004, respectively.

The  foreign  product  sales,  as a  percentage  of product  sales to  unrelated
parties, were made to customers in the following countries:

                                For the Years Ended June 30,
                                ----------------------------
                                2006        2005        2004
                                ------      ----        -----
                 Puerto Rico     -  %       3.8%         .3%
                 Kuwait          9.7        -           -
                 Spain           -          -            .7
                 Switzerland     -          1.9         -
                 England         7.6        2.8         -
                 Germany         5.9         .9         -
                                ------      ----        -----
                                23.2%       9.4%        1.0%
                                =====       ====        =====

Foreign Service and Repair Fees
-------------------------------

The Company's  areas of service and repair are principally in the United States.
The  Company had  foreign  revenues  of service and repair of medical  equipment
amounting to 8.2%,  9.0% and 14.3% of  consolidated  net service and repair fees
for the years  ended June 30,  2006,  2005 and 2004,  respectively.  The foreign
service and repair fees, as a percentage of total service and repair fees,  were
provided principally to the following countries:

                                For the Years Ended June 30,
                                -----------------------------
                                2006        2005        2004
                                ----        ----        -----
                 Korea           .9%        1.2%         2.2%
                 Spain          2.0         2.8          3.5
                 Puerto Rico    1.1          .3          -
                 Saudi Arabia    .9         1.4          2.5
                 Poland          .9         1.5          2.8
                 Switzerland     .7          -           -
                 Germany         .2          -           -
                 England         .2          -           -
                 Scotland       1.3         1.8          3.3
                                ----        ----        -----
                                8.2%        9.0%        14.3%

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



                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 22 - QUARTERLY FINANCIAL DATA (UNAUDITED)

                     (000's omitted, except per share data)


                                           For the Quarters Ended
                          -----------------------------------------------------------------
                          September 30,  December 31,    March 31,   June 30,
                               2005          2005          2006         2006         Total
                          -------------  ------------  -----------  ------------  ---------
                                                                  
Total Revenues - Net         $ 10,153       $ 10,541     $  7,103     $  5,279    $ 33,076

Total Costs and Expenses       18,188         16,085       14,461       14,067      62,801

Net Loss                       (8,317)        (5,358)      (7,357)      (8,931)    (29,963)

Basic and Diluted Net Loss
  Per Share                  $  (0.08)      $  (0.05)    $  (0.07)    $  (0.07)   $  (0.27)






                                           For the Quarters Ended
                          -----------------------------------------------------------------
                                                                  
                          September 30,  December 31,    March 31,   June 30,
                               2004          2004          2005        2005         Total
                          -------------  ------------  -----------  ------------  ---------
Total Revenues - Net          $ 25,068      $ 29,499    $  25,330     $  25,002   $ 104,899

Total Costs and Expenses        24,161        28,276       25,355        25,443     103,235

Net Income (Loss)                  786         1,141         (480)         (433)      1,014


Basic and Diluted Net
  Income Per Share             $  0.01      $   0.01    $    -        $   -       $    0.02




Income  (loss)  per  share  from   operations  for  each  quarter  was  computed
independently using the weighted-average number of shares outstanding during the
quarter.  However,  income (loss) per share for the year was computed  using the
weighted-average  number of shares outstanding during the year. As a result, the
sum of the income  (loss) per share for the four quarters may not equal the full
year income (loss) per share.


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 23 - ALLOWANCE FOR DOUBTFUL ACCOUNTS

The following  represents a summary of allowance  for doubtful  accounts for the
years ended June 30, 2006, 2005 and 2004, respectively:




                                  Balance                                 Balance
Description                   June 30, 2005  Additions     Deductions  June 30, 2006
-----------                   -------------  ------------  ----------  -------------
                                                           
Receivables from equipment
  sales and service contracts   $  498,452   (1)$145,635   $    -       $   644,087
Receivables from equipment
  sales and service contracts
  - related parties                646,621          -           -           646,621
Management fee receivable from
  related medical practices      2,017,163  (1)1,327,000     290,677      3,053,486
Advance and notes to related
  parties                          364,791          -          -            364,791





                                  Balance                                  Balance
Description                   June 30, 2004    Additions   Deductions  June 30, 2005
-----------                   -------------  ------------  ----------  -------------
                                                           
Receivables from equipment
 sales and service contracts   $   467,990   (1)$30,462     $  -         $  498,452
Receivables from equipment
 sales and service contracts
 - related parties                 655,563         -         (1)8,942       646,621
Management fee receivable from
  related medical practices      1,874,390   (1)142,773         -         2,017,163
Advance and notes to related
  parties                          364,791         -            -           364,791




                                  Balance                                 Balance
Description                   June 30, 2003   Additions    Deductions  June 30, 2004
-----------                   -------------  ------------  ----------  -------------
                                                           
Receivables from equipment
  sales and service contracts  $   442,437    (1)$25,553    $   -        $  467,990
Receivables from equipment
  sales and service contracts
  - related parties                694,655          -      (1)39,092        655,563
Management fee receivable from
  related medical practices      1,296,390    (1)578,000        -         1,874,390
Advance and notes to related
  parties                          446,035          -      (1)81,244        364,791

(1)  Included in provision for bad debts.


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 24 - SALE OF PHYSICAL MEDICINE MANAGEMENT BUSINESS

On July  28,  2005,  FONAR,  HMCA and  Dynamic  entered  into an Asset  Purchase
Agreement with Health Plus Management Services, L.L.C. ("Health Plus"), pursuant
to which HMCA and its  subsidiary  Dynamic  sold to Health  Plus the  portion of
their  business which was engaged in the business of managing  physical  therapy
and rehabilitation  facilities,  together with the assets used in the conduct of
such business.

The assets sold  consisted  principally of the  management  agreements  with the
physical  therapy  and  rehabilitation   facilities,  the  assignment  of  other
agreements and rights utilized in the Company's  physical therapy  equipment,  a
portion of the  accounts  receivable  and  furniture  and  fixtures  the Company
provided to the physical therapy and rehabilitation facilities.

The sale was made to Health  Plus.  There is no  material  relationship  between
Health Plus and FONAR, HMCA or Dynamic, or any of their respective  directors or
officers or  associates  of any such person.  The two  principals of Health Plus
were  employed  by  HMCA  and  Dynamic  up to the  time  of the  closing  of the
transaction in HMCA's physical therapy and  rehabilitation  facility  management
business.  In consideration  for the termination of their employment  agreement,
these two  individuals  each became entitled to receive  $800,000.  In addition,
each became entitled to receive $200,000 for billing and collection  services to
be  provided  on behalf of HMCA and  Dynamic  with  respect  to a portion of the
accounts  receivable of certain physical therapy and  rehabilitation  facilities
which arose during the period when HMCA was engaged in the  management  of those
facilities. The $1,000,000 payable to each of these individuals was satisfied in
shares of FONAR  common  stock.  During the year the  Company  issued  1,871,490
shares totaling $1,995,675.  The remaining balance under this obligation at June
30, 2006 is $4,325 which is included in other current  liabilities.  The Company
capitalized $400,000 with respect to collection services.  During the year ended
June 30, 2006, $400,000 was charged to compensatory element of stock.

The purchase price under the Asset Purchase Agreement was $6.6 million,  payable
pursuant  to  a  promissory  note  (the  "Note")  in  120  monthly  installments
commencing on August 28, 2005. The first twelve  installments  are interest only
and the remaining 108 payments will consist of equal  installments  of principal
and interest in the amount of $76,014 each.  The Note is secured by a first lien
on all of the assets of Health Plus, including its accounts receivable. The Note
is subject to  prepayment  provisions  to the extent  Health Plus resells all or
part of the assets and business or utilizes the assets sold as collateral in any
debt financing.  The note provides for interest at 5% per annum.  The fair value
assigned to the note was  $6,078,068  reflecting  a discount of $521,932 for the
below  market  interest  rate.  At June  30,  2006 the  balance  of the note was
$6,600,000, the unamortized debt discount was $521,932 and the carrying value of
the note receivable was $6,078,068.

For  accounting  purposes in accordance  with  accounting  principles  generally
accepted in the United States, the Company determined that the classification of
the disposed  business  described above as discontinued  operations would not be
appropriate.  Accordingly,  the operating  results of the disposed business have
been  included  in  continuing  operations  in  the  accompanying   consolidated
financial statements.


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


NOTE 24 - SALE OF PHYSICAL MEDICINE MANAGEMENT BUSINESS (Continued)

The Company  recognized revenue from the disposed business of approximately $9.6
million  during the year ended June 30, 2005. In connection  with this sale, the
Company  recorded a loss of  $143,598  during the year ended June 30,  2006.  In
addition,  the Company  recorded a charge to earnings  during the quarter  ended
September 30, 2005 of $1.6 million  related to the termination of the employment
contracts discussed above.

The following schedule shows the calculation of the loss on sale of the physical
medicine business:

Selling Price                                    $6,600,000
Less: Discount for below market interest           (521,932)
                                                 ------------
Net selling price                                 6,078,068

Assets sold:

Management fee receivable                        $1,388,547
Property and equipment - net                        444,230
Notes receivable                                    431,000
Management agreements - net                       3,954,389
Security deposits                                     3,500
                                                 ------------
Subtotal                                          6,221,666
                                                 ------------
Loss on sale of business                         $ (143,598)
                                                 ============


NOTE 25 - SUBSEQUENT EVENTS


Issuances of Common Stock
-------------------------

During the period from July 1, 2006 through August 30, 2006:

a)   The  Company   issued  50,749  shares  of  common  stock  to  employees  as
     compensation of $19,199 under stock bonus plans.

b)   The Company issued 135,000 shares of common stock to consultants and others
     at a value of $61,800.

c)   The Company issued  4,377,881 shares of common stock for costs and expenses
     of $1,917,069.

d)   The Company issued 92,000 shares of common stock upon the exercise of stock
     options resulting in proceeds of $49,680.





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

There  have  been  no  disagreements  with  our  independent  registered  public
accounting firm or other matters requiring disclosure under Regulation S-K, Item
304(b).


ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We have performed an evaluation under the supervision and with the participation
of our  management,  including  our  principal  executive  officer and principal
financial  officer,   of  the  effectiveness  of  our  disclosure  controls  and
procedures,  as defined in Rule  13a-15(e)  and 15d-15(e)  under the  Securities
Exchange Act of 1934 (the "Exchange  Act").  As of the end of the period covered
by this report (June 30, 2005),  our  disclosure  controls and  procedures  were
determined to be effective.


MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Pursuant to Item 308(a) of Regulation  S-K, we are required to furnish an annual
management   report  on  our  internal   control  of  our  financial   reporting
concurrently  with the  filing of our Annual  Report on Form  10-K.  In order to
issue our report, management documented both the design of our internal controls
and the testing processes that support  management's  evaluation and conclusion.
Our management has completed the necessary  processes and procedures for issuing
its report on  internal  controls  based on  criteria  established  in  Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of  the  Treadway   Commission   (COSO).   Our  management  is  responsible  for
establishing and maintaining effective internal control over financial reporting
and for its assessment of the  effectiveness  of internal control over financial
reporting.  The Company's internal control over financial reporting is a process
designed under the supervision of the Company's  principal executive officer and
principal  financial officer,  and effected by the Company's board of directors,
management and other personnel,  to provide reasonable  assurance  regarding the
reliability of financial  reporting and the preparation of financial  statements
for  external  purposes  in  accordance  with  accounting  principles  generally
accepted in the United States of America.  Our internal  control over  financial
reporting  includes  those  policies  and  procedures  that (1)  pertain  to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the  transactions  and  dispositions  of the assets of the company;  (2) provide
reasonable  assurance  that  transactions  are  recorded as  necessary to permit
preparation of financial  statements in accordance  with  accounting  principles
generally  accepted  in the United  States of  America,  and that  receipts  and
expenditures   of  the   company  are  being  made  only  in   accordance   with
authorizations  of  management  and  directors of the  company;  and (3) provide
reasonable  assurance  regarding  prevention or timely detection of unauthorized
acquisition,  use,  or  disposition  of the  company's  assets that could have a
material effect on the financial statements.

Internal  control over  financial  reporting  includes the controls  themselves,
monitoring  and  internal  auditing  practices  and  actions  taken  to  correct
deficiencies  as  identified.  Because  of its  inherent  limitations,  internal
control over financial reporting may not prevent or detect misstatements.  Also,
projections of any evaluation of  effectiveness to future periods are subject to
the risk that controls may become  inadequate  because of changes in conditions,
or  that  the  degree  of  compliance   with  the  policies  or  procedures  may
deteriorate.

As of June  30,  2006,  management,  with  the  participation  of our  principal
executive officer and principal financial officer, assessed the effectiveness of
our internal control over financial reporting based on the framework established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations  of  the  Treadway  Commission  (COSO).   Management's  assessment
included an  evaluation  of the design of our internal  control  over  financial
reporting and testing of the operational  effectiveness  of our internal control
over financial reporting. Management reviewed the results of its assessment with
the Audit  Committee of our Board of  Directors,  and based on this  assessment,
management  has  determined  that as of June 30,  2006,  there were no  material
weaknesses or significant  deficiencies  in our internal  control over financial
reporting.  In the absence of material  weaknesses or significant  deficiencies,
management  has  concluded  that,  as of June 30, 2006,  Fonar  Corporation  and
Subsidiaries did have effective  internal control over financial  reporting.  As
defined by the Public Company  Accounting  Oversight  Board  ("PCAOB")  Auditing
Standard No. 2, a material  weakness is a  significant  control  deficiency or a
combination of  significant  control  deficiencies,  that results in there being
more than a remote  likelihood  that a  material  misstatement  of the annual or
interim  financial  statements  will  not be  prevented  or  detected.  Marcum &
Kleigman LLP, our independent  registered  public accounting firm, which audited
our  consolidated  financial  statements  included in our Annual  Report on Form
10-K, has issued its attestation  report on our  management's  assessment of our
internal control over financial reporting.


PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Directors serve from the date of their election until the next annual meeting of
stockholders  and until  their  successors  are elected  and  qualify.  With the
exception of Dr. Raymond V. Damadian,  who does not receive any fees for serving
as a director,  each director  receives $20,000 per annum for his or her service
as a director. Officers serve at the discretion of the Board of Directors.

A majority  of our board of  directors  is composed  of  independent  directors:
Robert  J.  Janoff,  Charles  N.  O'Data  and  Robert  Djerejian.   These  three
individuals also serve as the three members of the audit  committee,  which is a
standing  committee  of  board of  directors  having a  charter  describing  its
responsibilities.  Mr.  O'Data  has  been  designated  as  the  audit  committee
financial  expert.  His relevant  experience  is  described in his  biographical
information.  We have  adopted  a code of  ethics  applicable  to,  among  other
personnel,  our  principal  executive  officer,   principal  financial  officer,
controllers and persons performing  similar  functions.  The code is designed to
deter wrongdoing and to promote:  1. honest and ethical  conduct,  including the
ethical  handling of actual or apparent  conflicts of interest  between personal
and   professional   relationships;   2.  full,  fair,   accurate,   timely  and
understandable disclosure in reports and documents that we file or submit to the
Securities and Exchange  Commission and in other public  communications we make;
3. compliance with applicable  governmental laws, rules and regulations;  4. the
prompt internal  reporting of violations of the code to an appropriate person or
persons identified in the code and 5.  accountability for adherence to the code.
We will  provide a copy of the code to any person who  requests a copy. A person
may request a copy by writing to FONAR Corporation,  110 Marcus Drive, Melville,
New York 11747, to the attention of the Legal Department or Investor Relations.

The officers and directors of the Company are set forth below:

Raymond V. Damadian, M.D.     70          President, Treasurer,
                                          Chairman of the Board
                                          and a Director

David B. Terry                59          Senior Vice President
                                                   and Secretary

Claudette J.V. Chan           68          Director

Robert J. Janoff              79          Director

Charles N. O'Data             70          Director

Robert Djerejian              74          Director


Raymond V.  Damadian,  M.D. has been the Chairman of the Board and  President of
FONAR since its  inception  in 1978 and  Treasurer  since  February,  2001.  Dr.
Damadian was employed by the State  University  of New York,  Downstate  Medical
Center,  New  York,  as an  Associate  Professor  of  Biophysics  and  Associate
Professor of Internal  Medicine from 1967 until  September  1979.  Dr.  Damadian
received an M.D.  degree in 1960 from Albert Einstein  College of Medicine,  New
York, and a B.S. degree in mathematics from the University of Wisconsin in 1956.
In addition,  Dr. Damadian conducted  post-graduate work at Harvard  University,
where  he  studied  extensively  in  the  fields  of  physics,  mathematics  and
electronics.  Dr.  Damadian is the author of numerous  articles and books on the
nuclear  magnetic  resonance  effect in human tissue,  which is the  theoretical
basis  for the FONAR MRI  scanners.  Dr.  Damadian  is a 1988  recipient  of the
National  Medal  of  Technology  and in 1989  was  inducted  into  the  National
Inventors Hall of Fame, for his  contributions  in conceiving and developing the
application of magnetic resonance technology to medical  applications  including
whole body  scanning and  diagnostic  imaging.  Dr.  Damadian is the  President,
Treasurer and director of HMCA.

David B. Terry is the Senior Vice  President and  Secretary of the Company.  Mr.
Terry has been serving as Vice  President  since  December 1998 and as Secretary
since May 1990.  Previously,  he served as  Treasurer  from May 1990 to December
1998, as Secretary from July 1978 through June 1987 and as Treasurer from August
1981 through June 1987. From July 1978 through June 1987, he was also a Director
of the Company. Between July 1987 and January 1990, Mr. Terry was a co-owner and
actively engaged in the business of Carman-Terry Realty, a real estate brokerage
firm. In January 1990,  Mr. Terry resumed his employment  with the Company.  Mr.
Terry is a brother-in-law of Raymond V. Damadian.

Claudette  J.V. Chan has been a Director of Fonar since October 1987.  Mrs. Chan
was employed  from 1992 through  1997 by Raymond V.  Damadian,  M.D. MR Scanning
Centers Management Company and since 1997 by HMCA, as "site inspector," in which
capacity she is responsible for supervising and implementing standard procedures
and policies for MRI scanning centers.  From 1989 to 1994 Mrs. Chan was employed
by St. Matthew's and St. Timothy's Neighborhood Center, Inc., as the director of
volunteers  in the  "Meals on Wheels"  program,  a program  which  cares for the
elderly. In approximately 1983, Mrs. Chan formed the Claudette Penot Collection,
a retail mail-order business specializing in women's apparel and gifts, of which
she was the President until she stopped  operating the business in approximately
1989.  Mrs. Chan  practiced and taught in the field of nursing until 1973,  when
her son was born.  She  received a bachelor  of science  degree in nursing  from
Cornell University in 1960. Mrs. Chan is the sister of Raymond V. Damadian.

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

Charles N. O'Data has been a Director of FONAR since February 1998. From 1968 to
1997, Mr. O'Data was the Vice President for Development  for Geneva  College,  a
liberal arts college located in western Pennsylvania. In that capacity, he acted
as  the  College's  chief  investment  officer.  His  responsibilities  included
management of the College's  endowment fund and fund raising.  In July 1997, Mr.
O'Data  retired  from  Geneva  College  after 36 years of  service  to  assume a
position of  National  Sales  Executive  for SC Johnson  Company's  Professional
Markets  Group,  a unit of SC Johnson Wax, and  specialized  in  healthcare  and
education  sales,  a position he held until the spring of 1999.  In his capacity
with SC Johnson he was responsible for sales to the nation's three largest Group
Purchasing  Organizations  which  included  some  4,000  hospitals.  Mr.  O'Data
presently acts as an independent  financial consultant to various entities.  Mr.
O'Data served on the board of the Medical Center, Beaver,

Pennsylvania,  now a part of Heritage Valley Health System, a 500 bed acute care
facility,  for 22 years, three as its Chair. Mr. O'Data also served on the board
of the Hospital Council of Western  Pennsylvania,  a  shared-services  and group
purchasing  organization  covering  seven  states.  He founded The Beaver County
Foundation,  a Community Foundation,  in 1992, and serves as its President.  Mr.
O'Data is  listed  as a finance  associate  in the  Middle  States  Association,
Commission on Higher  Education.  The commission is the formal  accrediting body
for higher  education in the eastern region of the country.  In this capacity he
evaluates the financial  aspects of educational  organizations.  Mr. O'Data is a
graduate of Geneva  College,  where he received a B.S.  degree in  Economics  in
1958.

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


ITEM 11.  EXECUTIVE COMPENSATION.

With the  exception of the Chief  Executive  Officer,  the  compensation  of the
Company's  executive  officers is based on a  combination  of salary and bonuses
based on performance.  The Chief Executive Officer's  compensation consists of a
salary.

The Board of Directors  does not have a compensation  Committee.  Dr. Raymond V.
Damadian, President, Chief Executive Officer and Chairman of the Board, controls
over 50% of the voting  power of our  capital  stock.  Dr.  Damadian is the only
executive  officer  who is a member  of the  Board of  Directors.  Dr.  Damadian
participates in the determination of executive compensation for our officers.

The Board of Directors has  established an audit  committee.  The members of the
committee are Robert J. Janoff, Charles N. O'Data and Robert Djerejian.

There is set forth in the following Summary  Compensation Table the compensation
provided by us during fiscal 2006 to its Chief Executive  Officer.  There is set
forth in the following  Option Grant Table and Option  Exercise  Table any stock
options granted and exercised by Dr. Damadian during fiscal 2006.


I.  SUMMARY COMPENSATION TABLE
                                                    Long Term Compensation
                                             -----------------------------------
            Annual Compensation                   Awards             Payouts
------------------------------------------   ------------------  ---------------
  (a)       (b)     (c)       (d)   (e)         (f)       (g)     (h)     (i)
  Name                             Other                                   All
  and                              Annual    Restricted                   Other
Principal                          Compen-    Stock     Options   LTIP   Compen-
Position           Salary    Bonus sation    Award(s)    SARs    Payouts sation
   2       Year     ($)       ($)   ($)      ($)          (#)      ($)    ($)
---------  ----  ----------  ----- -------   ---------- -------  ------- -------
Raymond V. 2006  $93,059.68    -      -           -        -        -       -
Damadian,  2005  $86,799.98    -      -           -        -        -       -
CEO        2004  $86,799.99    -      -           -        -        -       -
---------  ----  ----------  ----- -------   ---------- -------  ------- -------

II.  OPTION/SAR GRANTS IN LAST FISCAL YEAR
                                                    Potential
                                                    Realizable Value
                                                    At Assumed
                                                    Annual Rates     Alternative
                                                    of Stock Price   to (f) and
                                                    Appreciation     (g): Grant
                   Individual Grants                for Option Term  Date  Value
--------------------------------------------------- ---------------  -----------
  (a)        (b)       (c)        (d)       (e)        (f)   (g)        (h)
                    % of Total
                    Options/
                    SARs
           Options/ Granted to Excercise                               Grant
           SARs     Employees  or Base                                 Date
           Granted  in Fiscal  Price     Expiration                    Present
Name       (#)      Year       ($/Sh)    Date        5%($)   10%($)    Value $
---------- -------- ---------- --------- ----------  -----   ------  -----------
Raymond V.
Damadian,      0        -          -          -         -       -        -
President & CEO

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

Aggregated Options/SAR Exercises in Last Fiscal Year and FY-End Option/Sar Value
--------------------------------------------------------------------------------
(a)            (b)             (c)          (d)            (e)
                                            Number of      Value of Unexercised
Name       Shares Acquired  Value Realized  Unexercised    In-the-Money
           on Exercise (#)  ($)             Options/SARs   Options/SARs at
                                            at FY-End (#)  FY-End ($)

                                            Exercisable/   Exercisable/
                                            Unexercisable  Unexercisable
---------  ---------------  --------------  -------------  --------------------
Raymond V.               0            -                 0                 -
Damadian,
President and CEO




EMPLOYEE COMPENSATION PLANS

Equity Compensation Plan Information as of June 30, 2006

Plan category   Number of securities  Weighted-average     Number of securities
                to be issued upon     exercise price of    remaining available
                exercise of           outstanding options, for future issuance
                outstanding options,  warrants and rights  under equity
                warrants and rights                        compensation plans
                                                           (excluding securities
                                                           reflected in column
                                                           (a)

Equity                 2,866,643                $1.20               3,621,472
compensation
plans
approved by
security
holders

Equity                      -                    N/A                     -
compensation
plans not
approved by
security
holders

Total                   2.866,643                $1.20                3,621,472


Fonar's 1993 Incentive Stock Option Plan, adopted on March 26, 1993, is intended
to qualify as an incentive  stock option plan under Section 422A of the Internal
Revenue Code of 1954, as amended. The 1993 Incentive Stock Option Plan permitted
the issuance of stock  options  covering an  aggregate  of  1,500,000  shares of
Common Stock of FONAR.  The 1993 Stock Option Plan terminated on March 25, 2003.
No options to purchase shares of Common Stock remained available for grant under
the plan at that time.  There are 59,000 options that were issued under the plan
that remain outstanding.

Fonar's 1997 Nonstatutory Stock Option Plan, adopted on May 9, 1997, permits the
issuance of stock  options  covering an aggregate of 5,000,000  shares of Common
Stock of FONAR. The options may be issued at such prices and upon such terms and
conditions as are determined by FONAR. The 1997  Nonstatutory  Stock Option Plan
will terminate on May 8, 2007. As of June 30, 2006,  options to purchase 357,900
shares of Common Stock of FONAR were available for future grant.  Of the options
granted under this plan, 2,228,943 remain outstanding.

Fonar's 2002 Incentive  Stock Option Plan,  adopted on July 1, 2002, is intended
to qualify as an incentive  stock option plan under Section 422A of the Internal
Revenue Code of 1954, as amended.  The 2002 Incentive  Stock Option Plan permits
the issuance of stock  options  covering an  aggregate  of  2,500,000  shares of
Common  Stock of Fonar.  The options  have an  exercise  price equal to the fair
market  value of the  underlying  stock on the date the option is  granted,  are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary  termination of  employment.  The 2002 Stock Option Plan will
terminate on June 30, 2012. As of June 30, 2006,  options to purchase  1,273,572
shares of Common Stock of Fonar were  available for future grant under the plan.
Of the options granted under this plan 578,700 remain outstanding.

Fonar's 2003 Supplemental  Stock Bonus Plan,  adopted May 1, 2003, permits Fonar
to issue an aggregate  of 5,000,000  shares of Common Stock of Fonar as bonus or
compensation.  Fonar selects the persons to whom bonus stock will be issued, the
number of shares to be awarded and such other terms and  conditions  as it deems
advisable.  The 2003  Supplemental  Stock Bonus Plan will terminate on April 30,
2013.  As of June 30,  2006 there  were no shares of Common  Stock of Fonar were
available for future grant under the plan.

Fonar's  2004 Stock Bonus Plan,  adopted on February 4, 2004,  permits  Fonar to
issue an  aggregate  of  5,000,000  shares of Common  Stock of Fonar as bonus or
compensation. As of June 30, 2006, there were no shares of Common Stock of Fonar
available for future grant under the plan.

Fonar's  2005  Incentive  Stock Option  Plan,  adopted on February 15, 2005,  is
intended to qualify as an incentive  stock option plan under Section 422A of the
Internal  Revenue  code of 1954,  as amended.  The Plan  permits the issuance of
stock  options  covering an  aggregate  of  2,000,000  shares of common stock of
Fonar.  The options have an exercise price equal to the fair market value of the
underlying stock on the date the option is granted,  are  non-transferable,  are
exercisable for a period not exceeding ten years,  and expire upon the voluntary
termination of  employment.  The Plan will terminate on February 14, 2015. As of
June 30,  2006,  2,000,000  shares of common stock of Fonar were  available  for
future grant under this plan.

Fonar's 2005 Stock Bonus Plan,  adopted on February 15, 2005,  permits  Fonar to
issue an  aggregate  of  3,000,000  shares of Common  stock of Fonar as bonus or
compensation. As of June 30, 2006, there were no shares of common stock of Fonar
available for future grant under this plan.

Fonar's 2005 Supplemental  Stock Bonus Plan,  adopted on July 18, 2005,  permits
Fonar to issue an  aggregate  of  3,000,000  shares of common  stock of Fonar as
bonus or  compensation.  As of June 30, 2006,  319,006 shares of common stock of
Fonar were available for future grant under this plan.

HMCA's 1997 Incentive Stock Option Plan,  adopted on March 10, 1997, is intended
to qualify as an incentive  stock option plan under Section 422A of the Internal
Revenue Code of 1954, as amended.  The 1997 Incentive  Stock Option Plan permits
the issuance of stock  options  covering an  aggregate  of  2,000,000  shares of
Common  Stock of HMCA.  The  options  have an  exercise  price equal to the fair
market  value of the  underlying  stock on the date the option is  granted,  are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment.  The exercisability of the options
granted to date is contingent upon the successful completion by HMCA of a public
offering of its securities or the recognition by HMCA of at least $10 million in
revenues for at least two  consecutive  fiscal  quarters.  The 1997 Stock Option
Plan will  terminate on March 9, 2007. As of June 30, 2006,  options to purchase
400,000  shares of HMCA Common Stock were  available  for future grant under the
plan.

HMCA's 1998  Incentive  Stock  Option Plan,  adopted on December  16,  1998,  is
intended to qualify as an incentive  stock option plan under Section 422A of the
Internal Revenue Code of 1954, as amended.  The 1998 Incentive Stock Option Plan
permits the issuance of stock options  covering an aggregate of 2,000,000 shares
of Common Stock of HMCA.  The options  have an exercise  price equal to the fair
market  value of the  underlying  stock on the date the option is  granted,  are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the  voluntary  termination  of  employment.  The  excerciseability  of the
options granted to date is contingent upon the successful  completion by HMCA of
a public offering of its  securities.  The 1998 Stock Option Plan will terminate
on December 15, 2008. As of June 30, 2006,  options to purchase 1,330,000 shares
of HMCA Common Stock were available for future grant under the plan.

HMCA's 1998  Nonstatutory  Stock  Option  Plan,  adopted on December  16,  1998,
permits the issuance of stock options covering an aggregate of 500,000 shares of
Common  Stock of HMCA.  The  options  may be issued at such prices and upon such
terms and  conditions  as are  determined  by HMCA.  The  exercisability  of the
options granted to date is contingent upon the successful  completion by HMCA of
a public offering of its  securities.  The 1998  Nonstatutory  Stock Option Plan
will  terminate on December 15, 2008.  As of June 30, 2006,  options to purchase
100,000 shares of common stock were available for future grant.


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

The  following  table sets forth the number and  percentage of shares of Fonar's
securities held by each director, by each person known by us to own in excess of
five percent of Fonar's voting securities and by all officers and directors as a
group as of August 30, 2006.

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                 2,588,274             2.17%
    Class C Stock                9,561,174            99.98%
    Class A Preferred              477,328             6.09%

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

Robert J. Janoff
Director
    Common Stock                    90,000               *
    Class A Preferred                1,999               *

Charles N. O'Data
Director
    Common Stock                       700               *

Robert Djerejian
Director
    Common Stock                         0               *

All Officers and Directors
as a Group (5 persons) (2) (3)
    Common Stock                 2,703,287             2.26%
    Class C Stock                9,561,174            99.98%
    Class A Preferred              480,165             6.13%
___________________________
*   Less than one percent

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

2.   Includes  101 shares of our Common  Stock and 19 shares of our Class A Non-
     voting  Preferred  Stock held by an officer  jointly  with his wife and 192
     shares  of our  Common  Stock  and 38  shares  of our  Class  A  Non-voting
     Preferred Stock held in trust by an officer for his children.

3.   Includes  options  to  purchase  21,372  shares of Common  Stock held by an
     officer.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Background.

Between 1990 and 1996, Raymond V. Damadian, M.D. MRI Scanning Centers Management
Company,  also  referred  to as  "RVDC",  a  Delaware  corporation  of which Dr.
Damadian was the sole stockholder,  director and President, purchased and leased
scanners  from  FONAR  to  establish  a  network  of  professional  corporations
operating MRI scanning centers, also referred to as the "Centers",  in New York,
Florida,  Georgia and other locations.  Dr. Raymond V. Damadian is the Chairman,
President and principal  stockholder  of FONAR and also the owner,  director and
President  of  each  of  these  professional  corporations.  RVDC  provided  the
necessary  management  and the  scanners  to the  Centers,  although  in certain
situations, a Center would acquire the scanner directly from FONAR.

ACQUISITION OF RVDC.

Effective June 30, 1997,  Fonar's  wholly-owned  subsidiary,  Health  Management
Corporation  of  America,  also  referred to as "HMCA",  formerly  known as U.S.
Health Management Corporation, acquired RVDC by purchasing all of the issued and
outstanding  shares of RVDC from Dr.  Damadian  for 10,000  shares of the Common
Stock of FONAR. The transactions can be rescinded by Dr. Damadian,  however,  in
the event of a change of control in FONAR or the  bankruptcy of FONAR.  There is
no time limit on the right to rescind. In connection with the transaction, FONAR
granted  RVDC a  nonexclusive  royalty  free  license  to  Fonar's  patents  and
software.  These  licenses  may be  terminated  by  FONAR  in the  event  of the
bankruptcy of RVDC or a change in control of RVDC.

AGREEMENTS WITH HMCA.

Effective  July 1, 1997,  new  management  agreements  were  entered into by the
Centers and HMCA.  Since that time  certain of the  original  Centers  have been
closed and new Centers  opened.  Each new Center also  entered into a management
agreement with HMCA.

Pursuant  to  the  management  agreements,   HMCA  is  providing   comprehensive
management and administrative services and office facilities,  including billing
and collection of accounts,  payroll and accounts payable  processing,  supplies
and utilities to the Centers.  Under the  management  agreements,  HMCA provides
service through FONAR for the scanners at the Centers.  In total, 12 MRI Centers
have management agreements with HMCA. Dr. Damadian is the stockholder,  director
and president of each of the Centers.

HMCA entered the business of performing management services for physical therapy
and  rehabilitation  practices  beginning with the acquisition of Dynamic Health
Care Management,  Inc., also referred to as Dynamic, in August, 1998. During the
fourth  quarter  of  fiscal  2005  the  professional  corporations  owned by Dr.
Damadian ceased operation of these facilities and new professional  corporations
owned by physicians not affiliated  with Dr.  Damadian,  HMCA,  Dynamic or Fonar
commenced  operations  at these  sites.  In  connection  with this  change,  the
professional  corporations  owned  by  Dr.  Damadian  entered  into  termination
agreements with HMCA and Dynamic. Pursuant to these agreements, the professional
corporations  owned by Dr. Damadian,  assigned  accounts  receivable to HMCA and
Dynamic,  in payment of unpaid  management  fees and  termination  fees,  in the
aggregate amount of $11,775,000.

In the beginning of fiscal 2006, on July 28, 2005,  HMCA sold the portion of its
business  managing  physical  therapy  and  rehabilitation  facilities  for $6.6
million,  payable  over a period  of ten  years,  and in  connection  therewith,
assigned its management agreements with the new professional corporations of the
new  physician  owners to the buyer.  Neither the new  physician  owners nor the
purchaser are affiliated with us.

The fees to HMCA under the management  agreements with the MRI Centers are based
on the number of  procedures  performed.  The per  procedure  charges to the MRI
Centers  ranged  from  $250 to $500 per MRI  scan.  The fees to HMCA  under  the
management  agreements with the physical  therapy and  rehabilitation  practices
were flat fees  charged on a monthly  basis.  The monthly  fees to the  physical
therapy and  rehabilitation  facilities  ranged from  approximately  $110,000 to
$205,000.

During the fiscal  years ended June 30, 2006 and June 30, 2005 the net  revenues
received by HMCA from the MRI Centers owned by Dr.  Damadian were  approximately
$12.7 million and $13.9 million respectively, and the net revenues received from
the  physical  therapy and  rehabilitation  practices  were  $648,000,  and $9.7
million respectively.

OTHER TRANSACTIONS

On June 30, 1994, Melville MRI, P.C., also referred to as the "Melville Center",
a New York  professional  corporation  of which  Raymond V. Damadian is the sole
shareholder, director and President, purchased the scanner being utilized at its
site from the Company for a purchase  price of  $1,011,431.12,  which in Fonar's
opinion  represented  a fair market  price based on sales of like  equipment  by
Fonar to its customers.  Of the purchase  price,  $900,000 was to be paid by the
assumption and payment of our indebtedness to the lender secured by the scanner.
In fiscal 2001,  following the payment in full by Fonar,  as  guarantor,  of the
indebtedness due to the lender, there was as a result a balance of $893,606 then
owing to Fonar by the Melville  Center.  The payment terms were  restructured in
March 2004 to be $15,418.32  per month,  inclusive of interest at the rate of 5%
per annum,  over an 18 month  period  commencing  April  2004.  The  outstanding
balance as of June 30, 2005 was $45,872.  As of September 30, 2005, the note was
paid in full.

Robert Janoff, a director of the Company,  is a limited partner in a partnership
in which we have a 92%  partnership  interest.  The  partnership  manages an MRI
scanning  center in Bensonhurst,  Brooklyn,  New York and was party to a service
contract  at an annual  rate of $50,000 on its scanner for the period of July 1,
2005 through June 30,  2006.  The service  contract has been renewed at the same
rate for the period July 1, 2006 through June 30, 2007.

Canarsie  MRI  Associates,  also  referred  to as  "Canarsie",  a joint  venture
partnership of which MRI Specialties,  Inc., also referred to as  "Specialties",
is an owner, is party to a service agreement for its scanner with the Company at
an annual fee of $85,000 for the period from March 24,  2006  through  March 23,
2007. It is expected that the service  contract will be renewed when it expires.
During  fiscal 2001,  Canarsie  entered into an agreement to purchase a QUAD(TM)
12000 MRI scanner from FONAR for a purchase  price of $850,000.  Of the purchase
price,  $400,000  was paid and  $450,000  was payable  pursuant to a note over a
period of 7 years with 6% interest per annum.  The monthly  payment is $6,573.85
and commenced on December 1, 2001.  The  principal  balance owing to FONAR as of
June 30, 2006, was $177,054.  Timothy Damadian,  the son of Raymond V. Damadian,
is the sole stockholder, director and President of Specialties.

Pompano  MRI  Associates,  also  referred  to  as  "Pompano",  a  joint  venture
partnership  of which Guardian MRI,  Inc.,  also referred to as  "Guardian",  is
party to a service agreement with FONAR at the rate of $85,000 per annum for its
Upright(TM) MRI scanner.  The service  agreement  commenced on December 13, 2005
and runs through December 12, 2006. It is anticipated that the service agreement
will  be  renewed.  Timothy  Damadian,  the son of  Raymond  V.  Damadian,  is a
stockholder,  director  and  officer  of  Guardian.  Jevan  Damadian  and  Keira
Reinmund, also children of Dr. Damadian, are also stockholders of Guardian.

A one-year  service  agreement  between FONAR and Orlando MRI Associates,  L.P.,
also  referred to as "Orlando  Partnership",  commenced  on July 13, 2005 at the
rate of $85,000 per annum for an Upright(TM) MRI scanner.  It was renewed for an
additional one-year period at the same price on July 13, 2006. It is anticipated
that the service  agreement  will be renewed upon its  expiration  in July 2007.
Timothy  Damadian,  the son of Raymond V.  Damadian is a limited  partner in the
Orlando Partnership.

Black Bear  Management  LLC, a New York limited  liability  company of which TRD
Services,  Inc., also referred to as "TRD",  is a member,  is party to a service
agreement with FONAR for its Upright(TM) MRI at a fee of $85,000 per annum.  The
term runs from November 23, 2005 through  November 22, 2006. It is expected that
the service agreement will be renewed.  Timothy Damadian,  the son of Raymond V.
Damadian, is the stockholder, director and President of TRD.

Bronx Management Associates,  LLC, a New York limited liability company of which
Raymond V.  Damadian and Donna  Damadian,  jointly,  TRD  Services,  Inc.,  also
referred to as "TRD",  JAD  Ventures,  Inc.,  also  referred to as "JAD",  Keira
Reinmund,  Thomas Terry and Constance Terry, among others, are members, is party
to a service  agreement with FONAR for its  Upright(TM) MRI scanner running from
March 23,  2006  through  March 22,  2007 for an annual  fee of  $85,000.  It is
anticipated  that the service  agreement  will be reviewed upon its  expiration.
Donna  Damadian  is the  wife of  Raymond  Damadian.  TRD is  owned  by  Timothy
Damadian, a son of Raymond and Donna Damadian, JAD is owned by Jevan Damadian, a
son of Raymond and Donna  Damadian and Keira Reinmund is the daughter of Dr. and
Mrs. Damadian. Constance Terry is the wife of David B. Terry, Vice President and
Secretary of Fonar and brother-in-law of Dr. Damadian.  Thomas Terry is also the
brother-in-law of Dr. Damadian.  In addition,  FONAR has a 20% interest in Bronx
Management Associates, LLC.

Deer Park  Management  Services,  LLC, a New York limited  liability  company of
which TRD and JAD are, among others,  members,  is party to a service  agreement
with FONAR for its  Upright(TM)  MRI scanner  running  from May 1, 2006  through
April 30,  2007 at an annual fee of  $85,000.  It is  expected  that the service
agreement will be renewed upon its expiration.  TRD and JAD are owned by Timothy
Damadian  and  Jevan  Damadian,  respectively,  who are the sons of  Raymond  V.
Damadian.

Long Island  Management  Services,  LLC, a New York limited liability company of
which TRD, JAD and Donna  Damadian  are,  among others,  members,  is party to a
service  agreement  with FONAR for its  Stand-Up(TM)  MRI scanner  running  from
September 10, 2006 through  September 9, 2007 at a fee of $85,000 per annum.  It
is anticipated  that the service  agreement will be renewed upon its expiration.
Donna Damadian is the wife of Raymond Damadian. TRD and JAD are owned by Timothy
Damadian  and  Jevan  Damadian,  respectively,  the sons of  Raymond  and  Donna
Damadian.

Miami  MRI  Associates,  LLC,  also  referred  to as Miami,  a  Florida  limited
liability company of which TRD, JAD and Donna Damadian are, among other parties,
members,  is party to a service  agreement  with FONAR for its  Upright(TM)  MRI
scanner  running  from October 11, 2005 to October 10, 2006 at a rate of $85,000
per annum. It is anticipated that the service agreement will be renewed upon its
expiration.  Donna  Damadian  is the wife of Raymond  Damadian.  TRD and JAD are
owned by Timothy Damadian and Jevan Damadian,  respectively, the sons of Raymond
and Donna Damadian.

Manhattan  Management  Services,  LLC, a New York limited  liability  company of
which TRD, JAD, Donna  Damadian,  Keira Reinmund and Robert  Djerejian are among
other  parties,  members,  was party to a service  agreement  with FONAR for its
Upright(TM) MRI scanner from June 23, 2005 to June 22, 2006 at a rate of $85,000
per annum.  It has been renewed for an  additional  year,  from June 23, 2006 to
June 22, 2007 at the same rate. Donna Damadian is the wife of Raymond  Damadian.
TRD and JAD are owned by Timothy Damadian and Jevan Damadian,  respectively, the
sons of Raymond and Donna  Damadian.  Keira  Reinmund is the daughter of Raymond
and Donna  Damadian.  Robert  Djerejian is a member of the Board of Directors of
FONAR.

Queens Management  Services,  LLC, a New York limited liability company of which
TRD, JAD, Keira  Reinmund,  Donna Damadian and Robert  Djerejian are among other
parties,  members,  was  party  to  a  service  agreement  with  FONAR  for  its
Upright(TM)  MRI  scanner  from  August  4,  2005 to August 3, 2006 at a rate of
$85,000 per annum.  It has been  renewed for an  additional  year from August 4,
2006 to August 3, 2007 at the same rate.  Donna  Damadian is the wife of Raymond
Damadian.  TRD and  JAD are  owned  by  Timothy  Damadian  and  Jevan  Damadian,
respectively,  the sons of Raymond  and Donna  Damadian.  Keira  Reinmund is the
daughter  of Raymond and Donna  Damadian.  Robert  Djerejian  is a member of the
Board of Directors of FONAR.

South Shore Management  Services,  LLC, a New York limited  liability company of
which TRD, JAD, Keira  Reinmund,  Donna Damadian and Robert  Djerejian are among
other  parties,  members,  is party to a service  agreement  with  FONAR for its
Upright(TM)  MRI  scanner  from  April 11,  2006 to April 10,  2007 at a rate of
$85,000 per annum. It is anticipated that the service  agreement will be renewed
upon its expiration. Donna Damadian is the wife of Raymond Damadian. TRD and JAD
are owned by Timothy  Damadian  and Jevan  Damadian,  respectively,  the sons of
Raymond and Donna Damadian.  Keira Reinmund is the daughter of Raymond and Donna
Damadian. Robert Djerejian is a member of the Board of Directors of FONAR.

Stand-Up MRI of East  Elmhurst,  P.C., a New York  professional  corporation  of
which  Raymond V.  Damadian is the sole  shareholder,  director  and  President,
entered into an agreement to purchase a  Upright(TM)  MRI scanner from FONAR for
$1,500,000 in October 2004. The installation has been completed and the purchase
price paid in full as of May 2005.

Stand-Up MRI & Diagnostic Center,  P.A., a Florida  professional  association of
which  Raymond V.  Damadian is the sole  shareholder,  director  and  President,
entered into an agreement to purchase an Upright(TM)  MRI scanner from FONAR for
$1,500,000  to be  installed  in Ormond  Beach,  Florida  in January  2005.  The
installation  has been  completed and the purchase  price paid in full as of May
2005.

Comprehensive  MRI of New York,  P.C., a New York  professional  corporation  of
which  Raymond V.  Damadian  is the sole  shareholder,  director  and  President
("Comprehensive")  entered  into an  agreement  to  purchase a  Upright(TM)  MRI
scanner from FONAR for $1,500,000 to be installed in East Setauket,  New York in
March 2005. The  installation  has been completed and the purchase price paid in
full as of August 2005. Comprehensive also entered into an agreement to purchase
an Upright(TM)  MRI scanner from FONAR for $1,500,000 to be installed in Latham,
New  York.  The  purchase  price  was  paid  in full in  December  2005  and the
installation completed in May 2006.

In fiscal  2006,  Raymond V.  Damadian,  M.D.  MR  Scanning  Centers  Management
Company,  a  wholly-subsidiary  of HMCA,  sold  Tallahassee  Magnetic  Resonance
Imaging,  P.A. to Raymond V.  Damadian,  the sole Director and President of HMCA
and the principal stockholder,  Chairman of the Board and President of FONAR for
a deminimus amount. The liabilities  exceeded the assets of Tallahassee Magnetic
Resonance Imaging, P.A.

Also in fiscal 2006, Tallahassee Scanning Services, P.A., a Florida professional
association of which Raymond V. Damadian is the sole  shareholder,  Director and
President, entered into an agreement to purchase an Upright(TM) MRI scanner from
FONAR for $1,500,000. The installation has been completed and the purchase price
paid in full.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees

The  aggregate  fees billed by Marcum & Kliegman LLP for the audit of our annual
consolidated  financial  statements  for the fiscal year ended June 30, 2006 and
the  reviews  of the  financial  statements  included  in our Forms 10-Q for the
fiscal year ended June 30, 2006 were $628,206.

The  aggregate  fees billed by Marcum & Kliegman LLP for the audit of our annual
financial  statements for the fiscal year ended June 30, 2005 and the reviews of
the financial  information  included in our Forms 10-Q for the fiscal year ended
June 30, 2005 were $542,643.

Internal Control Audit Fees

The  aggregate  fees billed by Marcum and Kliegman LLP for auditing our internal
controls and compliance with the relevant sections of the Sarbanes-Oxley Act for
the fiscal year ended June 30, 2006 were $464,504.

The  aggregate  fees billed by Marcum & Kliegman  LLP for  auditing our internal
controls and compliance with the relevant sections of the Sarbanes-Oxley Act for
the fiscal year ended June 30, 2005 were $170,755.

Audit Related Fees

No fees were billed by Marcum & Kliegman LLP for the fiscal years ended June 30,
2006 or June 30,  2005 for  services  related  to the  audit  or  review  of our
financial statements that are not included under the caption "Audit Fees".

No fees were billed by Marcum & Kliegman LLP for the fiscal years ended June 30,
2006 or June 30, 2005 for designing, operating,  supervising or implementing any
of our financial information systems or any hardware or software systems for our
financial information.

Tax Fees

The  aggregate  fees  billed by Marcum & Kliegman  LLP for tax  compliance,  tax
advice and tax planning in the fiscal year ended June 30, 2006 were $221,681

The  aggregate  fees  billed by Marcum & Kliegman  LLP for tax  compliance,  tax
advice and tax planning in the fiscal year ended June 30, 2005 were $149,793.

All Other Fees

The  aggregate  fees  billed by  Marcum &  Kliegman  LLP for all other  services
rendered by them  during the fiscal  years ended June 30, 2006 and June 30, 2005
were $62,644 and $93,891,  respectively,  which included  services in connection
with the  registration of securities,  employee  benefit plan audits and reviews
and  procedures  that we  requested  Marcum & Kliegman to  undertake  to provide
assurances on matters not required by laws or regulations.

Since January 1, 2003, the audit  committee has adopted  policies and procedures
for  pre-approving  all non-audit work performed by the auditors.  Specifically,
the committee  must  pre-approve  the use of the auditors for all such services.
The audit committee has  pre-approved  all non-audit work since that time and in
making its determination  has considered  whether the provision of such services
was compatible with the independence of the auditors.

Our audit  committee  believes  that the  provision  by Marcum & Kliegman LLP of
services in addition to audit  services in fiscal 2006 and 2005 were  compatible
with maintaining their independence.

PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

a)  FINANCIAL STATEMENTS AND SCHEDULES

The following consolidated financial statements are included in Part II, Item 8.

     Report of Independent Registered Public Accounting Firm

     Report of Independent Registered Public Accounting Firm on Internal Control
over Financial Reporting.

     Consolidated Balance Sheets as at June 30, 2006 and 2005.

     Consolidated  Statements of  Operations  for the Three Years Ended June 30,
2006, 2005 and 2004.

     Consolidated  Statements of Stockholders'  Equity for the Three Years Ended
June 30, 2006, 2005 and 2004.

     Consolidated  Statements  of Cash Flows for the Three  Years Ended June 30,
2006, 2005 and 2004.

     Notes to Consolidated Financial Statements.

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


b)   REPORTS ON FORM 8-K

     None.

c)   EXHIBITS

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

     3.3 Section A of Article  Fourth of the  Certificate of  Incorporation,  as
amended,  of the  Registrant  incorporated  by  reference  to Exhibit 4.3 to the
Registrant's registration statement on Form S-3, Commission File No. 333-63782.

     3.4 Section A of Article  Fourth of the  Certificate of  Incorporation,  as
amended,  of the  Registrant  incorporated  by  reference  to Exhibit 3.3 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2003,
Commission File No. 0-10248.

     3.5 By-Laws,  as amended,  of the Registrant  incorporated  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 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 by reference to
Exhibit 4.2 to the Registrant's  registration  statement on Form S-1, Commission
File No. 33-13365.

     4.3 Form of 4%  Convertible  Debentures due June 30, 2002  incorporated  by
reference to Exhibit 4.1 of the Registrant's current report on Form 8-K filed on
June 11, 2001. Commission File No. 0-10248.

     4.4 Form of Purchase  Warrants  incorporated by reference to Exhibit 4.2 of
the Registrant's  current report on Form 8-K filed on June 11, 2001.  Commission
File No. 0-10248.

     4.5 Form of Callable  Warrants  incorporated by reference to Exhibit 4.3 of
the Registrant's  current report on Form 8-K filed on June 11, 2001.  Commission
File No. 0-10248.

     4.6 Form of  Replacement  Callable  Warrants  incorporated  by reference to
Exhibit 4.7 of the Registrant's  registration statement on Form S- 3, Commission
File No. 333-10677.

     4.7 Form of Amended and Restated  Purchase  Warrant for The Tail Wind Fund,
Ltd.  incorporated by reference to Exhibit 4.7 of the  Registrants  registration
statement on Form S-3, Commission File No. 333-116908.

     4.8 Form of Amended and Restated  Purchase  Warrant for Placement Agent and
Designees   incorporated  by  reference  to  Exhibit  4.8  of  the  Registrant's
registration statement on Form S-3, Commission File No. 333- 116908.

     10.1  License  Agreement  between the  Registrant  and Raymond V.  Damadian
incorporated  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  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  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 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  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  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 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 the Registrant
and Reckson  Associates  incorporated 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 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  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  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  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  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  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  by  reference to Exhibit 28.2 to
the  Registrant's  registration  statement on Form S-8,  Commission File No. 33-
62099.

     10.15 1997  Non-Statutory  Stock Option Plan  incorporated  by reference to
Exhibit 28.1 to the Registrant's  registration statement on Form S-8, Commission
File No.: 333-27411.

     10.16 1997 Stock Bonus Plan  incorporated  by  reference to Exhibit 28.2 to
the Registrant's  registration  statement on Form S-8,  Commission File No: 333-
27411.

     10.17 Stock  Purchase  Agreement,  dated July 31, 1997, by and between U.S.
Health  Management  Corporation,  Raymond V. Damadian,  M.D. MR Scanning Centers
Management Company and Raymond V. Damadian, incorporated by reference to Exhibit
2.1 to the Registrant's Form 8-K, July 31, 1997, commission File No: 0-10248.

     10.18 Merger Agreement and  Supplemental  Agreement dated June 17, 1997 and
Letter of  Amendment  dated June 27,  1997 by and among U.S.  Health  Management
Corporation and Affordable Diagnostics Inc. et al., incorporated by reference to
Exhibit 2.1 to the  Registrant's  8-K,  June 30,  1997,  Commission  File No: 0-
10248.

     10.19 Stock  Purchase  Agreement  dated March 20, 1998 by and among  Health
Management Corporation of America, FONAR Corporation,  Giovanni Marciano,  Glenn
Muraca et al.,  incorporated by reference to Exhibit 2.1 to the  Registrant's 8-
K, March 20, 1998, Commission File No: 0-10248.

     10.20 Stock  Purchase  Agreement  dated August 20, 1998 by and among Health
Management Corporation of America, FONAR Corporation, Stuart Blumberg and Steven
Jonas, incorporated by reference to Exhibit 2 to the Registrant's 8-K, September
3, 1998, Commission File No. 0-10248.

     10.21 2000 Stock Bonus Plan  incorporated  by  reference to Exhibit 99.1 to
the Registrant's  registration  Statement on Form S-8, Commission File No.: 333-
66760.

     10.22 2002 Stock Bonus Plan  incorporated  by  reference to Exhibit 99.1 to
the Registrant's  registration  statement on Form S-8, Commission File No.: 333-
89578.

     10.23 2002 Incentive Stock Option Plan incorporated by reference to Exhibit
99.1 to the  Registrant's  registration  statement on Form S-8,  Commission File
No.: 333-96557.

     10.24 2003 Stock Bonus Plan  incorporated  by  reference to Exhibit 99.1 to
the Registrant's  registration  statement on Form S-8,  Commission File No: 333-
106626.

     10.25 2003  Supplemental  Stock Bonus Plan  incorporated  by  reference  to
Exhibit 99.1 to the Registrant's  registration statement on Form S-8, Commission
File No: 333-106626.

     10.26 2004 Stock Bonus Plan  incorporated  by  reference to Exhibit 99.1 to
the Registrant's  registration  statement on Form S-8,  Commission File No. 333-
112577.

     10.27 2005 Stock Bonus plan  incorporated  by  reference to Exhibit 99.1 to
the  Registrant's  registration  statement  on Form  S-8,  Commission  File  No.
333-122859.  10.28 2005 Supplemental  Stock Bonus plan incorporated by reference
to  Exhibit  99.1  to the  Registrant's  registration  statement  on  Form S- 8,
Commission File No. 333-126658.

     10.29 Purchase  Agreement  dated May 24, 2001 by and between the Registrant
and The Tail Wind Fund Ltd.  incorporated  by  reference  to Exhibit 10.1 to the
Registrant's current report on Form 8-K filed June 11, 2001. Commission File No.
0-10248.

     10.30  Registration  Rights  Agreement  dated May 24, 2001 by and among the
Registrant, The Tail Wind Fund Ltd. and Roan Meyers, Inc. incorporated herein by
reference to Exhibit 10.2 to the  Registrant's  current report on Form 8-K filed
June 11, 2001. Commission File No. 0-10248.

     10.31 Amendment to Callable Warrant dated April 28, 2004 by and between The
Tail Wind Fund,  Ltd. and the  Registrant  incorporated  by reference to Exhibit
10.17 to the Registrant's  registration  statement on Form S-3,  Commission File
No. 333-116908.

     10.32  First  Amendment  to  Purchase  Warrant  dated April 28, 2004 by and
between The Tail Wind Fund, Ltd. and the Registrant incorporated by reference to
Exhibit 10.18 to the Registrant's registration statement on Form S-3, Commission
File No. 333-116908.

     10.33 Form of First Amendment to Purchase Warrant dated June 1, 2004 by and
between  each  of  Roan/Meyers  Associates,  L.P.  and  its  designees  and  the
Registrant,  incorporated  by  reference  to Exhibit  10.19 to the  Registrant's
registration statement on Form S-3, Commission File No. 333- 116908.

     10.34  Asset  Purchase  Agreement  dated July 28,  2005 among  Health  Plus
Management Services,  L.L.C., Health Management Corporation of America,  Dynamic
Healthcare Management, Inc. and Fonar Corporation,  incorporated by reference to
Exhibit 2 to the Registrant's  Form 8-K, August 2, 2005,  Commission File No. 0-
10248.

     14.1  Code  of  Ethics,  incorporated  by  reference  to  Exhibit  14.1  of
registrant's Form 10-K for the fiscal year ended June 30, 2004,  Commission File
No.: 0-10248.

     21.1 Subsidiaries of the Registrant. See Exhibits.

     23.1 Independent Registered Public Accounting Firm's Report See Exhibits.

     31.1 Section 302 Certification. See Exhibits.

     32.1 Section 906 Certification. See Exhibits.

     99.1 Press  Release  on  Sale  to  Largest   Orthopedic   Hospital  in  the
          Netherlands. See Exhibits.



SIGNATURES

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

                               FONAR CORPORATION

Dated:  September 18, 2006

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

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

    Signature                 Title                   Date

/s/ Raymond Damadian     Chairman of the       September 18, 2006
Raymond V. Damadian      Board of Directors,
                         President, Director
                         Principal Executive
                         Officer and Acting
                         Principal Financial
                         Officer)

/s/ Claudette J.V. Chan  Director              September 18, 2006
Claudette J.V. Chan


/s/ Robert J. Janoff     Director              September 18, 2006
Robert J. Janoff

/s/ Charles N. O'Data    Director              September 18, 2006
Charles N. O'Data

/s/ Robert Djerejian     Director              September 18, 2006
Robert Djerejian




                              CORPORATE INFORMATION

Corporate Headquarters

110 Marcus Drive
Melville, NY  11747
(631) 694-2929

Investor Relations

FONAR Corporation
110 Marcus Drive
Melville, NY  11747
(631) 694-2929

Stock Transfer Agency

Computershare Trust Company, Inc.
350 Indiana Street, Suite 800
Golden, Colorado  80401

Auditors

Marcum & Kliegman, LLP
New York, New York

Board of Directors

Raymond V. Damadian, M.D.
Chairman of the Board

Claudette Chan, Director

Robert Janoff, Director

Charles O'Data, Director

Robert Djerejian, Director

Officers

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

David B. Terry
Senior Vice President and Secretary