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:

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



                                FONAR CORPORATION

              Proxy - Annual Meeting of Stockholders - June 6, 2005

           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 Wyndham  Wilmington
Hotel,  700 King  Street,  Wilmington,  Delaware  on June 6, 2005 at 10:00 a.m.,
local  time,  and at any  adjournment(s)  thereof,  and  there to vote  upon all
matters specified in the notice of said meeting,  as set forth herein,  and upon
such other  business as may properly and lawfully  come before the meeting,  all
shares of stock of the Company which the  undersigned  would be entitled to vote
if personally present at said meeting.

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

No.  1. Election of Directors

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

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


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

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

No. 2. To ratify the adoption of (a) the Company's 2005  Incentive  Stock Option
Plan and (b) the Company's 2005 Stock Bonus Plan.

                                                                    
              FOR               AGAINST               ABSTAIN        
                                                                     
         +----------+         +----------+         +----------+      
         /          /         /          /         /          /      
         /          /         /          /         /          /      
         +----------+         +----------+         +----------+      


No.  3. To  ratify  the  selection  of Marcum &  Kliegman  LLP as the  Company's
independent auditors for the fiscal year ended June 30, 2005.

                                                                     
              FOR               AGAINST               ABSTAIN        
                                                                     
         +----------+         +----------+         +----------+      
         /          /         /          /         /          /      
         /          /         /          /         /          /      
         +----------+         +----------+         +----------+      


No. 4. In their  discretion,  the Proxies are authorized to vote upon such other
business as may properly come before the meeting.

               AUTHORITY                             AUTHORITY     
                GRANTED                               WITHHELD      
                                                     

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

                                    Dated:  ______________________, 2005


                                    ----------------------------------
                                    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.




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


                    NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
                                  June 6, 2005

To The Stockholders:

The Annual Meeting of the stockholders of Fonar  Corporation will be held at the
Wyndham Wilmington Hotel, 700 King Street,  Wilmington,  Delaware 19801, June 6,
2005, at 10:00 a.m. local time for the following purposes:

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

2. To ratify the adoption of (a) the Company's 2005 Stock Bonus Plan and (b) the
Company's 2005 Incentive Stock Option Plan.

3. To ratify the  selection of Marcum & Kliegman LLP as the  Company's  auditors
for the fiscal year ended June 30, 2005.

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

Only  stockholders  of  record at the close of  business  on April 20,  2005 are
entitled to notice of, and to vote at, this meeting. A list of such stockholders
will be available for  examination by any stockholder for any purpose germane to
the meeting,  during  normal  business  hours,  at the  principal  office of the
Company, 110 Marcus Drive, Melville, New York, for a period of ten days prior to
the meeting.

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

                                              BY ORDER OF THE BOARD OF DIRECTORS

                                              /s/ David B. Terry

                                              David B. Terry, Vice President and
                                              Secretary



                                 PROXY STATEMENT
                              FOR ANNUAL MEETING OF
                      STOCKHOLDERS TO BE HELD JUNE 6, 2005

This proxy  statement,  which is first being mailed to  shareholders on or about
April 25, 2005, is furnished in connection  with the  solicitation of proxies by
the Board of Directors of Fonar Corporation (the "Company"),  to be voted at the
annual  meeting of the  stockholders  of the Company to be held at 10:00 a.m. on
June 6, 2005 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 April 20, 2005 will be
entitled to vote at the meeting. Shares of Common Stock are entitled to one vote
per share,  shares of Class B Common  Stock are  entitled to ten votes per share
and shares of Class C Common Stock are entitled to twenty-five  votes per share.
At the close of business on April 30,  2005,  there were  104,297,268  shares of
Common  Stock  held of record  by 4,595  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 3,952  stockholders at the
close of business on April 30, 2005, are not entitled to vote.

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

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



1. ELECTION OF DIRECTORS AND MANAGEMENT INFORMATION

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

DIRECTORS AND OFFICERS

Raymond  V.  Damadian,  M.D.  (age 69),  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 67), 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 77), 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 member of the
Board of  Directors  of Harmony  Heights  of Oyster  Bay,  New York,  which is a
nonprofit residential school for girls with learning disabilities.

Charles N. O'Data (age 69), 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 is listed as a
finance  associate  in  the  Middle  States  Association  Commission  on  Higher
Education,  which 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  (73),  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,   an  architecture,   design  and
engineering   firm,  which  among  other   specialties   designs  hospitals  and
laboratories. Prior to that time he was the senior managing partner of the firm.
Mr. Djerejian  serves on the Board of Trustees of Pratt  Institute,  where he is
also Vice Chairman of the  Executive  Committee and on the Board of Directors of
the  Delaware  College of Art and  Design,  of which he was one of the  founding
directors.  He is a graduate  of Pratt  Institute,  where he  received a B.A. in
Architecture in 1955.

David B. Terry (56) is the Senior Vice President of Administration and Secretary
of the Company. Mr. Terry has been serving as Vice President since December 1998
and as Secretary  since May, 1990.  Previously,  he served as Treasurer from May
1990 to December,  1998,  as  Secretary  from July 1978 through June 1987 and as
Treasurer from August 1981 through June 1987.  From July 1978 through June 1987,
he was also a Director of the Company.  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, 2004 the Board of Directors unanimously consented
to take action in lieu of a meeting on seven 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. A copy of the revised  charter is attached to
his  Proxy  Statement.   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,
2004.

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
April 14, 2005.

                                          Shares
Name and Address of                       Beneficially         Percent
Beneficial Owner (1)                      Owned                of Class
-------------------------                 ------------         --------

Raymond V. Damadian, M.D.
c/o FONAR Corporation
Melville, New York
 Director, President
 CEO, 5% + Stockholder
    Common Stock                           2,488,274              2.39%
    Class C Stock                          9,561,174             99.98%
    Class A Preferred                        477,328              6.09%


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


Robert J. Janoff
Director
    Common Stock                              80,000               *
    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         2,588,843                                2.48%
    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  16,928  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,  2004 which is
specifically  incorporated  by  reference  herein.  A copy of the  Form  10-K is
included  in the  Annual  Report  to  Stockholders  which is  being  sent to the
Company's stockholders with this Proxy Statement.)

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

COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.

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

As noted above,  the Company's  compensation  policy is primarily based upon the
practice of  pay-for-performance.  Section  162(m) of the Internal  Revenue Code
imposes a limitation on the deductibility of  nonperformance-based  compensation
in excess of $1 million paid to the Chief Executive  Officer.  No officer of the
Company  received  compensation in excess of $1 million in fiscal 2002 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, 2004 by the Company's Chief Executive Officer.

Name and                                             Long-Term
Principal Position            Annual Compensation  Compensation     All Other
Position             Year     Salary        Other     Awards       Compensation
--------             ----     ------        -----     ------       ------------
Raymond V. Damadian  2004     $86,799.99      0          0              0
Chairman of the;     2003     $86,799.98      0          0              0
Board; President;
Chief Executive
Officer;             2002     $86,799.96      0          0              0
Director

Compensation Pursuant to Stock Options and SAR Grants

No stock  options or stock  appreciation  rights were  granted to the  Company's
Chief Executive Officer during fiscal 2004.

Option/SAR Exercises and Year End Values

No options or stock  appreciation  rights were exercised by the Company's  Chief
Executive  Officer during fiscal 2004. The Company's Chief Executive Officer did
not hold any unexercised stock options or stock  appreciation  rights at the end
of fiscal 2004.

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,
1999 and ending on December 31, 2004 (as measured by dividing (i) the sum of (A)
the cumulative amount of dividends for the measurement period, assuming dividend
reinvestment and (B) the difference between the Company's share price at the end
and the  beginning  of the  measurement  period;  by (ii) the share price at the
beginning of the  measurement  period) with the cumulative  total return of each
of: (a) the CRSP Total Return Index for Nasdaq U.S.  companies  ("Nasdaq");  (b)
the CRSP Total Return Index for Nasdaq Medical Device Manufacturers ("Nas-MDM");
and (c) the CRSP Total Return  Index for Nasdaq  Health  companies  ("Nas-Hea.")
during such period, assuming a $100 investment on June 30, 1999. The stock price
performance  on the graph below is not  necessarily  indicative  of future price
performance.

Relative Dollar Values

             6/30/99   6/30/00   6/29/01   6/28/02   6/30/03   6/30/04  12/31/04
Fonar Common -------   -------   -------   -------   -------   -------  --------
  Stock      $100.00   $185.78   $172.44   $175.11   $115.56   $113.78   $139.56
NASDAQ-US    $100.00   $147.86    $80.32    $54.72    $60.70    $76.51    $81.43
NAS-Hea.     $100.00    $77.18   $110.13   $102.71   $113.91   $169.13   $179.32
NAS-MDM      $100.00   $115.18   $107.97   $103.35   $105.05   $149.86   $154.62
                                                                      


2. RATIFICATION OF STOCK OPTION AND STOCK BONUS PLANS

On  February  14,  2005,  the Board of  Directors  adopted  the  Company's  2005
Incentive Stock Option Plan (the "2005 Incentive  Plan"),and the 2005 Bonus Plan
(the "2005 Bonus Plan"). The stockholders are being asked to ratify the adoption
of the 2005  Incentive  Plan and 2005 Bonus Plan  (collectively,  the  "Plans").
Approximately  525 people are eligible to receive  awards  under the Plans.  The
persons  who  will  receive  awards  and  the  amount  of  the  awards  are  not
determinable.

The Plans were effective as of February 15, 2005. The 2005 Incentive Plan covers
2,000,000  shares of the  Company's  Common  Stock;  the 2005 Bonus Plan  covers
3,000,000  shares of the Company's Common Stock. The 2005 Incentive Plan permits
the granting of  incentive  stock  options  through  February  14, 2015,  in the
discretion of the Incentive Stock Option  Committee or the Board of Directors of
the Company,  to key employees of the Company and any of its subsidiaries.  "Key
employees"  include all employees of the Company or any of its  subsidiaries who
render  substantial  services in  management  and  administration,  research and
development, production, sales or marketing.

The 2005 Bonus Plan permits the granting of stock bonuses  through  February 14,
2015, in the  discretion of the Stock Bonus  Committee or the Board of Directors
of the Company, to employees,  directors,  advisors and consultants for services
rendered or to be rendered to the Company or any of its subsidiaries.

The purpose of the Plans is to enable persons  performing  valuable services for
the  Company  to acquire a  proprietary  interest  in the  Company  through  the
ownership of its Common Stock.  Management believes that such ownership provides
such persons  with a more direct stake in the future  welfare of the Company and
encourages them to remain in the service of the Company or its  subsidiaries and
that the Plans will assist the Company in obtaining  and  retaining the services
of such persons.

Restrictions  may  be  imposed  on  resale  (by  officers,   directors  and  10%
stockholders)  of the shares of Common  Stock  purchased  under the Plans by the
provisions of Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). In addition,  any participant who may be deemed an affiliate of
the  Company,  as defined by the  Securities  and  Exchange  Commission,  may be
required  to utilize a separate  prospectus  to  reoffer or resell  such  shares
unless an exemption is applicable.  The provisions of the 2005 Incentive Plan do
not impose any  restrictions on the resale of shares.  The Stock Bonus Committee
or Board of Directors may impose  restrictions  on shares of Common Stock issued
pursuant to the 2005 Bonus Plan.

                                   THE PLANS

The following is a summary of certain  provisions of the Plans. The summary does
not purport to be complete  and is qualified in its entirety by reference to the
provisions of the Plans.  Copies of the 2005  Incentive Plan and 2005 Bonus Plan
are attached hereto as Exhibit B.

The Plans are administered by Committees  appointed by the Board of Directors of
the Company,  consisting of individuals who serve at the discretion of the Board
and who are eligible to receive  options under the 2005 Incentive Plan and stock
bonus under the 2005 Bonus Plan.  In the  absence of any  Committees,  the Plans
will  be  administered  directly  by the  Board  of  Directors.  The  Committees
determine,  among other things, who will receive options or stock bonuses,  when
the options or stock bonuses will be received,  the number of shares  underlying
each option or stock bonus,  the term of each option,  the date each option will
become  exercisable in whole or in part and the exercise price for the shares of
Common Stock  underlying  each  option.  The two members of the  Committees  are
officers of the Company, and Dr. Raymond V. Damadian,  one of the members of the
Committees,  is also  Chairman  of the  Board  of  Directors  and the  principal
stockholder of the Company.

Options  granted  under the Incentive  Plan are in the form of "incentive  stock
options," as defined in Section 422 of the Internal  Revenue Code (the  "Code").
The exercise  price for the shares of Common Stock  underlying an option granted
pursuant to the Incentive Plan may not be less than the fair market value of the
Common Stock on the date the option is granted,  except if the option is granted
to an  employee  who, at the time of the grant of such  option,  is the owner of
more than 10% of the total combined  voting power of all classes of stock of the
Company or any of its subsidiaries,  the exercise price for the shares of Common
Stock  underlying  the option may not be less than 110% of the fair market value
of the Common Stock on the date the option is granted. The aggregate fair market
value of shares of  Common  Stock as to which  options  may be  exercised  by an
employee in any calendar  year under the  Incentive  Plan and any other plans of
the Company and its subsidiaries  providing for the grant of options  qualifying
as  "incentive  stock  options," as defined in Section 422 of the Code,  may not
exceed  $100,000.  Any incentive stock option granted to an employee who, at the
time of the  proposed  grant,  owns more than 10% of the total  combined  voting
power of all  classes of stock of the Company or any of its  subsidiaries,  must
expire no later than five  years  after the date of grant.  All other  incentive
stock options must expire no later than ten years after the date of grant.

Options  granted under the Incentive  Plan may be exercised by the employee only
during his lifetime and during his continued  employment with the Company except
that any option granted to an employee who voluntarily terminates his employment
with the written  consent of the Company or whose  employment  is  involuntarily
terminated  will expire  three  months after the  cessation  of  employment.  If
employment terminates by reason of retirement,  an option granted under the 2005
Incentive Plan is exercisable by the recipient, to the extent exercisable, for a
period of three months from the date of retirement.  If employment terminates by
reason  of  disability,  an option  granted  under  the 2005  Incentive  Plan is
exercisable  by the  recipient,  at any time,  for a period of one year from the
date of  disability.  Options  are not  assignable  except by will or the law of
descent and distribution. If employment terminates by reason of death, an option
granted   under  the  2005   Incentive   Plan  is   exercisable   by  his  legal
representatives, at any time, for a period of six months from the date of death.
Notwithstanding  the  above,  an  option  will  not  be  exercisable  after  the
expiration of the term of the option.

Bonus stock awards granted under the 2005 Bonus Plan are not  assignable  except
by will or the laws of descent and distribution.

Upon  exercise of an option under the 2005  Incentive  Plan,  the full  exercise
price of the  number  of  shares  purchased  must be paid by  certified  or bank
cashier's  check,  shares of Common Stock of the  Company,  or any other form of
consideration  acceptable  to the  Committee.  Partial  exercise of an option is
permitted  under the 2005 Incentive  Plan. In no event may a fraction of a share
be purchased or issued under the 2005 Incentive Plan.

The 2005  Incentive Plan will remain in effect until the earlier of such time as
all shares  covered by the 2005  Incentive  Plan have been issued or transferred
from treasury upon exercise of options, or through February 14, 2015. No options
may be  granted  under  the 2005  Incentive  Plan  after  those  dates  although
previously  outstanding  options may be exercised until their expiration  dates.
The 2005 Bonus Plan will remain in effect  until the earlier of such time as all
shares  covered by the 2005 Bonus Plan have been issued or through  February 14,
2015,  and no stock  bonuses may be granted under the 2005 Bonus Plan after that
date.  Common  Stock  covered  by the  Plans may be  either  treasury  shares or
authorized and unissued shares.

The Board of Directors has the right to amend, suspend or terminate the Plans at
any time,  except that it may not, without  stockholder  approval,  increase the
maximum  number of shares covered by the 2005 Incentive Plan or 2005 Bonus Plan,
reduce the  minimum  option  price under the 2005  Incentive  Plan or change the
maximum  period during which options may be exercised  under the 2005  Incentive
Plan.

In the event of stock dividends,  stock splits and similar changes involving the
Common Stock of the Company,  the Committees  shall take such action as in their
judgment is necessary to preserve to the holders of options rights substantially
proportionate  to the rights  existing prior to such event.  In the event of any
such  change,  the  Committees  may  provide  for an increase or decrease in the
number of shares of Common Stock subject to options  outstanding  under the 2005
Incentive  Plan and the  aggregate  number of shares of Common  Stock  available
under the 2005 Incentive or 2005 Bonus Plans. With respect to the 2005 Incentive
Plan, no action may be taken by the Incentive Stock Option  Committee  which, in
its  judgment,  would  constitute  a  modification,  extension or renewal of the
option (within the meaning of Section 425(h) of the Code),  or would prevent the
option from  qualifying  as an "incentive  stock option"  (within the meaning of
Section 422 of the Code). The determination of the Committees will be conclusive
and binding upon the participants in the Plans.

The Plans are not subject to any  provisions of the Employee  Retirement  Income
Security Act of 1974, as amended,  nor do the Plans qualify under Section 401(a)
of the Code.

Federal Income Tax Consequences

Incentive  Stock  Options.  The grant of an incentive  stock option will have no
immediate  tax  consequences  for the Company or the  employee.  If the employee
exercises an incentive  stock option and does not dispose of the acquired shares
within two years  after the grant of the  incentive  stock  option or within one
year  after  the date of the  transfer  of such  shares  to him  ("disqualifying
disposition"), he will not realize any compensation income, gain or loss until a
subsequent  disposition of such shares. For purposes of the alternative  minimum
tax,  however,  the amount by which the fair market value of the acquired shares
at the  time  of  exercise  exceeds  the  option  price  will  be an item of tax
preference.

If an employee makes a disqualifying disposition, he will be required to include
in income, as compensation,  the lesser of (i) the difference between the option
price and the fair market value of the acquired shares (on the exercise date or,
in the case of certain  optionees  who are officers or directors  subject to the
profit  recapture  provisions  of Section  16(b) of the Exchange Act, six months
thereafter)  and (ii) the amount of gain realized.  In addition,  depending upon
the amount  received as a result of such  disposition,  the employee may realize
capital gain or loss.

The Company will be entitled to a deduction (provided applicable  withholding or
reporting  requirements  are met) at the same time and in the same amount as the
employee  is in receipt of  compensation  income as a result of a  disqualifying
disposition.  If there is no  disqualifying  disposition,  no deduction  will be
available to the Company.

Stock Bonuses.  The grant of stock bonuses under the 2005 Bonus Plan will result
in  compensation  to the employee which must be recognized as ordinary income on
the date the stock  bonus is  granted.  The  amount  of income  will be the fair
market  value of the stock on the date the stock bonus is  granted.  The Company
will be entitled to a deduction  (provided  applicable  withholding or reporting
requirements  are met) for Federal  income tax  purposes at the same time in the
same amount as the employee is required to recognize income.

Upon a subsequent sale or taxable exchange of the shares acquired as a result of
stock bonuses,  an employee will realize long or short-term capital gain or loss
equal to the difference  between the amount  realized on the sale and the amount
of income recognized on the grant of the stock bonus (his tax basis).

The foregoing is only a brief summary of the applicable  federal income tax laws
and should not be relied  upon as being a complete  statement.  The  federal tax
laws are complex, and they are subject to legislative changes and new or revised
judicial or  administrative  interpretations.  In addition to the federal income
tax consequences  described herein,  the grant of options under the Plans or the
receipt of shares  upon  exercise  thereof may also have  significant  state and
local tax consequences.

The  affirmative  vote of shares holding a majority of the votes  represented at
the  meeting is  required  to ratify  the  adoption  of the Plans.  THE BOARD OF
DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL.

3. 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, 2005. 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, 2002,  June 30, 2003 and
June 30, 2004.

Grassi & Co., CPA's, P.C. were the Company's  auditors for the fiscal year ended
June 30,  2001.  The  Company  changed  accounting  firms  when  the  individual
accountants  handling the Company's  matters moved to Marcum & Kliegman LLP. The
Company's previous auditors, Tabb, Conigliaro & McGann, P.C., merged into Grassi
& Co., CPAs, P.C. Tabb,  Conigliaro & McGann were the Company's auditors for the
fiscal years ending June 30, 1990 through June 30, 2000.

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, 2004
and the reviews of the financial statements included in the Company's Forms 10-Q
for the fiscal year ended June 30, 2004 were $524,731.

The  aggregate  fees billed by Marcum & Kliegman for the audit of the  Company's
annual  financial  statements  for the fiscal  year ended June 30,  2003 and the
reviews of the financial  information  included in the Company's  Forms 10-Q for
the fiscal year ended June 30, 2003 were $460,805.

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, 2004 and June 30, 2003.

TAX FEES

The  aggregate  fees  billed by Marcum & Kliegman  LLP for tax  compliance,  tax
advise and tax planning in the fiscal year ended June 30, 2004 and June 30, 2003
were $172,542 and $189,094.

The aggregate fees billed by Grassi & Co., CPAs,  P.C. for tax  compliance,  tax
advise and tax planning in the fiscal year ended June 30, 2002 were $194,922.

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, 2004 and June 30, 2003
were $111,452 and $124,417,  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 Company's audit  committee  believes that the provision by Marcum & Kliegman
LLP of  services  in  addition  to audit  services  in fiscal 2004 and 2003 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.

PROPOSALS OF STOCKHOLDERS

Proposals of stockholders intended to be presented at the 2006 annual meeting of
stockholders  must be received by the Company no later than February 10, 2006 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, May 11, 2005

A COPY OF THE  COMPANY'S  FORM 10-K  REPORT  FOR FISCAL  YEAR  2004,  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



                                    EXHIBIT A

                                FONAR CORPORATION

                         REVISED AUDIT COMMITTEE CHARTER

This Audit Committee Charter, as most recently revised,  adopted by the Board of
Directors (the "Board") of Fonar Corporation (the "Company").

1. PURPOSE

The Audit Committee (the  "Committee")  shall assist the Board of Directors (the
"Board") in fulfilling its  responsibility  to oversee (i) management's  conduct
of: the Company's financial reporting, including by overviewing the integrity of
the financial reports and other financial information provided by the Company to
any  governmental or regulatory  body, the Company's  securityholders  and other
users  thereof;  (ii)  management's  establishment  and conduct of the Company's
systems of internal accounting and financial  controls,  including the Company's
internal audit function;  (iii) the  qualifications,  engagement,  compensation,
independence and performance of the Company's independent auditors,  the conduct
of the annual  audit and any other  audit,  attest or review  services,  and the
engagement of the independent  auditors to provide any non-audit services;  (iv)
the  preparation of the audit committee  report required by U.S.  Securities and
Exchange  Commission  ("SEC")  rules;  (v) the  Company's  legal and  regulatory
compliance;  and  (vi)  the  Company's  codes  of  conduct,  as  established  by
management and the Board.  The Committee's role shall apply equally with respect
to any subsidiary of the Company  (including  any  partnership or joint venture)
whose  financial  results are  consolidated  with the  financial  results of the
Company and any other subsidiary  which is directly or indirectly  controlled by
the Company and also with respect to any separate  financial reports of any such
subsidiary.

In discharging  its role,  the Committee is empowered to investigate  any matter
that  comes to its  attention  and  shall  have  access to all  books,  records,
facilities  and  personnel of the Company  which are  necessary in order for the
Committee to perform its duties hereunder. The Committee has the power to retain
legal counsel,  auditors or other experts as it determines  appropriate to carry
out its role and  responsibilities  and shall be provided  adequate funding from
the  Company  to  engage  such  advisors  and  for  the  administration  of  the
Committee's  affairs.  The Company shall compensate the independent  auditor for
its  audit,  review  and attest  services  as  determined  and  directed  by the
Committee.

The Committee shall report regularly to the Board on the Committee's activities,
including all actions taken by the Committee on behalf of the Company and on any
material  issues  that arise with  respect to the  quality or  integrity  of the
Company's  financial  statements,   the  performance  and  independence  of  the
independent  auditor,  the  performance  of the  internal  audit  function,  the
Company's  compliance with legal or regulatory  requirements and the adequacy of
and compliance  with the Company's  codes of conduct to the extent such codes of
conduct  relate to the duties and  purposes of the Audit  Committee as described
herein and any other  matters the  Committee  reasonably  deems  appropriate  in
connection  with the  performance  of its  duties  hereunder  or which the Board
requests.  The  Committee  shall  report to the Board at least  annually  on its
expenses, including the compensation of the independent auditor.

II. COMMITTEE MEMBERSHIP

The Committee  shall consist of three or more members of the Board,  as shall be
determined  by the Board,  each of whom has been  determined  by the Board to be
"independent" in accordance with the applicable  listing  standards of the NASD.
All  members of the  Committee  shall  meet the  applicable  financial  literacy
requirements  of the NASD and at least one member  shall be an "audit  committee
financial  expert" as such term is defined under applicable SEC rules. No member
of the  Committee  may serve on the audit  committee  of more than three  public
companies,  including the Company,  unless the Board of Directors has determined
that such  simultaneous  service  would not impair the ability of such member to
effectively serve on the Committee.

III. COMMITTEE MEETINGS; SUBCOMMITTEES

The Committee shall meet on a regularly-scheduled  basis at least four times per
year or more frequently as circumstances dictate. The Committee's meetings shall
include,  on  at  least  a  quarterly  basis,  an  executive  session  with  the
independent  auditor to provide the opportunity for full and frank discussion of
the  Company's  financial  reporting  without  any  member of senior  management
present, except for the Company's General Counsel if the Committee so desires.

IV. RESPONSIBILITIES AND FUNCTIONS

The Committee's role is one of oversight. The Committee's primary responsibility
relates to the Company's financial reporting and its other  responsibilities and
functions as stated herein, while important in their own right, are ancillary to
the accurate and complete  presentation of the Company's  financial position and
prospects.  The Company's  management is responsible for preparing the Company's
financial  statements,  for assuring the Company's compliance with its legal and
regulatory  obligations  and for the  adherence  by Company  personnel  with the
Company's  business  policies and codes of conduct.  The  Company's  independent
auditor is  responsible  for auditing the  Company's  financial  statements  and
assessing  the  adequacy  of the  Company's  internal  controls.  The  Company's
management and independent auditor have more knowledge and detailed  information
about the Company,  greater expertise in financial  reporting,  internal control
matters, the legal and regulatory  obligations of the Company and the details of
the Company's codes of conduct and business policies, and greater opportunity to
analyze financial reporting issues facing the Company than do Committee members.
Consequently, in carrying out its oversight responsibilities, the Committee does
not  provide  any  expert or special  assurance  as to the  Company's  financial
statements,  internal  controls,  legal  compliance or adherence to its codes of
conduct  and  business  policies  or any  professional  certification  as to the
independent auditor's work.

The following  functions of the  Committee  are  specified as a guide,  with the
understanding  that the Committee will exercise its judgment in determining  the
specific  activities  the  Committee  may  undertake  at  any  time  and  in its
activities may diverge from this guide as appropriate  given the  circumstances.
The  Committee is  authorized  to carry out these and such other  functions  and
responsibilities  as are assigned by the Board from time to time and to take any
actions  reasonably related to the Committee's  responsibilities  as mandated by
this Charter.

To fulfill its purpose, the Committee shall:

1.   appoint,  subject to ratification  of the appointment by the  shareholders,
     and,  if  appropriate,  dismiss the  accounting  firm which shall audit the
     Company's annual  financial  statements and any other accounting firm which
     shall  provide to the Company any other  audit,  attest or review  services
     (each of which shall be  considered an  "independent  auditor" for purposes
     for this Charter), and evaluate the performance, determine the compensation
     and oversee the work of the independent auditors;  the independent auditors
     shall report  directly to the Committee and the Committee shall resolve any
     disagreement  between  management and the  independent  auditors  regarding
     financial  reporting In connection  with the  appointment  of the Company's
     independent auditors, the Committee shall on an annual basis:

     (a)  receive and review a formal written statement from the accounting firm
          to be retained as the Company's  independent  auditor  delineating all
          relationships  between the accounting firm and the Company (consistent
          with Independence Standards Board Standard No. 1 and any additional or
          successor  standard  established  by  the  Public  Company  Accounting
          Oversight Board) and also delineating any services the accounting firm
          has provided to the Company's  chief  executive,  chief  financial and
          chief  accounting  officer;  the Committee  shall actively engage in a
          dialogue  with such  accounting  firm with  respect  to any  disclosed
          relationships   or  services  that  may  impact  the  objectivity  and
          independence  of the accounting  firm and take  appropriate  action in
          response  to the  accounting  firm's  report to satisfy  itself of the
          auditor's independence;

     (b)  consider whether, in the interest of assuring continuing  independence
          of the independent  auditor,  the Company should  regularly rotate the
          accounting firm that serves as its independent auditor;

     (c)  set clear  policies with respect to the Company's  hiring of employees
          or former employees of the independent auditors;

     (d)  receive and review a report from the independent  auditors describing:
          (i)  such  firm's  internal  quality-control  procedures  and (ii) any
          material  issues raised by the most recent internal  quality-  control
          review,  peer review, or Public Company  Accounting  Oversight,  Board
          Review  of  such  firm,  or  by  any  inquiry  or   investigation   by
          governmental  or professional  authorities,  within the preceding five
          years,  regarding one or more  independent  audits  carried out by the
          firm, and any steps taken to deal with any such issues;

2.   review and approve any auditing and non-auditing services to be provided by
     the Company's independent auditors, including the adoption by the Committee
     of any policies and procedures  detailing  services  which the  independent
     auditors are permitted to provide to the Company without  specific  advance
     approval by the Committee,  if any, except that if services rendered by the
     auditors  were not  recognized  as  non-audit  services  at the time of the
     independent auditor's  engagement,  such services shall be promptly brought
     to the attention of the  Committee  and approved by the Committee  prior to
     the completion of the audit.

3.   review and discuss with management and the independent auditor on a regular
     basis: (i) the adequacy of the Company's  internal and disclosure  controls
     and  procedures,   including  computerized  information  system  disclosure
     controls and procedures and security; (ii) any significant  deficiencies or
     material  weaknesses in the design or operation of the  Company's  internal
     controls  which could  adversely  affect the  Company's  ability to record,
     process,  summarize  and report  financial  data that are  reported  to the
     Committee;  (iii)  any  fraud,  whether  or  not  material,  that  involves
     management or other employees who have a significant  role in the Company's
     internal controls that are reported to the Committee; and (iv) any findings
     and recommendations of the independent auditor with regard to such matters,
     together with management's responses;

4.   review and discuss with management,  including the chief financial  officer
     and  chief  accounting  officer,   and  the  independent  auditor  (i)  any
     significant  audit  findings  during  the  year,  including  the  status of
     previous audit  recommendations;  (ii) any audit  problems or  difficulties
     encountered in the course of the auditor's work, including any restrictions
     on the scope of  activities  or access to required  information;  (iii) any
     changes  required in the scope of the audit plan; (iv) the audit budget and
     staffing;  and (v) the  coordination  of audit  efforts in order to monitor
     completeness of coverage, reduction of redundant efforts, and the effective
     use of audit resources;

5.   review and discuss with management and the independent  auditor  accounting
     policies  that may be viewed as  critical;  review and discuss  significant
     changes in Company  accounting  policies and any  accounting  and financial
     reporting  proposals  (including changes in generally  accepted  accounting
     principles)  that may have a  material  impact on the  Company's  financial
     reports;  inquire as independent auditor's view of the accounting treatment
     related  to  significant  new  Company  transactions  or other  significant
     matters or events not in the ordinary course of the Company's  business and
     inquire  as to  the  independent  auditor's  views  about  whether  Company
     accounting principles as applied are conservative,  moderate, or aggressive
     from the  perspective  of income,  asset,  and liability  recognition,  and
     whether or not those principles reflect common or minority practices;

6.   review  and  discuss  with  management  and  the  independent  auditor  any
     financial or non-financial arrangements that do not appear in the financial
     statements  of the Company  but are  material  to the  Company's  financial
     position  or  performance;  and review,  discuss  with  management  and the
     independent  auditor,  and approve,  any transactions or courses of dealing
     with related  parties  (e.g.,  including  significant  shareholders  of the
     Company,   directors,   corporate  officers  or  other  members  of  senior
     management  or their family  members)  that are material in size or involve
     terms or other  aspects  that  differ  from  those  that  would  likely  be
     negotiated  with  independent  parties,  as  determined by the Committee to
     warrant review by the Committee;

7.   review  and  discuss  with  the  independent  auditor:  (i) any  accounting
     adjustments that were noted or proposed by the independent auditor but were
     "passed" (as immaterial or otherwise),  (ii) any communications between the
     audit team and the audit  firm's  national  office  respecting  auditing or
     accounting issues presented by the engagement and (iii) any "management" or
     "internal  control"  letter  issued,  or  proposed  to be  issued,  by  the
     independent auditor to the Company;

8.   review and discuss with management,  including the chief financial  officer
     and chief accounting  officer,  and the independent auditor any significant
     risks or exposures to which the Company is subject and assess the Company's
     underlying policies with respect to risk assessment and risk management and
     the steps management has taken to minimize risks;

9.   review the Company's financial statements,  including:  (i) prior to public
     release,  reviewing and  discussing  with  management  and the  independent
     auditor the Company's annual and quarterly financial statements to be filed
     with the SEC, including (a) the Company's  disclosures under  "Management's
     Discussion and Analysis of Financial  Condition and Results of Operations",
     (b) the certifications  regarding the financial statements or the Company's
     internal  accounting  and financial  controls and procedures and disclosure
     controls or procedures  filed with SEC by the Company's chief executive and
     financial  officers and personnel and any qualifications  thereon,  (c) the
     matters required to be discussed with the independent  auditor by Statement
     of  Auditing  Standards  No.  61 or  No.  71;  (ii)  with  respect  to  the
     independent auditor's annual audit report and certification, before release
     of the  annual  audited  financial  statements,  meet  separately  with the
     independent  auditor without any management  member present and discuss the
     independent auditor's assessment of the adequacy of the Company's system of
     internal  accounting and financial controls and the  appropriateness of the
     accounting  principles used in and the judgments made in the preparation of
     the Company's audited financial statements and the quality of the Company's
     financial  reports;  (iii)  also in  connection  with  the  release  of the
     Company's  audited  annual  financial  statements,   meet  separately  with
     management and the Company's financial  personnel and discuss  management's
     evaluation of the adequacy of the Company's  system of internal  accounting
     and financial controls and the appropriateness of the accounting principles
     used in and the judgments made in the preparation of the Company's  audited
     financial  statements and the quality of the Company's  financial  reports;
     (iv)  make a  recommendation  to  the  Board  of  Directors  regarding  the
     inclusion  of the audited  annual  financial  statements  in the  Company's
     Annual  Report  on Form  10-K to be filed  with the SEC;  and (v)  prior to
     submission to any governmental authority of any financial statements of the
     Company  with the SEC,  review such  financial  statements  and any report,
     certification or opinion thereon provided by the independent auditor;

10.  discuss  with  management  and the  independent  auditor,  as  appropriate,
     earnings press  releases and financial  information  and earnings  guidance
     provided to analysts and to rating agencies;

11.  establish and maintain procedures for the receipt,  retention and treatment
     of  complaints  regarding  accounting,   internal  accounting  controls  or
     auditing matters,  and the confidential,  anonymous submission by employees
     of concerns regarding questionable accounting or auditing matters;

12.  review  periodically  with the General  Counsel:  (i) legal and  regulatory
     matters  that  may  have  a  material  impact  on the  Company's  financial
     statements  and (ii) the scope and  effectiveness  of the  Company's  legal
     compliance policies and programs;

13.  receive and act upon any reports of a material  violation  of law  received
     from any  attorney  for the  Company in  accordance  with the SEC's Rule of
     practice,  any reports from legal counsel  appointed or retained,  with the
     authorization  of the  Committee,  to  investigate  any such report and any
     reports of the General Counsel on any proceeding relating to such reports;

14.  review  periodically with management the adequacy of the Company's codes of
     conduct (including the Company's policies and procedures concerning trading
     in Company  securities and use in trading of  proprietary  or  confidential
     information) and the compliance  therewith by Company  personnel and review
     and approve any waivers  sought under such codes with respect to directors,
     executive  officers and senior financial  officers) but any waiver reviewed
     by the  Committee  shall be  reported  by the  Committee  to the  Board and
     approval of the Board as well shall be required  for any such waiver to any
     officer who is a member of the Board;

15.  review  and  advise  the  Board  with   respect  to  the   appointment,   r
     reassignment,  replacement or dismissal of the chief financial  officer and
     chief  accounting  officer and other financial or accounting  personnel and
     consult with the Compensation Committee, if any, regarding any reduction in
     the salary or  benefits  of, the terms of  participation  in any  incentive
     compensation  program by and any discretionary  bonus or incentive award to
     the chief financial officer and chief accounting officer;

16.  prepare a report to be included in the  Company's  annual  proxy  statement
     stating  whether or not the  Committee:  (i) has reviewed and discussed the
     Company's audited financial statements with management;  (ii) has discussed
     with the  independent  auditor the matters  required to be discussed by SAS
     No. 61 and 90; (iii) has received  the written  disclosure  and letter from
     the independent  auditor  (delineating all relationships such firm has with
     the Company) and has discussed  with such firm its  independence;  and (iv)
     based on the review and discussions  referred to above,  the members of the
     Committee  recommended to the Board that the audited financials be included
     in the  Company's  Annual  Report  on Form  10-K for  filing  with the U.S.
     Securities and Exchange Commission;

17.  conduct an annual  self-evaluation  of the  performance  of the  Committee,
     including its  compliance  with this  Charter,  and review and reassess the
     adequacy of this Charter; and

18.  maintain minutes and other records of Committee meetings and activities.



                                    EXHIBIT B

                        2005 INCENTIVE STOCK OPTION PLAN

                                2,000,000 SHARES

                                FONAR CORPORATION

1.   Purposes of the Plan.

     The purpose of this Plan (the  "Plan"),  which is designed to qualify as an
"incentive stock option plan" under section 422A of the Internal Revenue Code of
1954,  as amended  (the  "Code"),  is to assist  Fonar  Corporation,  a Delaware
corporation (the  "Corporation"),  and its subsidiaries (as hereinafter defined)
in attracting and retaining key employees and to secure for the  Corporation and
its  subsidiaries  the  benefits of the  incentive  inherent in ownership of the
Corporation's  equity  securities  by  employees  who  are  responsible  for the
continuing growth and success of the Corporation and its subsidiaries.  The Plan
provides  a means by which such  employees  may be given an  opportunity,  as an
incentive to service or continued  service with the Corporation or a subsidiary,
to purchase shares of the Common Stock of the  Corporation  upon the exercise of
options  designed to qualify as "incentive  stock options" under Section 422A of
the Code.

     For the purposes of this Plan, the term "subsidiary" and/or  "subsidiaries"
shall have the same  meaning  as the term  "subsidiary  corporation"  defined in
section 425 (f) of the Code,  as from time to time  amended,  and shall  include
specifically Health Management Corporation of America.

2.   Shares Subject to the Plan.

     Subject  to the  provisions  of  Section 13 of the Plan,  an  aggregate  of
2,000,000 shares of Common Stock, par value $.0001 per share, of the Corporation
("Common  Stock"),  are  available for the issuance upon the exercise of options
under the Plan.

     The shares to be issued upon the exercise of options  under the Plan may be
authorized but unissued  shares of Common Stock or issued shares of Common Stock
which are held in the treasury of the Corporation.  If an option shall expire or
terminate  for  any  reason   without   having  been   exercised  in  full,  the
unpurchasable  shares which were subject  thereto  shall,  unless the Plan shall
have been  terminated,  be added to the shares  otherwise  available for options
under the Plan.

3.   Term of the Plan.

     Subject to the  provisions  of  Section 14 and 15, the Plan shall  commence
effective as of February 15, 2005,  and options  granted  under the Plan must be
granted no later than February 14, 2015.

4.   Administration of the Plan.

     The Plan shall be administered by a committee which shall consist of one or
more members,  as the Board of Directors shall from time to time determine,  who
shall  be  appointed  by  the  Board  of  Directors  of  the  Corporation   (the
"Committee")  or, in the absence of such a Committee,  by the Board of Directors
of the  Corporation.  Directors of the  Corporation  who are either  eligible to
receive options,  or to whom options have been granted,  may vote on any matters
affecting  the  administration  of the Plan or the granting of options under the
Plan;  provided,  however,  that no Director  shall vote upon the granting of an
option to  himself,  but any such  Director  may be counted in  determining  the
existence of a quorum at any meeting of the Board of Directors at which the Plan
is administered or action is taken with respect to the granting of an option.Any
action  of the  Committee  or the Board of  Directors  may be taken by a written
instrument  signed  by all of the  members  of the  Committee  or the  Board  of
Directors,  as the case may be, and any action so taken by written consent shall
be as fully  effective as if it had been taken by a majority of the members at a
meeting duly held and called.

     Subject to the express  provisions of the Plan,  the Committee or the Board
or Directors,  as the case may be, shall have the authority,  in its discretion:
(i) to determine the individuals to receive  options,  the times when they shall
receive  them,  the number of shares to be subject to each option,  the exercise
price for  shares of  Common  Stock  subject  to each  option,  the term of each
option,  the date each option shall become  exercisable in whole,  in part or in
installments,  and,  if in  installments,  the number of shares to be subject to
each  installment,  the date each installment  shall become  exercisable and the
term of each installment: to accelerate the date of exercise of any installment;
to determine  whether  shares may be issued upon exercise of an option as partly
paid and, if so, the date when future  installments  of the exercise price shall
become due and the  amounts of such  installments,  and to  determine  the other
terms and provisions of each option granted under the Plan; (ii) to construe and
interpret the terms of the respective option certificates and the Plan; (iii) to
establish, amend and rescind rules and regulations for the administration of the
Plan; and (iv) to make all other  determinations  deemed  necessary or advisable
for administering the Plan. The  determinations of the Committee or the Board of
Directors,  as the case may be, on the  matters  referred  to in this  Section 4
shall be final and conclusive.

5.   Eligibility and Selection.

     Only key employees  (including employees who are officers and directors) of
the  Corporation or of any of its  subsidiaries  are eligible to receive options
under the Plan.  For the purposes of the Plan,  the term "key  employees"  shall
mean and include all employees of the Corporation or any of its subsidiaries who
render substantial services to the Corporation in the management, administration
or  supervision  of the  business  or affairs of the  Corporation  or any of its
subsidiaries  or are engaged in the  research,  development,  production,  sale,
marketing, or promotion of the products or services of the Corporation or any of
its  subsidiaries.  Directors of the  Corporation  who are not  employees of the
Corporation or a subsidiary are not eligible to receive  options under the Plan.
In determining the employees to whom options shall be granted under the Plan and
the number of shares of Common Stock as to which  options may be granted to such
an employee, the Committee or the Board of Directors,  as the case may be, shall
consider the duties of the employees,  their present and potential contributions
to the success of the business of the Corporation, and such other factors as the
Committee or the Board of Directors deems relevant in furthering the purposes of
the granting of such options and the interests of the  Corporation.  An employee
may receive more than one option under the Plan.

6.   Incentive Stock Options.

     (a) Each option  ("Option") may be evidenced by a written  Incentive  Stock
Option Certificate (the "Certificate"); provided that to the extent permitted by
law and consistent with the terms and conditions of the Plan and the Option, the
Board of Directors may make such  modifications  in the terms and  conditions of
the Option as the Board shall deem necessary or advisable, or as may be required
in order that the Option  evidenced by the  Certificate  be an "incentive  stock
option".

     (b) Each Option  under the Plan (i) shall  specify the  exercise  price per
share of Common Stock, which shall not be less than the fair market value of the
Common  Stock of the  Company  on the  date on which  such  Option  is  granted,
provided  that  the  exercise  price  per  share  of any  Option  granted  to an
individual  who,  at the time  such  option  is  granted,  is the owner of stock
possessing more than ten percent (10%) of the total combined voting power of all
classes  of stock of the  Corporation  shall  not be less  than 110% of the fair
market  value of a share of the Common Stock of the  Corporation  on the date on
which such Option is granted; (ii) shall be exercisable during a period no later
than ten (10) years after the date on which it is granted,  as determined by the
Committee  or the Board of  Directors  at the time of grant;  provided  that any
Option  granted to any person who,  at the time such  Option is granted,  is the
owner of stock  possessing  more than ten  percent  (10%) of the total  combined
voting  power of all classes of stock of the  Corporation,  must expire no later
than  five (5)  years  after  the date of grant of the  Option;  (iii)  shall be
exercisable  at such time or times as may be  determined by the Committee or the
Board of  Directors at the time of grant,  provided  that an Option shall become
immediately exercisable as to all shares subject to the Option upon the death or
"disability" (as defined in Section 13) of the holder of the Option;  (iv) shall
not be  transferable by the holder of the Option (other than by will or the laws
of descent and  distribution),  and shall be exercisable  during the lifetime of
the holder of the Option only by such holder;  and (v) shall  contain such other
terms  and  conditions  or be in such  other  form as may be  determined  by the
Committee  or the Board of Directors  at the time of grant,  provided  that such
other terms and conditions  shall be permitted by law, shall not be inconsistent
with the Plan and shall not prevent the Option from  qualifying as an "incentive
stock option"  under  Section 422A of the Code. To the extent  permitted by law,
and without  limitation to the  foregoing,  the Board of Directors may make such
modifications  in the provisions of any  particular  Option under the Plan as it
shall deem  advisable or as may be required in order that the Option may qualify
as an "incentive stock option" under section 422A of the Code.

7.   Exercise Price.

     The  exercise  price  for each  share of  Common  Stock  issuable  upon the
exercise  of an Option  granted  under the Plan  shall not be less than the fair
market  value (or,  in the case of an Option  granted to any person  who, at the
time of the grant of such Option, is the owner of more than ten percent (10%) of
the total  combined  voting power of all classes of stock of the  Corporation or
any of its subsidiaries, not less than 110% of the fair market value) of a share
of Common  Stock at the time of  granting of the Option,  as  determined  by the
Committee or the Board of Directors,  provided that the method of  determination
shall not be inconsistent  with any regulations  applicable to "incentive  stock
options"  which  may be  promulgated  by the  Internal  Revenue  Service  or the
Secretary of the Treasury.

8.   Term of Options. 

     Options under the Plan shall be  exercisable  as shall be determined by the
Committee or the Board of  Directors,  as the case may be, at the time of grant;
provided that Options  granted  hereunder  shall be exercisable for a period not
exceeding ten (10) years from the date such Option is granted, and provided that
any Option granted to any person who, at the time such Option is granted, is the
owner of stock  possessing  more than ten  percent  (10%) of the total  combined
voting  power  of  all  classes  of  stock  of  the  Corporation  or  any of its
subsidiaries shall be exercisable for a period not exceeding five (5) years from
the date such Option is granted. Options shall be subject to earlier termination
as hereinafter provided.

9.   Exercise of Options.

     Each Option shall be  exercised,  in whole or in part, as to such number of
shares of Common  Stock and at such time or times as the  Committee or the Board
of Directors shall have  determined at the time of grant.  Except as provided in
Sections 10 and 11 hereof,  an Option may only be  exercised if the holder is at
the time of exercise in the employ of the  Corporation  or a  subsidiary  of the
Corporation.  Options shall be exercised only by the holder at the Corporation's
principal  office,  or at  such  other  office  as  may  be  designated  by  the
Corporation,  specifying  the  number of shares  purchased  and  accompanied  by
payment in full by certified or bank cashier's check,  shares of Common Stock of
the Corporation owned by the holder of the Option (or by any other property,  or
in any other form, acceptable to the Committee or the Board of Directors, as the
case may be.)  Certificates  representing  the  shares of stock  purchased  upon
exercise shall be issued as promptly as practicable thereafter. The holder of an
Option shall not have any of the rights of a stockholder of the Corporation with
respect to the shares of Common Stock issuable upon exercise of the Option until
one or more certificates  evidencing such shares of Common Stock shall have been
issued to the holder of the  Option.  In no event may a  fraction  of a share be
purchased or issued under the Plan.

     Options issued under the Plan (and any other plans of the  Corporation)  to
any  individual  will not be treated as "incentive  stock options" under Section
422A of the Code to the extent that the aggregate fair market value of the stock
underlying any such options (determined as at the time the options are granted),
which  become  exercisable  for the first  time in any  calendar  year,  exceeds
$100,000.

10.  Termination of Employment.

     Except as provided in Section 11, any Option  granted  under the Plan to an
employee who voluntarily  terminates his employment with the Corporation without
the  written  consent of the  Corporation  shall  expire  immediately  upon such
termination of employment.  Any Option granted under the Plan to an employee who
voluntarily terminates his employment with written consent of the Corporation or
whose employment is involuntarily terminated,  shall be exercisable for a period
which shall expire on the day 3 months after the cessation of employment, but in
no event after  expiration of the term of the Option and only to the extent such
Option is  otherwise  exercisable.  Except as  provided  in Section 11, upon the
expiration of any such Options,  all rights thereunder,  to the extent that such
rights  shall not have been  exercised,  shall  terminate  immediately.  Options
granted under the Plan shall not be affected by any change of employment as long
as  the  holder  continues  to be an  employee  of  the  Corporation  or of  any
subsidiary of the Corporation.

11.  Exercise Upon Death, Disability or Retirement of the Employee.

     (a) If the holder of an Option dies while  employed by the  Corporation  or
any of its subsidiaries, the Option may be exercised as to all shares subject to
the Option by the executor or administrator of such deceased employee or by such
other person at the time entitled by law to the rights of such deceased employee
under the Option, at any time within six (6) months after death, but in no event
after the expiration of the term of the Option.

     (b) In the event  that the  employment  of the  holder of any Option by the
Corporation  or a subsidiary of the  Corporation  is terminated by reason of the
"disability" of the holder of the Option,  the Option may be exercised as to all
shares  subject to the Option by the holder  thereof at any time  within one (1)
year after the date of such termination of employment, but in no event after the
expiration  of the  term of the  Option.  For  purposes  of the  Plan  the  term
"disability"  shall mean a physical or mental  disability  as defined in Section
105 of the Code.

     (c) In the event  that the  employment  of the  holder of any Option by the
Corporation  or a subsidiary of the  Corporation  is terminated by reason of the
retirement  of the holder of the  Option,  the Option may be  exercised  (to the
extent otherwise  exercisable on the date of the retirement of the holder of the
Option) by the holder thereof at any time within three (3) months after the date
of such  retirement,  but in no event  after the  expiration  of the term of the
Option. 12.  Non-Transferability  of Options.  Options shall not be transferable
otherwise than by the last will and testament of the holder of the Option or the
applicable  laws of descent  and  distribution,  and during the  lifetime of the
holder, Options may be exercised only by the holder thereof.  Options may not be
assigned, transferred,  pledged, hypothecated or disposed of in any way (whether
by operation of law or otherwise) except to the extent expressly provided for in
the Plan, and shall not be subject to execution, attached or similar process.

     Any assignment, transfer, pledge, hypothecation or other disposition of any
Option  attempted  contrary  to the  provisions  of this  Plan,  or any  levy or
execution,  attachment or other process  attempted upon an Option,  will be null
and void and without effect. Any attempt to make any such assignment,  transfer,
pledge,  hypothecation or other  disposition of an Option or any attempt to make
any such levy or execution, attachment or other process will cause the Option to
be  terminated  immediately  upon  the  happening  of  any  such  event  if  the
Corporation, at any time, should, in the sole discretion of the Committee or the
Board of Directors, so elect, by written notice to the employee or to the person
then entitled to exercise the Option under the  provisions of Section 11 hereof;
provided that any such termination of the Option under the foregoing  provisions
of this  Section  12 will  not  prejudice  any  rights  or  remedies  which  the
Corporation  or any  subsidiary  may have under the Plan,  any  Incentive  Stock
Option Certificate or otherwise.

13.  Adjustments.

     If (a) the  Corporation  shall at any time be involved in a transaction  to
which  subsection  (a) of  Section  425 of  the  Code  is  applicable,  (b)  the
Corporation  shall declare a dividend  payable in, or shall subdivide or combine
its Common Stock,  or (c) any other event shall occur which,  in the judgment of
the Committee or the Board of Directors, necessitates action by way of adjusting
the terms of the outstanding  Options,  the Committee or the Board of Directors,
as the case may be,  shall  take any such  action  as in its  judgment  shall be
necessary   to  preserve  to  the  holders  of  Options   rights   substantially
proportionate  to the rights  existing  prior to such event.  To the extent that
such  action  shall  include an  increase or decrease in the number of shares of
Common Stock subject to Options outstanding under the Plan, the aggregate number
of shares of Common  Stock  available  under  Section 2 of the Plan for issuance
upon exercise of such outstanding Options and of additional Options which may be
granted shall be increased or decreased, as the case may be, proportionately. No
action shall be taken by the  Committee  or by the Board of Directors  under the
provisions  of this  Section  13 which,  in its  judgment,  would  constitute  a
modification,  extension or renewal of the Option (within the meaning of Section
425(h)  of the  Code),  or  would  prevent  the  Option  from  qualifying  as an
"incentive  stock option" (within the meaning of Section 422A of the Code).  The
determination  of the Committee or the Board of  Directors,  as the case may be,
with respect to any matter  referred to in this  Section 13 shall be  conclusive
and binding upon each holder of an Option under the Plan.

14.  Termination and Amendment of the Plan.

     (a) Unless sooner  terminated,  as  hereinafter  provided,  this Plan shall
terminate at 11:59 p.m. on February 14,  2015,  and no options  shall be granted
hereunder after that date. The Board of Directors may,  without further approval
by the stockholders at any time terminate or amend this Plan without notice,  or
make such  modifications of this Plan as it shall deem advisable;  provided that
the Board of Directors may not,  without prior approval by the  stockholders  of
the Corporation, (i) increase the maximum number of shares of Common Stock as to
which  Options  may be granted  under the Plan  (except as  contemplated  by the
provisions of Section 13 hereof),  (ii) extend the term during which options may
be granted under the Plan, (iii) permit the exercise of an Option after the date
which such Option would otherwise  terminate  pursuant to the terms thereof;  or
(iv) reduce the exercise price per share to less than the fair market value of a
share of Common Stock on the date the Option is granted,  or, in the case of any
Option granted to an individual who, on the date of the grant of the Option,  is
the owner of more than ten percent (10%) of the total  combined  voting power of
all  classes of stock of the  Corporation  or any  subsidiary,  110% of the fair
market value of a share of Common stock (except,  in both cases, as contemplated
by  the  provisions  of  section  13  hereof).  No  termination,   amendment  or
modification  of the Plan may,  without  the  consent  of the person to whom any
Option has been granted,  adversely  affect the rights of such person under such
Option or any unexercised portion thereof.

     (b)  Notwithstanding  the  limitation  set forth in  Paragraph  (a) of this
Section  14,  the Plan and any  Option  and the number of shares as to which any
Option under the Plan shall have been granted may be reduced,  retroactively  at
any  time,  to  conform  to the  provisions  of the  Code  and  the  regulations
promulgated  thereunder,  in order that  Options  under the Plan may  qualify as
"incentive stock options" within the meaning of Section 422A of the Code, and no
such amendment shall be considered prejudicial to the rights of any holder of an
Option.

15.  Substitutions   and   Assumptions   of  Options   of  Certain   Constituent
     Corporations.

     Anything  in this  Plan  to the  contrary  notwithstanding,  the  Board  of
Directors may,  without  further  approval by the  stockholders,  substitute new
Options for prior options of a constituent  corporation (as hereinafter defined)
or  assume  the  prior  options  of  such  constituent  corporation.   The  term
"constituent  corporation" shall mean any corporation which has been merged into
or  consolidated  with the  Corporation,  or whose  assets  or stock  have  been
purchased or acquired by or liquidated into the Corporation or by or into one or
more  subsidiaries  of the  Corporation,  or any parent or any subsidiary of any
such corporation.

16.  Indemnification of Committee.

     In addition  to such other  rights of  indemnification  as they may have as
Directors or as members of the  Committee,  the members of the  Committee or the
Directors,  as the case may be, shall be indemnified by the Corporation  against
the reasonable  expenses,  including  attorneys'  fees actually and  necessarily
incurred in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein,  to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection  with the
Plan or any Option granted  thereunder,  and against all amounts paid by them in
settlement  thereof (provided such settlement is approved by the Corporation) or
paid  by  them  in  satisfaction  of a  judgment  in any  such  action,  suit or
proceeding, except in relation to matters as to which it shall be adjudicated in
such action, suit or proceeding that such Committee member or Director is liable
for  negligence or misconduct in the  performance  of his duties;  provided that
within 10 days  after  institution  of any such  action,  suit or  proceeding  a
Committee member shall in writing offer the Corporation the opportunity,  at its
own expense, to handle and defend the same.

17.  Effectiveness  of the Plan. 

     The Plan shall become effective on February 15, 2005 provided that the Plan
shall be submitted for approval by the  stockholders of the Corporation no later
than twelve  (12) months  after the date of adoption of the Plan by the Board of
Directors.



                              2005 STOCK BONUS PLAN

1.   Purposes of the Plan.

     The  purpose of this  Stock  Bonus  Plan (the  "Plan")  is to assist  FONAR
Corporation,  a Delaware corporation (the  "Corporation"),  and its subsidiaries
(as  hereinafter  defined)  in  attracting  and  retaining  the  services of key
employees,  non-employee directors,  officers, advisors and consultants,  and to
secure for the  Corporation and its  subsidiaries  the benefits of the incentive
inherent in ownership of the Corporation's  equity securities by parties who are
responsible  for the continuing  growth and success of the  Corporation  and its
subsidiaries.

     For the purposes of this plan, the term "subsidiary" and/or  "subsidiaries"
shall mean any corporation of which the majority of the outstanding voting stock
is owned directly or indirectly by the Corporation.

2.   Shares Subject to the Plan.

     Subject  to the  provisions  of  Section 7 of the  Plan,  an  aggregate  of
3,000,000 shares of Common Stock, par value $.0001 per share, of the Corporation
("Common Stock"),  are available for the issuance under the Plan as compensation
for services to the Corporation ("Bonus Stock").

     The shares to be issued as Bonus Stock under the Plan may be authorized but
unissued  shares of Common Stock or issued shares of Common Stock which are held
in the treasury of the Corporation.

3.   Term of the Plan.

     Subject to the  provisions  of  Section 8 and 10,  the Plan shall  commence
effective as of February 15, 2005,  and Bonus Stock  awarded under the Plan must
be issued no later than February 14, 2015.

4.   Administration of the Plan.

     The Plan shall be administered by a committee which shall consist of two or
such  greater  or  lesser  number  of  members,  as  determined  by the Board of
Directors from time to time, who shall be appointed by the Board of Directors of
the Corporation (the "Committee") or, in the absence of such a Committee, by the
Board of Directors of the  Corporation.  Directors  of the  Corporation  who are
either eligible to receive Bonus Stock, or to whom Bonus Stock has been granted,
may vote on any matters affecting the administration of the plan or the granting
of Bonus Stock  under the Plan.  Any action of the  Committee  may be taken by a
written  instrument signed by a majority of the members of the Committee then in
office. Members of the Committee need not be members of the Board of Directors.

     Subject to the express  provisions of the Plan,  the Committee or the Board
or Directors,  as the case may be, shall have the authority,  in its discretion:
(i) to determine the parties to receive  Bonus Stock,  the times when they shall
receive such awards,  the number of shares to be issued, and the time, terms and
conditions  of the issuance of any such shares;  (ii) to construe and  interpret
the  terms  of the  Plan;  (iii) to  establish,  amend  and  rescind  rules  and
regulations  for the  administration  of the  Plan;  and (iv) to make all  other
determinations   necessary  or  advisable  for   administering   the  Plan.  The
determinations  of the Committee or the Board of Directors,  as the case may be,
on the matters referred to in this Section 4 shall be final and conclusive.

5.   Eligibility and Selection.

     The  Committee  or the Board of  Directors,  as the case may be, shall have
sole and  absolute  discretion  to issue  Bonus  Stock  under the Plan to reward
employees,   non-employee  directors,  advisors  and  consultants  for  services
rendered or to be rendered to or for the benefit of the  Corporation,  or any of
its subsidiaries  (the grant of Bonus Stock under this Plan shall be referred to
as a "Bonus Stock Award"). In determining the parties to whom Bonus Stock Awards
shall be granted  under the Plan and the number of shares of Common  Stock which
may be granted to such persons, the Committee or the Board of Directors,  as the
case may be,  shall  consider  the  duties of the  parties,  their  present  and
potential  contributions  to the  success  of the  Corporation,  and such  other
factors as the Committee or the Board of Directors  deems relevant in furthering
the  purposes  of the  granting  of such Bonus  Stock and the  interests  of the
Corporation. A party may receive more than one Bonus Stock Award under the Plan.

6.   Bonus Stock Awards.

     (a) The  Committee  or the Board of  Directors,  as the case may be,  shall
determine for each party chosen to participate in the Plan  ("Participant")  the
number of shares of Common Stock to be covered by each Bonus Stock Award and the
installments, if any, in which the Bonus Stock will be granted.

     (b) The  Committee or the Board of  Directors  shall  determine  the terms,
conditions and  restrictions,  if any, to which such Bonus Stock or its issuance
will be  subject.  Any  restrictions  imposed  shall be  evidenced  by a written
agreement  executed by the  Participant.  Such agreement  shall also include any
terms and conditions required by applicable securities laws.

     (c) The Corporation shall deliver to the Participant on the date specified,
or as soon  thereafter as is  practicable,  the number of shares of Common Stock
specified in such Participant's Bonus Stock Award,  subject to and in accordance
with the Bonus Stock Award.

     (d) Bonus Stock  Awards  shall not be  transferable  other than by the last
will and testament of the holder of the Bonus Stock Award or the applicable laws
of descent and  distribution.  Bonus  Stock  Awards may not be  assigned,  sold,
transferred,  pledged,  hypothecated  or  disposed  of in any  way  (whether  by
operation of law or otherwise)  except to the extent  expressly  provided for in
the Plan and shall not be subject to execution, attachment or similar process.

7.   Dilution and Other Adjustments.

     In the event of any change in the  outstanding  Common  Shares by reason of
any  stock   dividend  or  split,   recapitalization,   merger,   consolidation,
reorganization,  combination  or  exchange of shares of Common  Stock,  or other
similar corporate change,  the Committee or the Board of Directors,  as the case
may be, shall make such  adjustments  as it, in its absolute  discretion,  deems
equitable in the number of kind of shares of Common Stock authorized by the Plan
and, with respect to  outstanding  shares of Common Stock covered by Stock Bonus
Awards but not yet issued, in the number of kind of stock covered by Stock Bonus
Awards made under the Plan.

8.   Termination and Amendment of the Plan.

     Unless  sooner  terminated,   as  hereinafter  provided,  this  Plan  shall
terminate  at 11:59 p.m.  on  February  14,  2015,  and no Bonus  Stock shall be
granted hereunder after that date. The Board of Directors may terminate or amend
this Plan at any time without notice, or make such modifications of this Plan as
it shall deem advisable.  No termination,  amendment or modification of the Plan
may  adversely  affect the rights of any party to whom a Bonus  Stock  Award has
been made without such party's consent.

9.   Indemnification.

     In addition  to such other  rights of  indemnification  as they may have as
directors or as members of the  Committee,  the members of the Committee and the
Board  of  Directors  shall  be  indemnified  by  the  Corporation  against  the
reasonable expenses, including attorney's fees actually and necessarily incurred
in  connection  with  the  defense  of any  action,  suit or  proceeding,  or in
connection with any appeal therein,  to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection  with the
Plan or any Bonus Stock Award granted  thereunder,  and against all amounts paid
by them in settlement  thereof (provided that such settlement is approved by the
Corporation)  or paid by them in  satisfaction of a judgment in any such action,
suit or  proceeding,  except  in  relation  to  matters  as to which it shall be
adjudicated in such action,  suit or proceeding  that such  Committee  member or
director,  as the case may be, is liable for  negligence  or  misconduct  in the
performance of his duties; provided that within 10 days after institution of any
such action, suit, or proceeding a Committee member or director, as the case may
be, shall offer the Corporation in writing the opportunity,  at its own expense,
to handle and defend the same.

10.  Effectiveness of the Plan.

     The Plan shall become  effective on February  15, 2005,  provided  that the
Plan shall be submitted for approval by the  stockholders  of the Corporation no
later  than  twelve  months  after  the  adoption  of the  Plan by the  Board of
Directors.


                                 ANNUAL REPORT

                                      2004

                                     FONAR

                               THE MRI SPECIALIST



                    FONAR PRESIDENT'S MESSAGE TO SHAREHOLDERS

                                  May 11, 2005

Dear Shareholders:

I am very  pleased  to report to you that FONAR  ended FY 2004 on a very  strong
note and has continued its forward  progress  during the first nine months of FY
2005.  Some  of the  accomplishments  we have  achieved  in the  past 12  months
include:  

o    Realized  growing  acceptance  for  Upright(TM)   imaging  by  the  medical
     community;

o    Increased sales and installations of the FONAR Upright(TM) MRI;

o    Recorded the 100th sale of the Upright(TM) MRI;

o    Improved operating efficiencies; and

o    Achieved profitability for the nine month period ended March 31, 2005.

Growing Acceptance for Upright(TM) Imaging and the Upright(TM) MRI

The growth that FONAR has  experienced  in its  business is due in large part to
the growing  acceptance  for  Upright(TM)  imaging by the medical  community  at
large.  Today,  an  ever-increasing   number  of  radiologists,   neurosurgeons,
orthopaedic  surgeons,  general surgeons and other clinicians are  acknowledging
the benefits of scanning their patients in a weight-bearing  position.  In fact,
many doctors tell us that they believe  scans from the  Upright(TM)  MRI are the
only way for them to clearly see the cause of their  patients'  discomforts  and
factor that information into their surgical and/or treatment strategies.

Even Yale-New Haven's Temple Radiology has joined the Upright(TM) revolution.  A
renowned  leader for acquiring new medical  technology,  Yale's  purchase of the
Upright(TM)   MRI  sets  the  standard  which  other   research   hospitals  and
universities  will  want to  emulate.  Upon  the  announcement  of the  sale and
installation of the scanner at Yale, Richard  Knobleman,  M.D., medical director
of Yale-New Haven Ambulatory Services  Corporation/Temple  Radiology,  remarked,
"We  selected  the FONAR  Upright(TM)  MRI because it is the only  scanner  that
allows  us to see a  complete  picture  of  patients'  pathologies  as they  are
experiencing pain and discomfort.  The difference in this new technology is like
night and day.  We  believe  this  technology  will  enable us to  perform  more
accurate surgical procedures."

In addition,  FONAR has received many other rave reviews for the Upright(TM) MRI
over the past year. I thought you might like to read a few of those testimonials
as well.

George L. Rodriguez,  MD, a board-certified Physical Medicine and Rehabilitation
physician and director of a new MRI facility in Philadelphia, PA, remarked, "For
years I have  waited  for the day  when I could  observe  the  soft  tissues  of
patients in many different  positions -  particularly  in the positions of pain.
Finally, this day has arrived. Upright(TM) imaging technology enables doctors to
better define the abilities,  restrictions and impairments of injured  patients,
particularly for accident and trauma victims.  That is why I purchased the FONAR
Upright(TM) MRI for my clinical  practice." Dr. Rodriguez added, "I can envision
a time when all conditions that affect motion and function are visible using the
Upright(TM)  MRI,  making  this  technology  the  `GOLD  STANDARD'  of  MRI  for
evaluating tissue  `function'.  I believe the medical community  eventually will
demand  Upright(TM)  MRIs for many  conditions  and  other MRI  studies  will be
considered  inappropriate.  I think the FONAR  Upright(TM)  MRI will replace all
other open MRIs."

Dr. Glenn Molin,  director of Next  Generation  MRI in Columbia,  MD, said,  "We
purchased the FONAR  Upright(TM)  MRI because of its advanced MRI  applications.
Intuitively,  physicians understand the value of Upright(TM) imaging and attempt
to achieve it through the use of X-ray or  myelography.  Now for the first time,
with  the  FONAR  Upright(TM)  MRI,  we can do  Upright(TM)  imaging  using  the
exquisite diagnostic capabilities of the MRI. I believe that the Upright(TM) MRI
will become the standard for ortho-neuro applications."

Michael A. Brisman, MD, neurosurgeon at Great Neck MRI in Long Island, NY, said,
"The  Upright(TM) MRI is a unique product and technology that provides the image
quality that discerning  physicians  expect,  as well as enables  neurosurgeons,
like me, to see changes in pathology  based on a patient's  position.  Moreover,
the Upright(TM) MRI is patient friendly,  allowing even the most  claustrophobic
patients  to be  scanned  without  difficulty.  As a  result,  using  the  FONAR
Upright(TM) MRI gives Great Neck Stand-Up MRI a competitive advantage in an area
that already has many MRI machines and facilities."

Paul Hoang, a pain management specialist, anesthesiologist and a general partner
in Victoria MRI in Victoria, TX, commented,  "We purchased the FONAR Upright(TM)
MRI after carefully examining the MRI marketplace.  We determined that the FONAR
scanner is the most  technologically  advanced product  available.  It is a very
differentiated  product  that  gives  us  a  diagnostic  competitive  edge  over
conventional MRI scanners."

Richard A. Marks, MD, a board-certified orthopedic surgeon and president of Up &
Open  Imaging in Dallas,  TX,  remarked,  "The  medical  community  at large has
overwhelmingly  embraced the remarkable technology of the Upright(TM) MRI study.
"The FONAR  Upright(TM) MRI at Up & Open Imaging  shatters another myth, that an
'Open' MRI gives substandard  images.  Our referring  physicians are awed by the
clarity of the images.  They realize that the image  quality bears a much closer
resemblance to a 1.5 Tesla closed magnet than to a grainy 0.35 Tesla Open."

Increased Sales and Installations

When I  reported  to you at this time last year,  FONAR had sold 76  Upright(TM)
MRIs and installed 40 scanners.  As of March 31, 2005,  sales have risen to 110,
an  increase  of 45%,  and the  number of  installations  has  climbed  to 81, a
two-fold  increase  over  last  year.  And  our  pipeline  of  opportunities  to
demonstrate  the scanner to other  physicians  and surgeons  continues to build.
Moreover,  I am pleased to say that FONAR is meeting  customer  demand as orders
are received.

The chart on the top of the next page -- Moving Average of Upright(TM)  MRI Unit
Sales/Month  -shows a 12-month moving average of monthly scanner sales. Note the
positive trend of the linear regression line.

FONAR is also more fully  reaping the  benefits of service and repair  fees,  as
warranties  on  Upright(TM)  machines  installed  last year  expire and we begin
collecting  annual service fees. At this time only 1/3 of our  Upright(TM)  MRIs
are out of warranty. We expect this trend to continue to improve, and we believe
it will create a stable revenue stream for us moving forward.

Explanation of Revenue Recognition

It is important not only to grasp our sales patterns on a quarterly  basis,  but
also to clearly  understand how FONAR recognizes scanner (product) revenues on a
quarterly basis. We recognize  revenues for the Upright(TM) MRI on a "percentage
of completion" basis, which means a portion of the total sales price is recorded
throughout the entire  sales/manufacturing/installation  process. Therefore, the
revenues  announced for a particular  quarter are not necessarily  reflective of
new orders or installations  that were announced in that quarter.  Rather, it is
the combination of new sales and progress payments (installations) received in a
quarter that provides the clearest picture of how revenues are recorded.

Increased Marketing Initiatives

Over the past 12 months,  we aggressively  escalated our marketing  initiatives.
During this timeframe, we attended more conferences and trade exhibits than ever
before, and we enhanced our presence at these events by expanding our booth size
and/or attaining  better booth placement;  we added five new sales people to the
FONAR team,  bringing  our sales  force to 20 members;  and we hosted our Second
Annual Customer/User Workshop.

Some  significant  conferences  in which  we  exhibited  in the  past 12  months
include: the 54th Annual Meeting of the Congress of Neurological  Surgeons (CNS)
in San  Francisco  (our first  appearance at this  conference);  the 19th Annual
Meeting and Technical Exhibit Show of the North American Spine Society (NASS) in
Chicago;  the  90th  Annual  Scientific  Assembly  and  Annual  Meeting  of  the
Radiological  Society of North America (RSNA) in Chicago,  which was attended by
more than 60,000 radiology and allied health care  professionals from around the
world; the 72nd Annual Meeting of the American  Academy of Orthopaedic  Surgeons
in (AAOS)  in  Washington,  DC;  and the 73rd  annual  meeting  of the  American
Association   of   Neurological   Surgeons   (AANS)  in  New  Orleans.   FONAR's
participation  at  conferences  and trade shows  generates good exposure for the
Upright(TM)  MRI, as well as helps us to generate  sales  leads.  Therefore,  we
believe that our  attendance  at these events offers a good return on investment
for the Company.

In addition,  our annual Customer/User  Workshops are proving to be an essential
component  of our  marketing  initiatives.  The  input of FONAR  customers  is a
critical element to the development and growth of the Upright(TM) MRI. In March,
we  assembled  for our  second  annual  workshop,  which was both  fruitful  and
informative.   Operating  an  Upright(TM)  MRI  scanning  center  and  providing
top-quality service to patients and physicians is very experience dependent. The
FONAR  Customer/User  Workshops are very  effective at promoting the exchange of
valuable  lessons learned in the MRI marketplace.  In addition,  these workshops
provide us with the  necessary  feedback  to stay  current  with our  customers'
needs.

Improved Operating Efficiencies

Concurrent with the rapid growth in product sales and service fees, we exercised
stringent  controls over  operating  expenses to ensure that our spending  paces
revenue growth.  This can be seen in the upgrading and  streamlining of our HMCA
business segment. There, we successfully turned around the business by carefully
managing expenses and realizing savings from the closing of unprofitable  sites.
Furthermore, we believe we can sustain this progress by replacing older scanners
with Upright(TM) MRIs. HMCA currently manages seven sites that are equipped with
Upright(TM)  MRIs.  Our plan is to open  three new sites with  Upright(TM)  MRIs
within the next nine months,  bringing the total number of HMCA  facilities with
Upright(TM) MRIs to ten.

Achieved Profitability

Due to increased  product  sales,  improved  efficiencies  resulting from higher
sales  volumes,  increased  service and repair fees and  continued  cost control
measures, FONAR was able to achieve and sustain profitability for the first nine
months of FY 2005.

Development Pipeline

Even though we have made tremendous strides with the Upright(TM) MRI, we are not
resting on our laurels.  At the RSNA event in November,  FONAR  demonstrated the
latest works-in-progress  application for the Upright(TM) MRI - obtaining images
of the  beating  heart and the  blood-vascular  system  with the  patient in the
vertical  position.  This is a significant  advancement  because when physicians
evaluate  cardiac  patients  with heart  failure,  they  prefer to see the heart
performing  against  its normal  physiological  uphill  load  rather than in the
lying-down  position,  where  the  blood is  practically  running  downhill.  In
addition,  imaging blood vessels vertically,  where the flow is against gravity,
is more likely to enable doctors to see the full impact of vascular  pathologies
on blood flow that is not evident when blood is flowing horizontally. Rather, in
the gravity-affected  vertical position,  multiple factors may lead to decreased
arterial or venous circulation, such as decreased cardiac output or loss of auto
regulation.

Along with  demonstrating  images of the beating  heart,  we also  unveiled  the
prototype of our new works-in-progress MRI-compatible treadmill that sits inside
the FONAR Upright(TM) MRI. This novel device is designed to provide doctors with
the ability to directly image the exercising heart.

Investor Relations Initiatives

In  September,  FONAR  engaged  The Anne  McBride  Company to assist us with our
investor  relations  and  communications  efforts.  Since  that  time,  we  have
conducted  quarterly  conference  calls,  commenced  an  institutional  investor
outreach program, and made presentations at investment-oriented conferences. For
example, we met with over 30 institutional investors, high net-worth individuals
and  sell-side  analysts,  as well as conducted  conference  calls with numerous
others. In addition,  we presented to an institutional  investor audience at The
Wall Street  Analyst  Forum in New York City on March 2 and at the Deutsche Bank
Health  Care  Conference  in  Baltimore  on May 3. Our  meetings  have been well
received  by  Wall  Street,  and  as a  result,  we are  starting  to  build  an
institutional  investor  following.  FONAR  plans to continue  this  program and
expects it will help to increase shareholder value going forward.

Sales Growth Confirms Long-Term Strategy

Our superior  technology and ability to meet the special needs of physicians and
surgeons  continues  to command  market  demand.  In  addition,  the pipeline of
opportunities  to demonstrate the Upright(TM) MRI to new physicians and surgeons
continues to build.  All at FONAR remain  focused on continuing  our pace of new
sales  and  installations  and  aggressively   marketing  to  customers,   while
continuing to upgrade and streamline our HMCA operations.

We are pleased with the  milestones  FONAR has attained in the last year, and we
plan to continue  capitalizing on our opportunities,  building a strong business
and  increasing   shareholder  value.  We  have  made  outstanding  progress  in
positioning  FONAR for  success,  and we plan to stay the  course in the  coming
year. We believe that our increased  marketing efforts and cost control measures
present both strong growth potential and financial stability for the Company.

Closing

I believe that we have begun to meet our investor goals.  The Upright(TM) MRI is
a success;  we are growing the Company at a very healthy  pace; we are achieving
profitability; and we expect a profitable year for Fiscal 2005.

In  conclusion,  I  would  like to  extend  a  special  thanks  to our  faithful
shareholders  who have  supported  FONAR  throughout  the years and  continue to
support  us today.  In  addition,  I would like to thank our  customers  and our
employees, both of whom supported the growth of our business over the past year.
We are pleased to share our achievements with you.

Sincerely,

Raymond V. Damadian
President and Chairman




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

                                    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, 2004

                                       OR

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

                           Commission File No. 0-10248
                           ---------------------------

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

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

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

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

          -------------------------------------------------------------
           Securities registered pursuant to Section 12(b) of the Act:
                                      None

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

Yes ___X___      No _______


Indicate by check mark if disclosure of delinquent filers,  pursuant to Item 405
of Regulation S-K  (ss.229.405 of this Chapter),  is not contained  herein,  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 _______

As of August 31, 2004,  99,431,233 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  approximately  96,884,790  shares of Common Stock
held by  non-affiliates  as of such date based on the closing price per share on
August  31,  2004  as  reported  on  the  NASDAQ   System,   was   approximately
$106,573,269.  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
Stand-Up(TM) Brand MRI scanner and Fonar 360(TM) MRI scanner.

The product we are now most vigorously  promoting is our  Stand-Up(TM)  MRI. The
Stand-Up(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.

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  physicians  and other  medical  providers,  including  diagnostic
imaging centers.

See Note 20 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  Stand-Up(TM)  MRI and the
Fonar 360(TM).

The  Stand-Up(TM)  MRI permits,  for the first time, MRI diagnoses to be made in
the  weight-bearing  state.  The  Stand-Up(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.
An elevator  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. In the future the  Stand-Up(TM)  MRI may
also be useful for MRI guided interventional procedures.

We are vigorously promoting sales of the Stand-Up(TM) MRI which we regard as our
most promising  product.  The market for the Stand-Up(TM) shows strong progress.
During  the  fiscal  year  ended  June  30,  2004,  we  received  orders  for 39
Stand-Up(TM)  MRI  scanners as compared to 22 for the fiscal year ended June 30,
2003.  Revenues  recognized from the sale of Stand-Up(TM) MRI scanners increased
in fiscal  2004 by 76% over  fiscal  2003 from  approximately  $24.3  million in
fiscal 2003 to  approximately  $42.7  million in fiscal  2004,  following a 119%
increase  from  fiscal  2002 to  fiscal  2003,  when  revenues  from the sale of
Stand-Up(TM)  MRI  scanners  increased  from $11.1  million to $24.3  million in
fiscal  2003.  The  following  chart  shows  the  revenues  attributable  to our
different  model  scanners for the fiscal years ended June 30, 2003 and June 30,
2004.  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 2003        Fiscal 2004

     Stand-Up(TM)        $24,298,460        $42,668,377
     Fonar 360(TM)                 0              0
     QUAD(TM)                      0              0
     Echo(TM)                      0              0
     Beta(TM)(used)      $   100,000              0

The Fonar 360(TM) includes the Open Sky(TM) MRI. We received our first order for
a Fonar 360(TM) scanner in August, 2004, which is 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 has an internal sales force of approximately 15 persons,  concentrating on
domestic  sales.  We  continue  to  use   manufacturer's   representatives   and
distributors for our foreign sales efforts. We have also expanded our website to
a full-scale interactive product information desk for reaching new customers and
assisting existing customers.

In March 1997, FONAR formed Health Management  Corporation of America,  formerly
U.S. Health Management Corporation, as a wholly-owned subsidiary for the purpose
of  engaging  in  the  business  of  providing   comprehensive   management  and
administrative services, office space, equipment, repair and maintenance service
for  equipment  and  clerical and other  personnel  (other than  physicians)  to
physicians' practices and other medical providers, including diagnostic centers.

HMCA  currently  is managing 11  diagnostic  imaging  centers,  and six physical
therapy and rehabilitation  practices located  principally in New York State and
Florida.  HMCA  discontinued  management of primary care  offices,  selling that
portion of its business in April, 2003.

PRODUCTS

FONAR's principal products are the Stand-Up(TM) MRI and the Fonar 360(TM).

The Stand-Up(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.

The   Stand-Up(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  Stand-Up(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)  version,  the Fonar
360(TM)  serves as an open  patient-friendly  scanner which allows 360 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.

In the  future,  we may also  develop  the Fonar  360(TM) to  function as an MRI
guided interventional scanner. In this version, which is in the planning stages,
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  operator  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 by
means of the MRI  image.  Surgically  inoperable  lesions  may then be  accessed
through  MRI guided  catheters  and  needles  making it  possible to deliver the
treatment agent directly to the targeted tissue.

It should be noted  that these  procedures  have not yet been  performed  in the
scanner, although they are promising possibilities.

With current treatment  methods,  therapy must always be restricted in the doses
that can be applied to the malignant  tissue  because of the adverse  effects on
the healthy tissues.  Thus  chemotherapies  must be limited at the first sign of
toxic side effects.  The same is the case with radiation therapy.  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 enable the operator to make
assessments during treatment whether the treatment is being effective.

The interventional version of the Fonar 360(TM) is still in the planning stages.
There is not a prototype. A separate FDA submission for the interventional Fonar
360(TM) has not been made as yet and might not be  necessary  in that it was not
required of other MRI  manufacturers in similar  situations.  We note that other
manufacturers  have  incorporated  the use of their  imaging  machine for use in
interventional procedures without separate FDA submissions.

In addition to the patient  comfort and new  applications,  such as MRI directed
interventions,  made possible by our scanners' open design, the Stand-Up(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 enables 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  Stand-Up(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  Stand-Up(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 Stand-Up(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  Stand-Up(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  Stand-Up(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
Stand-Up(TM)  MRI and Fonar 360(TM) scanners operate squarely in the optimum C/N
range.

The  Stand-Up(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  Stand-Up(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  2004,  sales of our  Stand-Up(TM)  MRI  scanners  accounted  for
approximately  59.6% of our total  revenues  and 87.7% of our medical  equipment
revenues,  as compared to 45.9% of total revenues and 81.1% of medical equipment
revenues  in  fiscal  2003 and  25.7% of total  revenues  and  68.7% of  medical
equipment  revenues in fiscal  2002.  This  dramatic  increase  shows the market
penetration  being achieved by the  Stand-Up(TM)  MRI scanner and our successful
reemphasis on new product development and scanner sales.

During fiscal 2003, less than 1% of both total revenues and of medical equipment
revenues were derived from the sale of a refurbished Beta(TM) scanner and during
fiscal 2002, 1% of total  revenues and 2.1% of medical  equipment  revenues were
derived from the sale of two refurbished Beta(TM) scanners.  During fiscal 2004,
no  medical  equipment  sales  revenues  were  derived  from  sales of  Beta(TM)
scanners.  The  Beta(TM) is an older model  scanner  which the Company  does not
manufacture  any longer.  Nevertheless,  the Company can refurbish and sell used
Beta(TM) scanners where there is a demand for it.

During  fiscal  2004 and  fiscal  2003,  sales  of our  Fonar  360(TM)  scanners
accounted for none of our revenues, although in the first quarter of fiscal 2005
we sold the first  Fonar  360(TM),  to a  hospital  in  England.  Our  principal
selling, marketing and advertising efforts have in the past two years focused on
the Stand-Up(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  Stand-Up(TM)  MRI is  successfully  penetrating  the
market  and our  objective  is to  achieve  profitability  as soon as  possible,
primarily  through  product  sales,  we  expect  to  continue  our  focus on the
Stand-Up(TM)  MRI  in the  immediate  future.  Further  in  the  future,  we are
optimistic  that our other  products  including  the Fonar  360(TM) 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  Stand-Up(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  hospitals  and private
scanning centers.

Fonar's  internal sales force is  approximately  15 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 Stand-Up(TM) MRI scanner.

In addition,  FONAR has expanded its website to include 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 2004 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.

In 2004,  FONAR  exhibited  for the  second  time at the  annual  meeting of the
American Academy of Orthopedic  Surgeons (AAOS).  FONAR has targeted  orthopedic
surgeons as an important  market for its  Stand-Up(TM)  MRI, and plans to attend
future AAOS meetings.

In addition,  in April,  2004 FONAR  exhibited at the  American  Association  of
Neurosurgeons (AANS) and plans to do so again in 2005 and future years.

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
Stand-Up(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.  In August, 2004, FONAR sold its first Fonar 360(TM)
scanner,  to a hospital  in  England.  Utilizing  a 6000 gauss (0.6 Tesla  field
strength)  iron core  electromagnet,  the  Stand-Up(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,  2004,  1.2% of the  Company's  revenues  were  generated by
foreign  sales,  as  compared  to 3.0%  and  5.0%  for  fiscal  2003  and  2002,
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  $2.2 million in fiscal 2002 and $2.5 million
in fiscal 2003 and $3.2 million in fiscal 2004.

We  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 upgrade  revenues of  approximately
$386,898 in fiscal 2002 and $205,893 in fiscal 2003.  We had no upgrade  revenue
in fiscal 2004.

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,  2004,  we  incurred  expenditures  of
$6,079,797,  $588,735 of which was capitalized,  on research and development, as
compared  to  $5,955,667,  $791,216  of which was  capitalized  and  $5,955,394,
$855,612 of which was  capitalized,  during the fiscal years ended June 30, 2003
and June 30, 2002, respectively.

Research and development activities have focused principally, on the development
and  enhancement  of the new  Stand-Up(TM)  and Fonar 360(TM) MRI scanners.  The
Stand-Up(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 Stand-Up(TM) MRI.

BACKLOG

Our backlog of unfilled orders at July 1, 2004 was approximately  $40.7 million,
as compared to $26.8  million at July 1, 2003. Of these  amounts,  approximately
$7.8 million and $4.9 million had been paid to FONAR as customer  advances as at
July 1, 2004 and July 1, 2003,  respectively.  Of the backlog amounts at July 1,
2004 and July 1, 2003,  $234,000  and $2.5  million,  respectively,  represented
orders from affiliates.  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 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. None of the recoveries with respect
to the enforcement of this patent were received by Dr. Damadian.

Historically,   the  patent  for  multiple  angle  oblique   imaging   generated
significant  revenues in connection  with the  enforcement and settlement of our
patent  litigations.  As a result  of these  litigations  and  settlements,  our
competitors  are now entitled to use this  technology as well.  This patent will
expire in 2006.

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 94 patents  issued and
approximately  55  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 94 issued patents extend to various times up to 2022.

We have entered into a cross-licensing  agreement,  utilizing other than FONAR's
MRI  technology,  with  another  entity to use prior art  developed  for nuclear
magnetic resonance technology and have entered into 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.  In
2001, the size of the MRI market in the United States was  approximately  $1.202
billion.  In  2002,  the  size  of the  MRI  market  in the  United  States  was
approximately $1.46 billion.  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.  FONAR's  current market
share of the United  States market for MRI scanners is  approaching  to 3.0%. In
the mid-field segment of the 2002 market in the United States,  Fonar had a 4.2%
market share,  based on the Frost and Sullivan data  contained in their U.S. MRI
Scanners and Coils Market publication.  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 principal  reason
for this market shift, in addition to patient  claustrophobia,  is the awareness
that the open magnet  designs permit access to the patient to perform 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 recently sold to a
hospital in Engalnd.  Fonar's  Stand-Up(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  Stand-Up(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.

While FONAR's  current  market share of the total  domestic MRI market is almost
3.0%,  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  Stand-Up(TM) and Fonar 360(TM) scanners operate
at 0.6  Tesla,  which  make  them  among the  highest  field  strength  open MRI
scanners.  Furthermore,  the  Stand-Up(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  Stand-Up(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
Good  Manufacturing  Practices  or GMPs,  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 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 June 25, 1992,
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 Stand-Up(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  Stand-Up(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 physicians' practices and other
medical providers,  in particular  diagnostic  imaging centers.  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  11  MRI  facilities  and  six  physical  therapy  and
rehabilitation practices. In April, 2003, HMCA sold its subsidiary A&A Services,
Inc.  which  managed four primary  care medical  practices.  For the 2004 fiscal
year, the revenues HMCA recognized from the MRI facilities were  $13,289,902 and
the revenues  recognized from the physical therapy and rehabilitation  practices
were $9,690,000. For the 2003 fiscal year, the revenues HMCA recognized from the
MRI facilities were  $13,497,837  and the revenues  recognized from the physical
therapy and rehabilitation  practices were $9,435,000.  The revenues  recognized
from the primary care medical  practices were $1,179,095  through April 9, 2003,
when this part of our business was sold.  These revenues have been  reclassified
as part of discontinued operations in the consolidated financial statements.

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  Stand-Up(TM)  MRI
scanners  at the most  promising  locations.  To  date,  we have  installed  new
Stand-Up(TM) MRI scanners at the MRI facilities we manage in Islandia, New York,
Staten Island, New York,  Bensonhurst,  New York and Boca Raton, Florida,  which
new site replaced our prior site in Deerfield  Beach,  Florida.  We also plan to
install  Stand-Up(TM)  MRI scanners at other MRI facilities we manage.  The next
locations  at which we plan to install  Stand-Up(TM)  MRI  scanners  are in East
Elmhurst, New York and Daytona, Florida.

HMCA's  longer  range plans  involve  opening new MRI  facilities  clustered  in
selected television and radio media areas in New York, Florida, Houston, Boston,
Los Angeles and  Chicago,  although at the present  time our efforts are focused
only in the New York and Florida  markets.  Marketing  efforts in targeted areas
include television, radio and billboard advertising.

In  addition,  HMCA  has  promoted  the  opening  of new  physical  therapy  and
rehabilitation offices by existing clients, expanding the number of such offices
from the initial three offices we managed in August,  1998 to the six offices we
currently  manage.  HMCA no longer  manages any primary  care offices and has no
present plans to do so. In April, 2003, HMCA sold A&A Services,  Inc., a company
which it had  acquired  in 1998.  This  subsidiary  managed  four  primary  care
offices.

PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES

HMCA's   services  to  the  facilities   and  practices  it  manages   encompass
substantially all of their business operations. The facilities and practices are
controlled, however, by the physician owners, not HMCA, and all medical services
are  performed  by the  physicians  and  other  medical  personnel  under  their
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.
Additional  physicians,  physical  therapists and technologists  have been added
where needed.

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,  flat fees are 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 $550 per MRI
scan.  The monthly  fees  charged to the  physical  therapy  and  rehabilitation
practices  range from  approximately  $90,000 to $285,000.  No MRI facilities or
physical  therapy  and  rehabilitation  facilities  are owned by HMCA.  Only one
chiropractic  practice  managed by HMCA,  providing HMCA with management fees of
approximately $22,500 in fiscal 2003 and $180,000 in fiscal 2002, was owned by a
seller in an acquisition.  HMCA discontinued  management of this practice in the
beginning of the second quarter of fiscal 2003.

The practices and the  facilities  enter into contracts with third party payors,
including  managed care companies.  With the exception of some capitated  health
plans in which the  medical  practices  previously  managed by HMCA up to April,
2003,  participated,  neither  HMCA's  clients nor HMCA  participate in any risk
sharing arrangements.  Capitated plans are those HMO programs where the provider
is paid a flat monthly fee per patient.  All of the fees from  capitated  health
plans were attributable to medical  professional  corporations  managed by A & A
Services,  Inc.,  representing 48%, and 46% of their revenues in fiscal 2003 and
fiscal 2002,  respectively.  Since divesting itself of the A&A Services, Inc. as
of April 8,  2003,  none of HMCA's  clients  nor HMCA have  participated  in any
capitated or other risk sharing arrangements.

HMCA MARKETING

HMCA's  marketing  strategy is to expand the business and improve the facilities
and  practices  which it manages.  HMCA will also seek to increase the number of
locations  of  those  facilities  and  practices  where  market  conditions  are
promising.  HMCA will seek to promote growth of its clients'  patient volume and
revenue through  installing new  Stand-Up(TM) MRI scanners at MRI facilities and
advertising in television, radio and other media.

HMCA's lack of capital  resources has prevented HMCA from  increasing the number
of  clients  it  manages  through  acquisitions  since it made  its most  recent
acquisition in August, 1998.

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  Stand-Up(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.

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  2004,  approximately  8.5% of the  revenues  of HMCA's  clients  were
attributable to Medicare and 1.0% were attributable to Medicaid. In fiscal 2003,
approximately  11.8% 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,  2004
approximately  57.9% of our  clients'  receipts  were from  patients  covered by
no-fault  insurance and  approximately  6.7% of our client's  receipts were from
patients covered by worker's  compensation  programs.  For the fiscal year ended
June 30,  2003,  approximately  57.7% of  HMCA's  clients'  receipts  were  from
patients  covered  by  no-fault  insurance  and  approximately  11.1% 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, 2004, we employed 476 persons on a full-time and part-time  basis.
Of such  employees,  31 were engaged in marketing and sales,  52 in research and
development,  92  in  production,  51  in  customer  support  services,  250  in
administration,  including 135 on site at facilities and offices managed by HMCA
and 74  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 $993,578,
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 the beginning of 2009.  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
$426,930.  The term of the lease extends through  September,  2009. In addition,
HMCA maintains  leased office premises for its clients at  approximately 22 site
locations having an aggregate  annual rental rate of approximately  $1.3 million
under leases having various terms.

ITEM 3. LEGAL PROCEEDINGS

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

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

On June 14, 2004, we held our annual meeting of stockholders. The matters before
the meeting were 1. the election of directors,  2. the  ratification  of certain
stock bonus  plans and 3. the  ratification  of the  selection  of auditors  for
fiscal 2004.  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 2004.  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 plans ratified by the stockholders were the Supplemental
2003 Stock Bonus Plan and the 2004 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        324,800,951              3,057,114
Claudette J.V. Chan        324,797,479              3,060,586
Robert J. Janoff           324,969,072              2,889,093
Charles N. O'Data          325,025,571              2,832,494
Robert Djerejian           324,901,727              2,956,338

(2) Ratification of Stock Bonus and Option Plans

   FOR         AGAINST        ABSTAIN     BROKER NON-VOTES
   ---         -------        -------     ----------------
 256,049,474   6,642,339      689,345       64,476,907

(3) Ratification of Auditors Marcum & Kliegman LLP

   FOR         AGAINST        ABSTAIN    BROKER NON-VOTES
   ---         -------        -------    ----------------
 326,045,921   1,413,213      398,932          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
                -----------------------------     ----    ----
                July     -  September    2002     1.99    0.99
                October  -  December     2002     1.30    0.96
                January  -  March        2003     1.12    0.80
                April    -  June         2003     1.45    0.81
                July     -  September    2003     2.10    1.19
                October  -  December     2003     1.60    1.10
                January  -  March        2004     1.59    1.15
                April    -  June         2004     1.52    1.13
                July     -  August       2004     1.30    1.00

On August 31, 2004, we had  approximately  4,671  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 4,031  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.

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.  We  anticipate  paying  one
additional  dividend on monies  received  from the  enforcement  of our patents.
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, 2004. 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. 

 

     STATEMENT OF OPERATIONS

                           As of and For the Periods Ended June 30,
                  2004             2003          2002            2001          2000
             ---------------  -------------  -------------  -------------  -------------
                                                           
Revenues(1)     $71,609,000    $52,892,000    $43,161,000    $40,274,000    $33,560,000

Cost of         $44,407,000    $32,477,000    $24,682,000    $25,959,000    $25,054,000
revenues(1)

Research &       $5,491,000     $5,164,000     $5,100,000     $5,866,000     $5,532,000
Development
Expenses

Net Loss        $(9,494,000)  $(15,201,000)  $(16,956,000)  $(14,538,000)  $(11,054,000)
from
continued
operations

Net Gain        $ ---            $ 194,000    $(5,926,000)     $(646,000)       $98,000
(Loss) from
discontinued
operations

Basic and            $(.10)         $ (.20)        $ (.27)       $  (.25)      $   (.20)
Diluted Net
Loss per
common share-
continuing
operations

Basic and            $---           $  ---         $ (.09)       $  (.01)      $    ---
Diluted Net
Gain (Loss)
per common
share-
discontinued
operations

Weighted          91,027,951     75,816,973     63,511,814     57,388,050    55,096,212
average
number of
shares
outstanding




                               BALANCE SHEET DATA
                                                           
Working          $22,593,000    $13,517,000    $14,107,000    $17,206,000   $24,857,000
capital(1)

Total            $77,201,000    $58,749,000    $73,129,000    $84,900,000   $84,599,000
assets

Long-            $ 6,702,000     $1,930,000    $ 9,624,000    $17,760,000   $15,443,000
term debt(1)
and
obligations
under
capital
leases

Stock-           $43,154,000    $32,379,000    $35,695,000    $41,830,000   $51,285,000
holder's
equity


(1)  Amounts as of and for the years  ended June 30,  2000 to June 30, 2003 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)  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 2004 and 2003,  respectively  received orders for 39 and
22 Stand-Up(TM)  MRI scanners.  The  Stand-Up(TM) MRI is the only MRI capable of
producing images in the weight bearing state.

At 0.6 Tesla field strength,  the Stand-Up(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 no longer engages in
the management of primary care medical practices.

All of HMCA's revenues for the fiscal year ended June 30, 2004 and 99% of HMCA's
revenues for the fiscal years ended June 30, 2003,  June 30, 2002,  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 $550 per MRI
scan. The fees are reviewed and if  appropriate,  adjusted on an annual basis by
mutual agreement.

The agreements with the physical rehabilitation  practices,  which were executed
in  1998,  provide  for a term of 20  years.  The fees are  fixed  monthly  fees
adjusted annually.  Historically,  adjustments have been on the basis of changes
in HMCA's costs, plus a percentage of costs.  Currently,  the monthly fees under
these   contracts  with  the  physical   rehabilitation   practices  range  from
approximately $90,000 to $285,000.  Prior to HMCA's diversiture of A&A Services,
Inc., which managed the medical practices,  the monthly fees under the contracts
with the medical practices were $110,000 during fiscal 2003.

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.  The  preparation  of these  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 recognize revenue from license agreements for our intellectual  property over
the shorter of the  contractual  life of the license or the  estimated  economic
life. For our current license agreement, we are recognizing revenue ratably over
5 years.

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, 2004, 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. During the
year ended June 30, 2002, we recorded an impairment  loss of $4,700,000  related
to the management contracts in our physician's  management services segment with
the primary care medical practices. In April, 2003, we sold A&A Services,  Inc.,
the subsidiary  which held those  contracts,  back to the original sellers for a
purchase price of $4.0 million.  In addition,  the buyers released HMCA from the
balance of its  indebtedness  remaining  due on the  original  purchase,  in the
amount of $913,495.  As  depreciated  assets  attributed to these  contracts was
$3,298,443,  we recognized a gain of $509,814 on the transaction.  These amounts
have been reflected as discontinued operations in the accompanying  consolidated
financial statements.

RESULTS OF OPERATIONS. FISCAL 2004 COMPARED TO FISCAL 2003

In fiscal 2004,  we  experienced a net loss of $9.5 million on revenues of $71.6
million, as compared to a net loss of $15.0 million on revenues of $52.9 million
for fiscal  2003.  This  represents  a decrease in the net loss of 36.7.% and an
increase  in  revenues  of 35.4%.  This was due in part to the fact  that  while
revenues  increased by 35.4%,  total costs and expenses increased by only 17.7%.
Our  consolidated  operating  loss decreased by 43.7% to $8.5 million for fiscal
2004 as compared to an operating loss of $15.1 million for fiscal 2003.

Discussion of Operating Results of Medical Equipment Segment
Fiscal 2004 Compared to Fiscal 2003
- ------------------------------------------------------------

Revenues  attributable to our medical  equipment  segment  increased by 62.3% to
$48.6  million in fiscal 2004 from $30.0  million in fiscal 2003,  reflecting an
increase in product  sales of 72.4%,  from $24.9 million in fiscal 2003 to $43.0
million in fiscal 2004 and an increase  in service  revenue of 29.4%,  from $2.5
million in fiscal  2003 to $3.2  million in fiscal  2004.  This  improvement  in
revenues  was  attributable  to our increase in sales of our  Stand-Up(TM)  MRI,
which 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.  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, 2004 and
June 30, 2003,  respectively,  we received orders for 39 and 22 Stand-Up(TM) MRI
scanners.

Confirming  our  expectation of increased  demand for our MRI scanners,  product
sales to unrelated parties increased by 113.3% in fiscal 2004 from $17.7 million
in fiscal 2003 to $37.7 million in fiscal 2004. Product sales to related parties
decreased,  however, by 26.9% in fiscal 2004 from $7.3 million in fiscal 2003 to
$5.3  million  in fiscal  2004.  We believe  that our  principal  challenges  in
achieving  greater  market  penetration  are  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  Stand-Up(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 continuing  increase in unrelated  party sales shows that we
are successfully meeting that challenge. Sales to related parties in fiscal 2004
were adversely  affected,  however,  by the bankruptcy  during the year of their
primary financing source, which had to be replaced. We anticipate that the trend
of increased  sales to unrelated  parties  relative to sales to related  parties
will continue to increase as we increase our penetration of the general market.

The operating loss for the medical  equipment  segment  improved by 22.1% from a
loss of $11.3  million in fiscal 2003 to a loss of $8.8  million in fiscal 2004.
This improvement is attributable to our continuing  increase in gross margins on
our scanner sales.

We recognized  revenues of $42.7 million from the sale of our  Stand-Up(TM)  MRI
scanners in fiscal 2004. In fiscal 2003, we recognized revenues of $24.3 million
from the sale of  Stand-Up(TM)  MRI scanners,  and $100,000 from the sale of one
refurbished, used, Beta(TM) scanner. We no longer manufacture Beta(TM) scanners.

Sales  of  MRI  scanners  to  affiliated  parties,  consisting  of  professional
corporations  and other entities in which Dr.  Damadian or members of his family
have  an  interest  represented  approximately  7.4%,  or $5.3  million,  of our
revenues in fiscal 2004, as compared to 13.8%, or $7.3 million,  of our revenues
in fiscal 2003.

License and royalty revenue  declined by 4.1% to  approximately  $2.4 million in
fiscal 2004 from approximately $2.6 million in fiscal 2003.

Gross profit margins on product sales improved  during fiscal 2004 from 35.7% in
fiscal  2003  to  38.1%  in  fiscal  2004.  The   improvement   was  principally
attributable  to the medical  equipment  segment  operating at a higher level of
capacity resulting from the increased sales volume.

Research and development expenses,  net of capitalized costs,  increased by 6.3%
to $5.5 million in fiscal 2004 as compared to $5.2  million in fiscal 2003.  Our
expenses  for fiscal 2004  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 2004 Compared to Fiscal 2003
--------------------------------------------------------------------------------

Revenues  attributable  to  the  Company's  physician  and  diagnostic  services
management segment, HMCA, increased by 0.2% to $23.0 million in fiscal 2004 from
$22.9 million in fiscal 2003. The reversal of the decline in revenues  reflected
anticipated increases in revenues provided by upgraded facilities offsetting the
closing of underperforming facilities. Presently, four MRI facilities managed by
HMCA have Stand-Up(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 $13.3 million or 57.9% of
related  revenues for the year ended June 30, 2003 to $13.8  million,  or 60% of
related revenue for the year ended June 30, 2004.

Operating  results  of this  segment  improved  from an  operating  loss of $3.8
million in fiscal 2003 to operating  income of $308,000 in fiscal  2004.  In the
fourth quarter of fiscal 2003,  HMCA  recognized an impairment loss of $795,237,
on certain  management  agreements  with a physical  rehabilitation  and therapy
facility which was closed in the beginning of the second quarter of fiscal 2003.
We attribute the  improvement  to HMCA's focus on upgrading  the more  promising
sites it manages such as the  introduction of  Stand-Up(TM)  MRI scanners at MRI
facilities.

Discussion of Consolidated Results of Operations
Fiscal 2004 Compared to Fiscal 2003
- ------------------------------------------------

We  recognized  interest  income of  $448,571 in 2004 as compared to $670,678 in
fiscal 2003,  representing  a decrease of 33.1%.  The decrease was  attributable
primarily to a decrease in interest on our investments in marketable  securities
and a decrease in interest income from related parties.

Interest  expense of $268,128  was  recognized  in fiscal 2004  decreasing  from
$626,450 in fiscal 2003 and  representing a decrease of 57.2%.  The decrease was
attributable primarily to the repayment of debt and capital lease obligations in
fiscal 2004.

Selling,  general and administrative expenses increased by 7.3% to $25.1 million
in fiscal  2004 from $23.4  million in fiscal  2003.  The  increase  in selling,
general and administrative  expenses was attributable primarily to the expansion
of Fonar's increased manufacturing,  advertising,  marketing and sales activity.
Commencing in fiscal 2002, we engaged the services of an advertising  agency and
introduced television and radio advertising.

The decrease in compensatory  element of stock issuances from approximately $4.8
million in fiscal 2003 to $4.1 million in fiscal 2004  reflected  the  continued
but reduced use of Fonar's  stock bonus plan to pay certain  highly  compensated
employees and others in stock rather than in cash.

The lower  provision  for bad debt of  $331,000  in fiscal  2004 as  compared to
$702,000 in fiscal  2003,  reflected a decrease in reserves  and  write-offs  of
certain receivables.

The amortization expense of $634,000 in fiscal 2004 and $696,000 in fiscal 2003,
reflects  the  amortization  of  management  agreements  attributable  to HMCA's
acquisitions.

We are  enthusiastic  about the future of our Stand-Up(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 are beginning to successfully  penetrate the market, as
reflected  in the dramatic  increase in product  sales from  approximately  $3.4
million in fiscal  2000 to $6.1  million  in fiscal  2001,  to $11.6  million in
fiscal 2002, to $24.9  million in fiscal 2003 and $43.0 in fiscal 2004.  Most of
the revenues on the Stand-Up(TM) MRI scanners sold in the last quarter of fiscal
2004,  were not  recognized  as of June 30, 2004,  and as of June 30, 2004,  our
balance sheet  reflects $7.8 million in customer  advances,  as compared to $4.9
million in  customer  advances as at June 30,  2003.  In addition to our success
with our Stand-Up(TM)  MRI, we sold our first Fonar 360(TM) in the first quarter
of fiscal 2005. In addition to increased  product sales,  the service and repair
fees have steadily 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 and $3.2 million in fiscal
2004.

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 2004 we continued
our  investment  in the  development  of our new  MRI  scanners,  together  with
software  and  upgrades,  with an  investment  of  $6,079,797  in  research  and
development,  $588,735 of which was  capitalized,  as  compared  to  $5,955,667,
$791,216 of which was capitalized,  in fiscal 2003. The research and development
expenditures were  approximately  12.5% of revenues  attributable to our medical
equipment  segment,  and 8.5% of total  revenues,  in 2004 and 19.9% of  medical
equipment  segment  revenues,  and 11.3% of total revenues in fiscal 2003.  This
represented a 2.1% increase in research and  development  expenditures in fiscal
2004 as compared to fiscal 2003 and our significantly  higher total revenues and
medical  equipment  revenues  which have resulted  from our greater  emphasis on
marketing and selling.

In summary,  Fonar continued the trend of steadily increasing MRI scanner sales,
most  dramatically  the increase in  Stand-Up(TM)  MRI scanner sales from fiscal
2001 through fiscal 2004. We anticipate  that the increase in scanner sales will
continue due to the unique  capability of the  Stand-Up(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
also increased over the past five fiscal years.

The  physician  and  diagnostic  services  management  segment,  HMCA,  revenues
reversed  their  decline in the same period,  from $28.5 in fiscal 2001 to $27.0
million in fiscal 2002 to $22.9 in fiscal 2003 and $23.0 million in fiscal 2004.

We have reversed the decline in HMCA revenues by closing unprofitable facilities
and  continuing  our program of replacing the MRI scanners at the MRI facilities
we manage with  Stand-Up(TM)  MRI  scanners.  Stand-Up(TM)  MRI scanners are now
installed in the sites we manage in Islandia, New York,  Bensonhurst,  New York,
Staten Island,  New York and Boca Raton,  Florida.  The next managed  facilities
which we plan to install  Stand-UP(TM)  MRI scanners are in East  Elmhurst,  New
York,  and Daytona,  Florida.  Our longer range plans  involve  managing new MRI
facilities  clustered  in  selected  television  and radio  media areas in major
metropolitan areas throughout the country.

Expenditures  for  advertising  and  marketing  are likely to  increase,  as the
Company continues its efforts to promote sales.

RESULTS OF OPERATIONS. FISCAL 2003 COMPARED TO FISCAL 2002

In fiscal 2003,  we  experienced a net loss of $15.0 million and a net loss from
continuing  operations of $15.2 million on revenues of $52.9 million as compared
to a net loss of $22.9  million  and a net loss from  continuing  operations  of
$17.0 million on revenues of $43.2 million for fiscal 2002. This  represented an
decrease in the net loss of 34.4%,  a decrease  in the net loss from  continuing
operations of 10.3% and an increase in revenues of 22.5%.

Discussion of Operating Results of Medical Equipment Segment
Fiscal 2003 Compared to Fiscal 2002
- ------------------------------------------------------------

Revenues  attributable to our medical  equipment  segment  increased by 85.2% to
$30.0  million in fiscal 2003 from $16.2  million in fiscal 2002,  reflecting an
increase in product  sales of 115%,  from $11.6  million in fiscal 2002 to $24.9
million in fiscal  2003 and an  increase  in service  revenue of 13.6% from $2.2
million  in fiscal  2002 to $2.5  million  in fiscal  2003.  We  attributed  the
increase in scanner sales to the growing market  penetration of the Stand-Up(TM)
MRI.  Product sales to unrelated  parties  increased by 228% in fiscal 2003 from
$5.4 million in fiscal 2002 to $17.7 million in fiscal 2003.

Product sales to related  parties,  consisting of professional  corporations and
other entities in which Dr.  Damadian or members of his family have an interest,
increased  by  approximately  17.7%,  from $6.2  million in fiscal  2002 to $7.3
million  in  fiscal  2003.   Such  related  party   scanner  sales   represented
approximately  13.8% of our  revenues is fiscal 2003 as compared to 13.9% of our
revenues in fiscal 2002.

Licensee and royalty revenue increased by 6.1% to approximately  $2.6 million in
fiscal 2003 from approximately $2.4 million in fiscal 2002.

Gross profit margins on product sales improved  significantly during fiscal 2003
from  28% in  fiscal  2002  to  35.6%  in  fiscal  2003.  Such  improvement  was
principally  attributable to the medical equipment segment operating at a higher
level of capacity resulting from increased sales volume.

Results of operations for the medical  equipment segment improved by 26% from an
operating  loss of $15.4  million in fiscal 2002 to an  operating  loss of $11.3
million in fiscal 2003.  This  improvement  was  attributable to our increase in
gross margins on our scanner sales.

We  recognized  revenues  of $24.3  million  from the sale of  Stand-Up(TM)  MRI
scanners  and of  $100,000  from the  sale of one  refurbished,  used,  Beta(TM)
scanner in fiscal 2003. In fiscal 2002 we  recognized  revenues of $11.1 million
from the sale of  Stand-Up(TM)  MRI scanners  and $361,000  from the sale of two
refurbished, used, Beta(TM) scanners.

Research and development expenses,  net of capitalized costs, increased by 2% to
$5.2  million in fiscal  2003 as compared to $5.1  million in fiscal  2001.  Our
expenses  for fiscal 2003  represented  continued  research and  development  of
FONAR's scanners,  its new hardware and software  product,  Sympulse(TM) and new
surface coils to be used within the Stand-Up(TM) MRI scanner.

Discussion of Operating Results of Physician Management Services Segment.
Fiscal 2003 Compared to Fiscal 2002
- -------------------------------------------------------------------------

Revenues  attributable  to our  physician  and  diagnostic  services  management
segment  (HMCA)  decreased  by 15.1% to $22.9  million in fiscal 2003 from $27.0
million in fiscal 2002. The decrease in revenues reflected a decline in MRI scan
volume prior to upgrading  older scanners and the closing of certain  facilities
managed by HMCA.  The $1.2 million and $1.5 million in revenues from the medical
primary  care  practices  in  fiscal  2003 and 2002 are not  included  in HMCA's
revenues; this part of its business was sold and results of operations are shown
separately under discontinued operations.

Costs of revenues for our physician and diagnostic  services  management segment
increased from $13.7 million,  or 50.7%, of related  revenues for the year ended
June 30, 2002 to $13.3 million, or 57.9%, of related revenues for the year ended
June 30, 2002.

Operating results of this segment declined from operating income of $1.1 million
in fiscal  2002 to an  operating  loss of $3.8 in  fiscal  2003.  In the  fourth
quarter of fiscal 2003,  HMCA  recognized  an  impairment  loss of $795,237,  on
certain  management  agreements  with  a  physical  rehabilitation  and  therapy
facility which was closed in the beginning of the second quarter of fiscal 2003.
HMCA believes that focusing its efforts on more profitable facilities, including
the   introduction   of   Stand-Up(TM)   MRI  scanners,   will  improve   HMCA's
profitability.

Discontinued Operations - Fiscal 2003 Compared to Fiscal 2002
--------------------------------------------------------------

The net gain from  discontinued  operations  for fiscal 2003 was $0.2 million as
compared to a loss from discontinued  operations of $5.9 million in fiscal 2002.
The net gain from discontinued operations in fiscal 2003 consists of a loss from
discontinued  operations  of $0.3  million  offset  by a gain  from  the sale of
discontinued  operations of $0.5 million. The loss from discontinued  operations
for fiscal 2002 was attributable primarily to an impairment loss of $4.7 million
due to the reduction of the value of the  management  contracts with the medical
primary  care  practices  reflected  on our  balance  sheet  because of past and
anticipated   performance.   This  portion  of  HMCA's  business  was  sold  and
accordingly  all  results  for the  current  and prior  fiscal  years  have been
reclassified as discontinued operations. In addition,  included in the loss from
discontinued operations in fiscal 2002, we recorded a debt conversion expense of
$545,000  in  connection  with  a  premium  associated  with  the  repayment  of
approximately  $2.5 million in long-term  debt incurred in  connection  with the
initial acquisition of A&A by HMCA.

The gain on the sale of discontinued operations in fiscal 2003 was $509,814, and
represented the excess of the consideration  received over the depreciated value
of the contracts and other assets of the sold subsidiary.

Discussion of Consolidated Results of Operations.
Fiscal 2003 Compared to Fiscal 2002
- -------------------------------------------------

We recognized interest income of $670,678 in fiscal 2003 as compared to $973,862
in fiscal 2002,  representing a decrease of 31.1%. The decrease was attributable
primarily to a decrease in interest on the Company's  investments  in marketable
securities.

Interest  expense of $626,450  was  recognized  in fiscal 2003  decreasing  from
$691,126 in fiscal 2002 and  representing  a decrease of 9.4%.  The decrease was
attributable  primarily to the  repayment of  long-term  debt and capital  lease
obligations in fiscal 2002.

In  fiscal  2002,  we  recorded  non-cash  financing  costs of $2.4  million  in
connection with the payment of our  convertible  debentures to The Tailwind Fund
in common stock and the issuance of related warrants.  This expense  represented
the discount  from the market price on the stock issued to The Tailwind Fund and
the value of the purchase warrants granted to the investor.

Selling,  general and administrative expenses increased by 9.3% to $23.4 million
in fiscal  2003 from $21.4  million in fiscal  2002.  The  increase  in selling,
general and administrative  expenses was attributable primarily to the expansion
of Fonar's increased manufacturing,  advertising,  marketing and sales activity.
Commencing in fiscal 2002, we engaged the services of an advertising  agency and
introduced television and radio advertising.

The increase in compensatory  element of stock issuances from approximately $4.7
million in fiscal 2002 to $4.8 million in fiscal 2003  reflected  the  continued
use of Fonar's stock bonus plan to pay certain highly compensated  employees and
others in stock rather than in cash.

The lower  provision  for bad debt of  $702,000  in fiscal  2003 as  compared to
$972,000 in fiscal  2002,  reflected a decrease in reserves  and  write-offs  of
certain indebtedness. This represented primarily a reduction in the reserves for
fees due to HMCA from  $729,000 in fiscal 2002 to $335,000 in fiscal 2003 offset
by an increase  in Fonar's bad debt from  $243,000 in fiscal 2002 to $367,000 in
fiscal 2003.

The amortization  expense in fiscal 2002 and 2001 of  approximately  $696,000 in
each year reflects the  amortization  of management  agreements  attributable to
HMCA's acquisitions. The loss on impairment of management agreements of $795,000
was attributable to the closure of the primary care practices  managed by HMCA's
subsidiary,  Central Health Care Services, Inc. because of a significant decline
in overall patient volume.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and marketable  securities  increased by 35.7% from $15.2
million at June 30, 2003 to $20.6 million at June 30, 2004.

Marketable  securities  approximated  $11.1  million  as of June  30,  2004,  as
compared to $5.8 million as of June 30, 2003. At June 30, 2004, we increased our
investments in U.S.  Government  obligations from  approximately $3.9 million at
June 30, 2003 to  approximately  $5.2  million,  increased  our  investments  in
corporate and government  agency bonds from  approximately  $1.9 million at June
30,  2003 to  approximately  $3.4  million  and  increased  our  investments  in
certificates of deposits, notes and equivalents from $0 at June 30, 2003 to $2.5
million.

Cash provided by operating activities for fiscal 2004 approximated $6.5 million.
Cash provided by operating  activities  was  attributable  substantially  to the
retention  of cash  payments  made by  customers  through the  issuance of stock
valued at $12.0 million to pay costs and expenses,  the issuance of stock valued
at $4.1 million,  the  compensatory  element of stock issuance,  the increase of
accounts  payable of $1.7 million,  the increase of various,  or "other" current
liabilities  of $2.6  million  and the  increase  in  customer  advances of $2.9
million.

Cash used in investing activities for fiscal 2004 approximated $8.4 million. The
principal  uses of cash from investing  activities  were purchases of marketable
securities of $5.4 million, purchases of property and equipment of $1.9 million,
costs of capitalized  software  development of $630,000 and costs of patents and
copyrights of $573,000.

Cash provided by financing activities for fiscal 2004 approximated $2.0 million.
The  principal  sources of cash in financing  activities  were proceeds from the
exercise of stock options and warrants of $3.9 million,  offset by the repayment
of borrowings and capital lease obligations of $1.0 and distributions to holders
of minority interests of $916,000.  Proceeds from long-term debt of $5.5 million
were offset by an increase of restricted cash of $5.5 million.

Total  liabilities  increased by 29.4% during  fiscal 2004,  from  approximately
$26.0 million at June 30, 2003 to approximately  $33.7 million at June 30, 2004.
The increase in total liabilities reflected principally an increase of 485.4% in
the current portion of long-term debt and capital  leases,  from $1.0 million at
June 30, 2003 to $6.0 million at June 30, 2004, an increase in accounts  payable
of 44.9% from $3.7 million at June 30, 2003 to $5.4 million at June 30, 2004 and
an increase in customer  advances of 58.1% from $4.9 million at June 30, 2003 to
$7.8 million at June 30,  2004.  The increase was offset in part by other items,
principally a decrease in billings in excess of costs and estimated  earnings of
38.2% from $4.8  million at June 30, 2003 to $2.9 million at June 30, 2004 and a
decrease in deferred  revenue from a license fee,  from $2.3 million at June 30,
2003 to $0 at June 30, 2004.

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        Years       years      years       years
- ----------         -----------  ----------  ----------  ----------  ----------
Long-term debt     $ 6,245,388  $5,742,570  $  461,078  $   41,740  $     -

Capital lease
Obligation             457,105     240,421     127,355      86,435       2,894

Employment Contract
Obligations          2,083,334     500,000   1,500,000      83,334        -

Operating
  leases            12,899,484   2,685,922   5,041,273   3,651,311   1,520,978
                   -----------  ----------  ----------  ----------  ----------
Total cash
Obligations        $21,685,311  $9,168,913  $7,129,706  $3,862,820  $1,523,872
                   ===========  ==========  ==========  ==========  ==========

As at June 30, 2004,  our  obligations  included  approximately  $1.7 million in
various state sales taxes.

Our working capital surplus as of June 30, 2004 approximates  $22.6 million,  as
compared to a working capital surplus of $13.5 million as of June 30, 2003.

In order to conserve its 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  2004,  the  compensatory  element  of stock
issuances  was $4.1  million  as  compared  to $4.8  million  for  fiscal  2003.
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 2004 approximated $1.9 million and substantially
consisted  of office and research and  development  equipment,  in the amount of
$1.0 million,  capitalized  software costs of $630,000,  and capitalized  patent
costs of $573,000.

Fonar has not committed to making capital  expenditures  in the 2005 fiscal year
other than its intention to continue  research and  development  expenditures at
current levels. In addition,  HMCA plans to incur  expenditures of approximately
$250,000  for  leasehold  improvement  costs for a new managed  MRI  facility in
Daytona, Florida, together with expenditures of $495,000 and $120,000 for CT and
x-ray equipment,  respectively, at the Daytona site, $375,000 in connection with
a new managed MRI facility in Elmhurst, New York and $220,000 in connection with
a managed physical rehabilitation and treatment facility in Elmhurst, New York.

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 and $2.5 million for the year ended June 30, 2003 and $3.2 million
for the year ended June 30, 2004.

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, 2004.  Below is a tabular
presentation of the maturity profile of the fixed rate instruments held by us at
June 30, 2004.


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

            Date        Investments in Fixed Rate     Weighted Average
                        Instruments                   Interest Rate

            6/30/05            7,032,322                  1.47%
            6/30/06            1,100,000                  3.43%
            6/30/07            1,100,000                  3.19%
            6/30/08              650,000                  3.38%
            6/30/09            1,048,500                  3.33%
            6/30/11              100,000                  3.56%
            6/30/14              100,000                  4.16%

Total:                        11,130,822

Fair Value
at 6/30/04                    11,088,437

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 AND SUPPLEMENTARY DATA

                       FONAR CORPORATION AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       Page No.
                                                                       --------

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 CONSOLIDATED BALANCE SHEETS
   At June 30, 2004 and 2003

 CONSOLIDATED  STATEMENTS OF OPERATIONS For the Three Years Ended June 30, 2004,
   2003 and 2002

 CONSOLIDATED  STATEMENTS OF STOCKHOLDERS' EQUITY For the Three Years Ended June
   30, 2004, 2003 and 2002

 CONSOLIDATED  STATEMENTS OF CASH FLOWS For the Three Years Ended June 30, 2004,
   2003 and 2002

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

To the Audit Committee of the Board of Directors
FONAR Corporation and Subsidiaries


We  have  audited  the  accompanying   consolidated   balance  sheets  of  FONAR
Corporation and  Subsidiaries  (the "Company") as of June 30, 2004 and 2003, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three  years in the  period  ended  June 30,  2004.  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  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, 2004 and 2003, and the  consolidated
results of its  operations and its cash flows for each of the three years in the
period  ended  June  30,  2004,  in  conformity  with  U.S.  generally  accepted
accounting principles.

During each of the three years in the period ended June 30, 2004, a  significant
portion of the Company's revenues was from related parties.


                                                       /s/ Marcum & Kliegman LLP


New York, New York
September 14, 2004



                       FONAR CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
                                     ------
                                                              June 30,
                                                      --------------------------
                                                          2004          2003
                                                      ------------  ------------

Current Assets:
  Cash and cash equivalents                           $  9,473,989  $  9,334,378
  Marketable securities                                 11,120,141     5,837,017
  Restricted cash                                        5,500,000       -
  Accounts receivable - net of allowances for
    doubtful accounts of $467,990 and $442,437
    at June 30, 2004 and 2003, respectively              1,006,287       716,435
  Accounts receivable - related parties - net of
    allowances for doubtful accounts of $655,563
    and $694,655 at June 30, 2004 and 2003,
    respectively                                           296,909       114,004
  Management fee receivable - related medical
    practices - net of allowances for doubtful
    accounts of $1,874,390 and $1,296,390 at
    June 30, 2004 and 2003, respectively                14,314,657    12,261,288
  Costs and estimated earnings in excess of
    billings on uncompleted contracts                    1,711,306       359,873
  Costs and estimated earnings in excess of
    on uncompleted contracts - related party               111,941       -
  Inventories                                            9,585,346     5,057,261
  Investment in sales-type leases                          153,413       135,456
  Current portion of advances and notes to related
    medical practices                                      240,127       464,181
  Prepaid expenses and other current assets              1,571,550     1,285,861
  Investment in sales-type lease - related party              -           14,285
  Note receivable from buyers of A&A Services                 -          150,000
                                                      ------------  ------------
      Total Current Assets                              55,085,666    35,730,039

Property and Equipment - Net                             8,210,621     8,625,434

Advances and Notes to Related  Medical  Practices Net of allowances for doubtful
  accounts of $364,791 and $446,035 at June 30, 2004 and
  2003, respectively                                       480,707       802,568

Investment in Sales-Type Lease                             452,778       606,191

Management Agreements - Net                              8,730,273     9,363,850

Other Intangible Assets - Net                            3,957,687     3,375,187

Other Assets                                               283,114       245,392
                                                      ------------  ------------
      Total Assets                                    $ 77,200,846  $ 58,748,661
                                                      ============  ============

See accompanying notes to consolidated financial statements.

                       FONAR CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS



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

                                                              June 30,
                                                      --------------------------
                                                          2004          2003
                                                      ------------  ------------
Current Liabilities:
  Current portion of long-term debt and capital
    leases                                            $  5,982,991  $  1,021,952
  Accounts payable                                       5,368,461     3,703,689
  Other current liabilities                             10,004,799     7,552,223
  Unearned revenue on service contracts - related
    parties                                                373,333       240,139
  Customer advances                                      7,800,305     4,305,918
  Customer advances - related parties                      -             626,847
  Income taxes payable                                      25,831        10,401
  Billings in excess of costs and estimated
    earnings on uncompleted contracts                    2,936,905     4,390,012
  Billings in excess of costs and estimated
    earnings on uncompleted contracts - related
    party                                                  -             361,427
                                                      ------------  ------------
      Total Current Liabilities                         32,492,625    22,212,608
                                                      ------------  ------------
Long-Term Liabilities:
  Due to related medical practices                         154,357       262,335
  Long-term debt and capital leases, less
    current maturities                                     719,502       907,624
  Deferred revenue - license fee, less current
    portion                                                   -        2,340,000
  Other liabilities                                        298,916       301,684
                                                      ------------  ------------
      Total Long-Term Liabilities                        1,172,775     3,811,643
                                                      ------------  ------------
      Total Liabilities                                 33,665,400    26,024,251
                                                      ------------  ------------
Minority Interest                                          381,022       345,118
                                                      ------------  ------------

Commitments, Contingencies and Other Matters

See accompanying notes to consolidated financial statements.



                       FONAR CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS


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

                                                              June 30,
                                                     --------------------------
                                                         2004          2003
                                                     ------------  ------------

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, 2004 and 2003                        $        784  $        784
  Preferred stock - $.001 par value;
    authorized - 10,000,000 shares; issued
    and outstanding - none                                   -             -
  Common stock - $.0001 par value; authorized -
    110,000,000  shares  at June 30,  2004 and  2003;  issued -  98,704,937  and
    82,452,958  shares at June 30, 2004 and 2003,  respectively;  outstanding  -
    98,413,873 and 82,161,894
    shares at June 30, 2004 and 2003, respectively          9,840         8,246
  Class B common stock (10 votes per share) -
    $.0001 par value; authorized - 4,000,000
    shares; issued and outstanding - 4,153 shares
    at June 30, 2004 and 2003                             -             -
  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, 2004 and 2003                          956           956
  Paid-in capital in excess of par value              152,090,431   131,519,579
  Accumulated other comprehensive (loss) income           (45,871)       68,672
  Accumulated deficit                                (107,383,692)  (97,889,309)
  Notes receivable from employee stockholders            (842,634)     (654,246)
  Treasury stock, at cost - 291,064 shares
    of common stock at June 30, 2004 and 2003            (675,390)     (675,390)
                                                     ------------  ------------
      Total Stockholders' Equity                       43,154,424    32,379,292
                                                     ------------  ------------
      Total Liabilities and Stockholders' Equity     $ 77,200,846  $ 58,748,661
                                                     ============  ============

See accompanying notes to consolidated financial statements.


                       FONAR CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                               For the Years Ended June 30,
                                        ---------------------------------------
                                           2004          2003          2002
Revenues                                -----------  ------------  ------------
  Product sales - net                   $37,658,710   $17,652,799  $  5,364,809
  Product sales - related parties - net   5,315,837     7,276,209     6,229,195
  Service and repair fees - net           2,729,352     2,063,999     1,901,954
  Service and repair fees - related
    parties - net                           480,556       415,691       254,173
  Management and other fees - related
    medical practices - net              22,979,902    22,932,837    27,007,974
  License fees and royalties              2,445,000     2,550,000     2,403,000
                                        -----------  ------------  ------------
      Total Revenues - Net               71,609,357    52,891,535    43,161,105
                                        -----------  ------------  ------------
Costs and Expenses
  Costs related to product sales         23,160,484    11,681,213     3,815,081
  Costs related to product sales -
    related parties                       3,447,944     4,351,860     4,523,940
  Costs related to service and repair     3,323,862     2,539,563     2,338,361
  Costs related to service and repair
    fees - related parties                  688,606       627,661       312,493
  Costs related to management and other
    fees - related medical practices     13,786,039    13,277,016    13,691,973
  Research and development                5,491,062     5,164,451     5,099,782
  Selling, general and administrative    25,091,363    23,361,212    21,379,598
  Compensatory element of stock
    issuances for selling, general and
    administrative expenses               4,125,717     4,842,748     4,712,163
  Provision for bad debts                   330,997       701,534       972,236
  Loss on impairment of management
    agreement                                  -          795,237       -
  Amortization of management agreements     633,577       696,285       696,285
                                        -----------  ------------  ------------
      Total Costs and Expenses           80,079,651    68,038,780    57,541,912
                                        -----------  ------------  ------------
      Loss from Operations               (8,470,294)  (15,147,245)  (14,380,807)

Other Income (Expenses)
Financing Costs Due to the change in
  term of Warrants                         (238,950)         -       (2,368,541)
Interest Expense                           (263,803)     (580,748)     (691,126)
Interest Expense - Related Parties           (4,325)      (45,702)      -
Investment Income                           403,398       470,271       824,858
Interest Income - Related Parties            45,173       200,407       149,004
Other Income (Expense)                       16,247       (25,499)      (69,133)
Minority Interests in Income of
  Partnerships                             (951,940)     (776,222)     (392,842)
                                        -----------  ------------  ------------
      Loss Before (Provision for)
        Benefit from Income Taxes        (9,464,494)  (15,904,738)  (16,928,587)

(Provision for) Benefit from Income
  Taxes                                     (29,889)      703,871       (27,039)
                                        -----------  ------------  ------------
      Net Loss from Continuing
        Operations                       (9,494,383) $(15,200,867) $(16,955,626)
                                        -----------  ------------  ------------

See accompanying notes to consolidated financial statements.


                       FONAR CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS


                                              For the Years Ended June 30,
                                        ---------------------------------------
                                           2004          2003          2002
                                        -----------  ------------  ------------

Discontinued Operations:
  Loss from discontinued operations       $    -     $   (315,363) $ (5,926,581)
  Gain on sale of discontinued
  operations                                   -          509,814          -
                                        -----------  ------------  ------------
      Net Gain (Loss)from Discontinued
        Operations                             -          194,451    (5,926,581)
                                        -----------  ------------  ------------
      Net Loss                          $(9,494,383) $(15,006,416) $(22,882,207)
                                        ===========  ============  ============
Basic and Diluted Net Loss Per Share -
  Continuing Operations                      $(0.10)       $(0.20)       $(0.27)
Basic and Diluted Net Loss Per share -
  Discontinued Operations                       -             -           (0.09)
                                             ------        ------        ======
Basic and Diluted Net Loss Per Share         $(0.10)       $(0.20)       $(0.36)
                                             ======        ======        ======
Weighted Average Number of Shares
  Outstanding                            91,027,951    75,816,973    63,511,814
                                        ===========  ============  ============

See accompanying notes to consolidated financial statements.


                       FONAR CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                        FOR THE YEAR ENDED JUNE 30, 2004

                                               Common Stock           Class C
                                        --------------------------    Common
                                           Shares        Amount       Stock
                                        ------------  ------------  ------------
Balance - June 30, 2003                   82,452,958    $    8,246    $      956

Net loss                                        -             -             -
Other comprehensive (loss) income, 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                   98,413,873    $    9,840    $      956
                                        ============  ============  ============

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       Paid-in
                                         Non-Voting    Capital in
                                         Preferred     Excess of      Treasury
                                           Stock       Par Value       Stock
                                        ------------  ------------  ------------
Balance - June 30, 2003                  $       784  $131,519,579  $  (675,390)

Net loss                                        -             -            -
Other comprehensive (loss) income, 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                  $       784  $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      Accumulated
                                       Receivable      Other
                                         From       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) income,
   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)
                                      ============  ============  =============

See accompanying notes to consolidated financial statements.


                       FONAR CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                        FOR THE YEAR ENDED JUNE 30, 2004


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

Balance - June 30, 2003                            $ 32,379,292    $    -

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

Other comprehensive income, 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 STATEMENT OF STOCKHOLDERS' EQUITY
                        FOR THE YEAR ENDED JUNE 30, 2003


                                                                     Class B
                                                                     Common
                                                Common Stock         Stock      Class C
                                          ----------------------    --------    Common
                                            Shares       Amount      Shares     Stock
                                          ----------   ---------    --------    -------
                                                                   
Balance - June 30, 2002                   71,582,243   $   7,158       4,211    $   956

Net loss                                        -            -          -          -

Other comprehensive income, net of tax:
    Unrealized losses on securities
      arising during the year, net of tax       -            -          -          -

Exercise of stock options                     27,571           3        -          -
Exercise of callable warrants              1,000,000         100        -          -
Stock issued to employees under stock
  bonus plans                              2,400,117         240        -          -
Issuance of stock for goods and services   5,433,077         543        -          -
Issuance of stock for consulting services    772,042          78        -          -
Issuance of stock for options held by
  related party                            1,125,000         113        -          -
Issuance of stock for note payable            15,000           1        -          -
Issuance of stock for minority interest       97,850          10        -          -
Net reduction in notes receivable
  from stockholders                            -           -            -          -
Conversion of Class B common stock to
  common stock                                    58       -             (58)      -
                                          ----------   ---------    --------    -------
BALANCE - JUNE 30, 2003                   82,452,958   $   8,246       4,153   $    956
                                          ==========   =========    ========    =======

See accompanying notes to consolidated financial statements.

                       FONAR CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                        FOR THE YEAR ENDED JUNE 30, 2003

                                            Class A      Paid-in
                                           Non-Voting   Capital in
                                           Preferred     Excess of     Treasury
                                             Stock       Par Value      Stock
                                           ----------  ------------  ----------

Balance - June 30, 2002                    $     784   $120,156,196  $ (675,390)

Net loss                                        -           -             -

Other comprehensive income, net of tax:
    Unrealized losses on securities
      arising during the year, net of tax       -           -             -

Exercise of stock options                       -            31,200       -
Exercise of callable warrants                   -         1,072,972       -
Stock issued to employees under stock
  bonus plans                                   -         2,653,942       -
Issuance of stock for goods and services        -         5,473,406       -
Issuance of stock for consulting services       -           784,806       -
Issuance of stock for options held by
  related party                                 -         1,226,138       -
Issuance of stock for note payable              -            21,749       -
Issuance of stock for minority interest         -            99,170       -
Net reduction in notes receivable
  from stockholders                             -           -             -
Conversion of Class B common stock to                                     -
  common stock                                  -           -             -
                                           ----------  ------------  ----------
BALANCE - JUNE 30, 2003                    $     784   $131,519,579  $ (675,390)
                                           ==========  ============  ==========

See accompanying notes to consolidated financial statements.


                       FONAR CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                        FOR THE YEAR ENDED JUNE 30, 2003

                                            Notes     Accumulated
                                          Receivable    Other
                                            From     Comprehensive  Accumulated
                                         Stockholders     Income        Deficit
                                         ------------ ------------ ------------

Balance - June 30, 2002                    $(997,132)  $   85,569  $(82,882,893)

Net loss                                        -            -      (15,006,416)

Other comprehensive income, net of tax:
    Unrealized losses on securities
      arising during the year, net of tax       -         (16,897)        -

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       -            -            -
Issuance of stock for options held by
  related party                                 -            -            -
Issuance of stock for note payable              -            -            -
Issuance of stock for minority interest         -            -            -
Net reduction in notes receivable
  from stockholders                          342,886         -            -
Conversion of Class B common stock to
  common stock                                  -            -            -
                                         -----------  -----------  ------------
BALANCE - JUNE 30, 2003                  $  (654,246) $    68,672  $(97,889,309)
                                         ===========  ===========  ============

See accompanying notes to consolidated financial statements.


                       FONAR CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                        FOR THE YEAR ENDED JUNE 30, 2003

                                                                   Comprehensive
                                                   Total           Income (Loss)
                                               ------------        -------------
Balance - June 30, 2002                     $ 35,695,248        $    -

Net loss                                     (15,006,416)           (15,006,416)

Other comprehensive income, net of tax:
    Unrealized losses on securities
      arising during the year, net of tax        (16,897)               (16,897)

Exercise of stock options                         31,203                   -
Exercise of callable warrants                  1,073,072                   -
Stock issued to employees under stock
  bonus plans                                  2,654,182                   -
Issuance of stock for goods and services       5,473,949                   -
Issuance of stock for consulting services        784,884                   -
Issuance of stock for options held by
  related party                                1,226,251                   -
Issuance of stock for note payable                21,750                   -
Issuance of stock for minority interest           99,180                   -
Net reduction in notes receivable
  from stockholders                              342,886                   -
Conversion of Class B common stock to
  common stock                                   -                         -
                                            ------------           ------------
BALANCE - JUNE 30, 2003                     $ 32,379,292           $(15,023,313)
                                            ============           ============


See accompanying notes to consolidated financial statements.


                       FONAR CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                        FOR THE YEAR ENDED JUNE 30, 2002


                                               Common Stock            Class C
                                        --------------------------     Common
                                           Shares        Amount         Stock
                                        ------------  ------------  ------------

Balance - June 30, 2001                   59,524,455      $  5,952      $   956

Net loss                                       -              -            -

Other comprehensive income, net of tax:
    Unrealized gains on securities
      arising during the year, net
      of tax                                   -              -            -

Exercise of stock options                     13,868             1         -
Exercise of callable warrants              1,000,000           100         -
Stock issued to employees under
  stock bonus plans                        2,108,674           211         -
Issuance of stock for
  professional services                      604,492            60         -
Issuance of stock under
  consulting contracts                     1,116,078           112         -
Issuance of stock for note
  receivable - stockholders                  140,100            14         -
Issuance of stock for
  conversion of convertible
  debentures                               3,832,073           383         -
Issuance of stock for financing
  costs                                    1,099,503           110         -
Issuance of stock for notes
  payable                                  2,045,000           205         -
Issuance of stock for equipment               98,000            10         -
Net reduction in notes
  receivable from stockholders                  -            -             -
Amortization of unearned
  compensation                                  -            -             -
Amortization of value assigned
  to warrants in debt financing                 -            -             -
                                          ----------     --------      --------
BALANCE - JUNE 30, 2002                   71,582,243     $  7,158      $    956
                                          ==========     ========      ========

See accompanying notes to consolidated financial statements.


                       FONAR CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                        FOR THE YEAR ENDED JUNE 30, 2002

                                          Class A        Paid-in
                                         Non-Voting    Capital in     Treasury
                                          Preferred     Excess of     Stock
                                            Stock       Par Value     Amount
                                        ------------  ------------  ------------

Balance - June 30, 2001                     $    784  $104,984,020    $(675,390)

Net loss                                        -             -            -

Other comprehensive income, net of tax:
    Unrealized gains on securities
      arising during the year, net
      of tax                                    -             -            -

Exercise of stock options                       -           15,045         -
Exercise of callable warrants                   -        1,499,900         -
Stock issued to employees under
  stock bonus plans                             -        2,762,301         -
Issuance of stock for
  professional services                         -          728,196         -
Issuance of stock under
  consulting contracts                          -        1,497,916         -
Issuance of stock for note
  receivable - stockholders                     -          159,161         -
Issuance of stock for
  conversion of convertible
  debentures                                    -        4,499,617         -
Issuance of stock for financing
  costs                                         -        1,291,036         -
Issuance of stock for notes
  payable                                       -        2,602,391         -
Issuance of stock for equipment                 -          116,613         -
Net reduction in notes
  receivable from stockholders                  -             -            -
Amortization of unearned
  compensation                                  -             -            -
Amortization of value assigned
  to warrants in debt financing                 -             -            -
                                            --------  ------------  ------------
BALANCE - JUNE 30, 2002                     $    784  $120,156,196    $(675,390)
                                            ========  ============  ============

See accompanying notes to consolidated financial statements.




                      FONAR CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                       FOR THE YEAR ENDED JUNE 30, 2002


                                           Notes                     Accumulated
                                         Receivable                    Other
                                           from         Unearned   Comprehensive
                                        Stockholders  Compensation     Income
                                        ------------  ------------  ------------

Balance - June 30, 2001                 $(1,040,457)  $(1,529,018)  $     84,133

Net loss                                       -             -              -

Other comprehensive income,
    net of tax:
    Unrealized gains on securities
      arising during the year,
      net of tax                               -             -             1,436

Exercise of stock options                      -             -              -
Exercise of callable warrants                  -             -              -
Stock issued to employees under
  stock bonus plans                            -             -              -
Issuance of stock for
  professional services                        -             -              -
Issuance of stock under
  consulting contracts                         -             -              -
Issuance of stock for
  notes receivable - stockholders          (159,175)         -              -
Issuance of stock for conversion
  of convertible debentures                    -             -              -
Issuance of stock for
  financing costs                              -             -              -
Issuance of stock for notes payable            -             -              -
Issuance of stock for Equipment                -             -              -
Net reduction in notes receivable
  from stockholders                         202,500          -              -
Amortization of unearned
  Compensation                                 -          451,623           -
Amortization of value assigned to
  warrants in debt financing                   -        1,077,395           -
                                        ------------  ------------  ------------
BALANCE - JUNE 30, 2002                 $  (997,132)    $    -      $    85,569
                                        ============  ============  ============

See accompanying notes to consolidated financial statements.



                      FONAR CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                       FOR THE YEAR ENDED JUNE 30, 2002

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

Balance - June 30, 2001              $ (60,000,686)  $41,830,294   $       -

Net loss                               (22,882,207)  (22,882,207)   (22,882,207)

Other comprehensive income,
    net of tax:
    Unrealized gains on securities
      arising during the year,
      net of tax                              -            1,436          1,436

Exercise of stock options                     -           15,046           -
Exercise of callable warrants                 -        1,500,000           -
Stock issued to employees under
  stock bonus plans                           -        2,762,512           -
Issuance of stock for
  professional services                       -          728,256           -
Issuance of stock under
  consulting contracts                        -        1,498,028           -
Issuance of stock for
  notes receivable - stockholders             -             -              -
Issuance of stock for conversion
  of convertible debentures                   -        4,500,000           -
Issuance of stock for
  financing costs                             -        1,291,146           -
Issuance of stock for notes payable           -        2,602,596           -
Issuance of stock for Equipment               -          116,623           -
Net reduction in notes receivable
  from stockholders                           -          202,500           -
Amortization of unearned
  Compensation                                -          451,623           -
Amortization of value assigned to
  warrants in debt financing                  -        1,077,395           -
                                      ------------   ------------  -------------
BALANCE - JUNE 30, 2002               $(82,882,893)  $35,695,248   $(22,880,771)
                                      ============   ============  =============

See accompanying notes to consolidated financial statements.


                      FONAR CORPORATION AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                        For the Years Ended June 30,
                                               -------------------------------------------
                                                    2004           2003           2002
                                               -------------  -------------  -------------
                                                                   
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                     $ (9,494,383)  $(15,006,416)  $(22,882,207)
  (Income) loss from discontinued operations           -          (194,451)     5,926,581
                                               -------------  -------------  -------------
  Loss from continuing operations                (9,494,383)   (15,200,867)   (16,955,626)
  Adjustments to reconcile net loss
    to net cash provided by operating activities:
      Minority interest in income of
        partnerships                                951,940        776,222        392,842
      Depreciation and amortization               3,880,898      4,433,490      4,809,468
      Amortization of unearned license fee       (2,340,000)    (2,340,000)    (2,340,000)
      Loss on impairment of management
        agreement                                      -           795,237           -
      Financing costs due to change in
        terms of warrants                           238,950        -                 -
      Gain on sale of equipment                     (21,500)        (1,608)          -
      Provision for bad debts                       330,997        701,534        972,236
      Compensatory element of stock issuances     4,125,717      4,842,748      4,712,163
      Stock issued for costs and expenses        12,002,712      5,473,949      3,093,797
  (Increase) decrease in operating assets, net:
      Accounts and management fee receivable     (2,938,367)       (73,152)    (1,320,499)
      Notes receivable                              -              170,000        200,000
      Costs and estimated earnings in excess of
        billings on uncompleted contracts        (1,463,374)       792,733        616,250
      Inventories                                (4,528,085)      (393,494)      (938,392)
      Principal payments received on
        sales-type lease - related parties           14,285      2,597,331         93,391
      Principal payments received on
        sales-type lease                            135,456        119,601        119,550
      Prepaid expenses and other current assets    (285,689)      (333,959)      (198,151)
      Other assets                                  (37,722)        80,124        (44,584)
      Receivables and advances to
        related parties and affiliates              519,181        492,594         62,151
  Increase (decrease) in operating
    Liabilities, net:
      Accounts payable                            1,664,772       (295,413)     1,031,617
      Other current liabilities                   2,674,269        472,617       (682,950)
      Customer advances                           2,867,540     (2,774,867)     6,035,110
      Billings in excess of costs and estimated
        earnings on uncompleted contracts        (1,814,534)     3,636,527        763,320
      Other liabilities                              (2,768)       (57,850)        32,123
      Income taxes payable                           15,430       (734,104)        (7,162)
                                               -------------  -------------  -------------
        NET CASH PROVIDED BY CONTINUING
          OPERATIONS                              6,495,725      3,179,393        446,654

        NET CASH PROVIDED BY (USED IN)
          DISCONTINUED OPERATIONS                      -           232,939       (244,905)
                                               -------------  -------------  -------------
        NET CASH PROVIDED BY OPERATING
          ACTIVITIES                              6,495,725      3,412,332        201,749
                                               -------------  -------------  -------------

See accompanying notes to consolidated financial statements.



                      FONAR CORPORATION AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                        For the Years Ended June 30,
                                               -------------------------------------------
                                                    2004           2003           2002
                                               -------------  -------------  -------------
                                                                   
CASH FLOWS FROM INVESTING ACTIVITIES
  (Purchases) sales of marketable securities   $ (5,397,667)  $   (280,431)  $    513,219
  Purchases of property and equipment            (1,935,186)    (1,273,557)    (3,097,512)
  Repayment of note receivable from buyers of
    A&A Services                                    150,000           -              -
  Costs of capitalized software development        (630,263)      (791,216)      (855,612)
  Proceeds from sale of discontinued
    operations, net                                 -            2,821,564        -
  Proceeds from sale of equipment                    21,500        133,898         39,465
  Cost of patents and copyrights                   (572,709)      (424,761)      (548,290)
                                               -------------  -------------  -------------
        NET CASH (USED IN) PROVIDED BY
          INVESTING ACTIVITIES                   (8,364,325)       185,497     (3,948,730)
                                               -------------  -------------  -------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from long-term debt                    5,500,000        950,000           -
  Decrease (increase) in restricted cash         (5,500,000)     5,500,000           -
  Repayment of borrowings and capital
    lease obligations                            (1,003,935)    (8,674,362)    (3,930,289)
  Net proceeds from exercise of
    stock options and warrants                    3,928,182      1,104,275      1,515,046
  Distributions to holders of minority interests   (916,036)      (604,230)      (273,508)
                                               -------------  -------------  -------------
        NET CASH PROVIDED BY (USED IN)
          FINANCING ACTIVITIES                    2,008,211     (1,724,317)    (2,688,751)
                                               -------------  -------------  -------------
NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS                                  139,611      1,873,512     (6,435,732)

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR     9,334,378      7,460,866     13,896,598
                                               -------------  -------------  -------------
CASH AND CASH EQUIVALENTS - END OF YEAR        $  9,473,989   $  9,334,378    $  7,460,866
                                               =============  =============  =============

See accompanying notes to consolidated financial statements.


                      FONAR CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2004


NOTE 1 - DESCRIPTION OF BUSINESS

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

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

HMCA entered the physician and diagnostic  management  services business through
the  consummation of two acquisitions 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 (see Note 22).

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 U.S.
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of contingent  assets and liabilities in the  consolidated  financial
statements and  accompanying  notes.  The most  significant  estimates relate to
allowances,   intangible  assets,  income  taxes,  useful  lives  of  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.



                      FONAR CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2004


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 earnings if the
securities are traded for short-term  profit.  Otherwise,  such unrealized gains
and losses are charged or credited to comprehensive income.

Management  determines the proper  classifications of investments in obligations
with fixed maturities and marketable  equity  securities at the time of purchase
and  re-evaluates  such  designations as of each balance sheet date. At June 30,
2004 and  2003,  all  securities  covered  by SFAS No.  115 were  designated  as
available for sale. Accordingly, these securities are stated at fair value, with
unrealized gains and losses reported in comprehensive income. Realized gains and
losses on sales of  investments,  as  determined  on a  specific  identification
basis,  are included in  investment  income in the  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.

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

Amounts allocated to management agreements, in connection with four acquisitions
completed  during the  period  from June 1997  through  August  1998,  are being
amortized  using  the  straight-line   method  over  the  20-year  term  of  the
agreements.


                      FONAR CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2004


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 requires considerable  judgement
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,  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 (see Note 3).







                      FONAR CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2004


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

Revenue   on  sales   contracts   for   scanners   is   recognized   under   the
percentage-of-completion  method.  The Company  manufactures  its scanners under
specific   contracts  that  provide  for  progress   payments.   Production  and
installation  take  approximately  six months.  The  percentage of completion is
determined by the ratio of costs incurred to date on completed sub-assemblies to
the total  estimated  cost for each scanner.  Contract  costs include  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  under various  long-term  agreements  with related
medical  providers  (the  "PC's").  The PC's are  primarily  owned by Raymond V.
Damadian,  M.D.,  President  and Chairman of the Board of FONAR.  The  Company's
agreements  with the PC's  stipulate  fees for services  rendered and  equipment
leased,  are primarily  calculated on activity  based efforts at  pre-determined
rates per unit of activity. All fees are re-negotiable at the anniversary of the
agreements and each year thereafter.

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

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



                      FONAR CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2004


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

Advertising costs are expensed as incurred.

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.

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

The Company has various stock-based employee  compensation plans, which are more
fully  described in Note 11. As permitted  under SFAS No. 148,  "Accounting  for
Stock-Based Compensation--Transition and Disclosure", which amended SFAS No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation", the Company has 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


                      FONAR CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2004


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

Employees", and related interpretations including Financial Accounting Standards
Board  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 net income, 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.

Basic earnings  (loss) per share ("EPS") is computed  based on weighted  average
shares outstanding and excludes any potential dilution.  In accordance with 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," the Company's participating  convertible  securities,  which include the
Class A  Non-voting  Preferred  stock,  Class B common  stock and Class C common
stock,   are  not  included  in  the   computation  of  basic  EPS  because  the
participating  securities do not have a  contractual  obligation to share in the
losses of the Company.  The  provisions  of EITF 03-6 became  effective  for the
Company  beginning April 1, 2004. The adoption of this new pronouncement did not
have any impact on the Company's consolidated financial statements.

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 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, are as
follows: 7,690,392,  9,841,956 and 6,213,083 as of June 30, 2004, 2003 and 2002,
respectively.

The following table illustrates the effect on net loss and 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,
                                       ----------------------------------------
                                           2004           2003           2002
                                       ------------  ------------  ------------
Net Loss As Reported                   $ (9,494,383) $(15,006,416) $(22,882,207)

Deduct:
  Total stock-based employee compensation
    expense determined under fair value
    based method for all awards             438,751       559,416       514,581
                                       ------------  ------------  ------------
Proforma Net Loss                      $ (9,933,134) $(15,565,832) $(23,396,788)
                                       ============  ============  ============

Basic and Diluted Net Loss Per Share
  as Reported                                $(0.10)       $(0.20)       $(0.36)
Basic and Diluted Proforma Net Loss          ======        ======        ======
  Per Share                                  $(0.11)       $(0.21)       $(0.37)
                                             ======        ======        ======

                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004

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,
                                       ----------------------------------------
                                           2004           2003           2002
                                       ------------  ------------  ------------
Expected life (years)                           3             3             3
Interest rate                                2.69%         4.00%         4.00%
Annual rate of dividends                        0%            0%            0%
Volatility                                     55%           55%           92%

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, 2004,  2003 and 2002 was
estimated at $0.75, $0.60 and $0.67, 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, 2004, the Company had cash on deposit of approximately  $8,259,000 in excess
of federally insured limits.

Related Parties:  Net revenues from related parties  accounted for approximately
40%, 58% and 78% of the  consolidated  net revenues for the years ended June 30,
2004, 2003 and 2002, respectively.

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

The financial  statements  include various  estimated fair value  information at
June 30, 2004,  2003 and 2002, 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.

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:


                      FONAR CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2004


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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 Pronouncement
- -------------------------------

In January 2003, as revised in December 2003, the FASB issued Interpretation No.
46 ("FIN 46"),  "Consolidation of Variable Interest Entities,  an Interpretation
of ARB No.  51."  FIN 46  requires  certain  variable  interest  entities  to be
consolidated by the primary beneficiary of the entity if the equity investors in
t he entity do not have the characteristics of controlling financial interest or
do not have  sufficient  equity at risk for the entity to finance its activities
without additional  subordinated financial support from other parties. FIN 46 is
effective  for all new  variable  interest  entities  created or acquired  after
January 31, 2003. For variable  interest  entities  created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period  beginning  after March 15, 2004. The effect of the adoption of
this new  accounting  pronouncement  did not have a  significant  impact  on the
Company's consolidated financial statements for the year ended June 30, 2004.

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

Certain  prior year balances  have been  reclassified  to conform to the current
year presentation.  The  reclassifications  did not have any effects on reported
net losses for any periods presented


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004


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. The cost, accumulated amortization and net carrying value
at June 30, 2004 and 2003 is as follows:

                              As of June 30, 2004
                              -------------------

                             Acquisition               Accumulated  Net Carrying
                                Date          Cost     Amortization    Value
                             -----------  -----------  ------------ ------------
Affordable Diagnostics, Inc. June 1997    $ 3,719,640  $ 1,255,702   $ 2,463,938

Dynamic Health Care
  Management, Inc.           August 1998    8,951,907    2,685,572     6,266,335
                                          -----------  -----------   -----------
                                          $12,671,547  $ 3,941,274   $ 8,730,273
                                          ===========  ===========   ===========

                              As of June 30, 2003
                              -------------------

                             Acquisition               Accumulated  Net Carrying
                                Date          Cost     Amortization    Value
                             -----------  -----------  ------------ ------------
Affordable Diagnostics, Inc. June 1997    $ 3,719,640  $ 1,069,720   $ 2,649,920

Dynamic Health Care
  Management, Inc.           August 1998    8,951,907    2,237,977     6,713,930
                                          -----------  -----------   -----------
                                          $12,671,547  $ 3,307,697   $ 9,363,850
                                          ===========  ===========   ===========

Amortization  of management  agreements for the years ended June 30, 2004,  2003
and 2002 was $633,577, $696,285 and $696,285, respectively.

The estimated amortization expense of management agreements for each of the next
5 years is approximately $634,000.

Impairment Loss and Sale of Management Company - A&A Services, Inc.
- -------------------------------------------------------------------

During the quarter  ended June 30,  2002,  the primary  care  medical  practices
managed  by  the  Company's  subsidiary,   A&A  Services,  Inc.,  experienced  a
significant  overall decline in patient volume and related  operating cash flows
which led to the inability of the medical  practices to fully and timely pay the
contractual  management  fees  to the  Company.  As a  result  of the  continued
occurrence of this negative  trend,  the Company  recorded an impairment loss of
$4,700,000 (see Note 22) during the quarter ended June 30, 2002 related to those
management  agreements,  which reduced the carrying value of such  agreements to
$3,518,847 at June 30, 2002.


                      FONAR CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2004


NOTE 3 - MANAGEMENT AGREEMENTS (Continued)

Impairment Loss and Sale of Management Company - A&A Services, Inc. (Continued)
--------------------------------------------------------------------------------

On April 8, 2003, the Company's wholly-owned  subsidiary,  HMCA, sold all of its
issued and outstanding stock of A&A Services, Inc. (see Note 22).

Impairment Loss - Central Health Care Management Services, Inc.
- ---------------------------------------------------------------

During the year ended June 30, 2003, the primary care medical  practices managed
by the Company's  subsidiary,  Central Health Care  Management  Services,  Inc.,
closed  because it experienced a significant  overall  decline in patient volume
and related  operating  cash flows,  which led to the  inability  of the medical
practices  to  fully  and  timely  pay the  contractual  management  fees to the
Company. As a result, the Company recorded an impairment loss of $795,237 during
the quarter  ended June 30, 2003,  related to the  management  agreement,  which
reduced the carrying value of such agreement to $-0-.


NOTE 4 - MARKETABLE SECURITIES

The following is a summary of marketable securities at June 30, 2004 and 2003:

                                                      June 30, 2004
                                        ----------------------------------------
                                                       Unrealized
                                                        Holding     Fair Market
                                            Cost       Gain (Loss)     Value
                                        -----------   ------------  ------------
Certificate of deposits                 $ 2,550,000   $   (24,243)  $ 2,525,757
U.S. Government Obligations               5,181,010       (24,912)    5,156,098
Corporate and government agency bonds     3,399,818        (1,696)    3,398,122
Equities - other                             35,184         4,980        40,164
                                        -----------   ------------  ------------
                                        $11,166,012   $   (45,871)  $11,120,141
                                        ===========   ============  ============

                                                      June 30, 2003
                                        ----------------------------------------
                                                       Unrealized
                                                        Holding     Fair Market
                                           Cost           Gain        Value
                                        -----------   ------------  ------------
U.S. Government Obligations             $3,919,329     $   11,887    $3,931,216
Corporate and government agency bonds    1,849,016         56,785     1,905,801
                                        ----------    ------------  ------------
                                        $5,768,345     $   68,672    $5,837,017
                                        ==========    ============  ============

All debt  securities are due within five years.  At June 30, 2004, the amount of
cost due within one year was $5,082,322.


                      FONAR CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2004


NOTE 5 - ACCOUNTS RECEIVABLE AND MANAGEMENT FEE RECEIVABLE

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

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

Collection  by the  Company of its  accounts  receivable  may be impaired by the
uncollectibility  of PC's  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  65%, 69% and 52%,  respectively,  of the PC's 2004, 2003 and 2002
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  PC's
accounted for  approximately  32%, 43% and 63%, of the consolidated net revenues
for the years ended June 30, 2004, 2003 and 2002, respectively.

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

Audited  financial  information  related to the 17  unconsolidated  related PC's
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,
2003, 2002 and 2001 related to the 17  unconsolidated  medical practices managed
by the Company are as follows:

                                 (000's omitted)

                                             2003          2002          2001
                                           --------      --------      --------

Patient Revenue - Net                      $ 30,974      $ 31,316      $ 32,268
                                           ========      ========      ========
(Loss) Income from
  Operations (Income Tax
  - Cash Basis)                            $    (53)     $   (160)     $    207
                                           ========      ========      ========
Net (Loss) Income (Income
  Tax - Cash Basis)                        $   (554)     $   (608)     $    (21)
                                           ========      ========      ========


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004


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

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, 2004 and 2003 is
as follows:
                                                   As of June 30,
                                             ---------------------------------
                                                 2004                 2003
                                             -----------           -----------
 Costs incurred on uncompleted Contracts     $11,961,900           $ 5,999,120
 Estimated earnings                            8,298,538             3,712,940
                                             -----------           -----------
                                              20,260,438             9,712,060
 Less: Billings to date                       21,374,096            14,103,626
                                             -----------           -----------
                                             $(1,113,658)          $(4,391,566)
                                             ===========           ===========

Included in the  accompanying  consolidated  balance  sheets under the following
captions:
                                                            As of June 30,
                                                      --------------------------
                                                          2004          2003
                                                      ------------  ------------
Costs and estimated earnings in excess
  of billings on uncompleted contracts                $ 1,711,306  $    359,873
Costs and estimated earnings in excess of billings
  on uncompleted contracts - related party                111,941          -
Less:  Billings in excess of costs and
  estimated earnings on uncompleted contracts           2,936,905     4,390,012
Less:  Billings in excess of costs and
  estimated earnings on uncompleted
  contracts - related party                                  -          361,427
                                                      ------------  ------------
                                                      $(1,113,658)  $(4,391,566)
                                                      ============  ============


                      FONAR CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2004


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


2) Customer advances consist of the following:


                                                   As of June 30, 2004
                                        ----------------------------------------
                                                        Related
                                           Total        Parties        Other
                                        ------------  ------------  ------------

Total advances                          $29,174,401   $ 1,009,096   $28,165,305
Less: Advances on contracts
        under construction               21,374,096     1,009,096    20,365,000
                                        ------------  ------------  ------------
                                        $ 7,800,305   $      -      $ 7,800,305
                                        ============  ============  ============



                                                   As of June 30, 2003
                                        ----------------------------------------
                                                        Related
                                           Total        Parties       Other
                                        ------------  ------------  ------------

Total advances                          $19,036,391   $ 1,203,473   $17,832,918
Less: Advances on contracts
        under construction               14,103,626       576,626    13,527,000
                                        ------------  ------------  ------------
                                        $ 4,932,765   $   626,847   $ 4,305,918
                                        ============  ============  ============


NOTE 7 - INVENTORIES


Inventories included in the accompanying consolidated balance sheets consist of:


                                              As of June 30,
                                        --------------------------
                                            2004       -  2003
                                        ------------  ------------
Purchased parts, components and
  Supplies                              $ 7,016,218   $ 3,733,783
Work-in-process                           2,569,128     1,323,478
                                        ------------  ------------
                                        $ 9,585,346   $ 5,057,261
                                        ============  ============



                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004


NOTE 8 - INVESTMENT IN SALES-TYPE LEASES

During  the year  ended  June 30,  2001,  the  Company  entered  into two  lease
agreements,  totaling $1,895,000,  with related parties for MRI scanners,  which
are  considered  sales-type  leases.  The  leases  are  payable  in 120  monthly
installments of $12,356 and $11,903, respectively, including interest at 10% and
8.5% per annum.  The  lessees  can also elect to pay lump sums of  $581,544  and
$580,149,  respectively, at the end of the first 60 months. If the lease term is
extended  beyond 60 months,  the lessee may elect to purchase the scanner at the
end of the second 60-month period for a purchase price of $1.

During the year ended  June 30,  2003,  three  related  entities  that had lease
agreements with the Company  obtained  financing from a third party and utilized
the proceeds to repay amounts due to the Company. During the year ended June 30,
2003, the Company  received a total of $2,600,000 from these related entities as
payment of a  substantial  portion of the amounts  due to the Company  under the
lease agreements.

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 sales-type leases as at June 30, 2004 and 2003 is as
follows:

                                              As of June 30,
                                        --------------------------
                                           2004           2003
                                        ----------      ----------
Net minimum lease payments receivable   $  733,281      $  978,112
Less: Unearned income                      127,090         222,180
                                        ----------      ----------
Net investment in sales-type leases     $  606,191      $  755,932
                                        ==========      ==========
Current portion                         $  153,413      $  149,741
Non-current portion                        452,778         606,191
                                        ----------      ----------
                                        $  606,191      $  755,932
                                        ==========      ==========

Future minimum lease payments are as follows:

                    Years Ending June 30:
                    ---------------------
                                    2005       $  153,413
                                    2006          173,751
                                    2007           79,027
                                    2008          200,000
                                               ----------
                                               $  606,191
                                               ==========

                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004


NOTE 8 - INVESTMENT IN SALES-TYPE LEASES (Continued)

Interest income from sales-type  leases with related parties for the years ended
June  30,  2004,  2003  and  2002  amounted  to  $-0-,  $172,363  and  $126,297,
respectively.

NOTE 9 - PROPERTY AND EQUIPMENT

Property and equipment, at cost, less accumulated depreciation and amortization,
at June 30, 2004 and 2003, is comprised of:
                                               As of June 30,
                                        --------------------------
                                            2004          2003
                                        ------------  ------------
Diagnostic equipment under capital
  leases                                $   621,411   $ 1,776,450
Diagnostic equipment                      3,096,638     3,993,324
Research, development and
  demonstration equipment                 9,506,134     8,566,952
Machinery and equipment                   7,689,317     7,433,921
Furniture and fixtures                    3,357,549     3,334,334
Equipment under capital leases            1,939,863     1,684,380
Leasehold improvements                    5,127,950     4,710,718
                                        -----------   -----------
                                         31,338,862    31,500,079
Less: Accumulated depreciation
        and amortization                 23,128,241    22,874,645
                                        -----------   -----------
                                        $ 8,210,621   $ 8,625,434
                                        ===========   ===========

Depreciation and amortization of property and equipment for the years ended June
30, 2004, 2003 and 2002 was $2,626,849, $3,247,798 and $3,581,268, respectively.

Equipment  under capital leases has a net book value of $785,130 and $842,762 at
June 30, 2004 and 2003, respectively.

NOTE 10 - OTHER INTANGIBLE ASSETS

Other intangible assets, net of accumulated  amortization,  at June 30, 2004 and
2003 are comprised of:
                                                 As of June 30,
                                           -------------------------
                                              2004           2003
                                           ----------     ----------
Capitalized software development costs     $3,371,561     $3,940,915
Patents and copyrights                      2,671,568      2,098,860
                                           ----------     ----------
                                            6,043,129      6,039,775
Less: Accumulated amortization              2,085,442      2,664,588
                                           ----------     ----------
                                           $3,957,687     $3,375,187
                                           ==========     ==========


                      FONAR CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2004


NOTE 10 - OTHER INTANGIBLE ASSETS (Continued)

Information  related to other  intangible  assets  for the years  ended June 30,
2004, 2003 and 2002 is as follows:

                                           2004          2003          2002
                                        ----------    ----------    ----------

Balance - Beginning of Year             $3,375,187    $2,648,618    $1,853,506

Amounts capitalized                      1,202,972     1,215,977     1,403,902

Amortization                              (620,472)     (489,408)     (608,790)
                                        ----------    ----------    ----------
Balance - End of Year                   $3,957,687    $3,375,187    $2,648,618
                                        ==========    ==========    ==========

Amortization  of patents and copyrights for the years ended June 30, 2004,  2003
and 2002 amounted to $82,429, $72,382 and $66,224, respectively.

Amortization of capitalized  software development costs for the years ended June
30, 2004, 2003 and 2002 was $538,043, $417,026 and $271,837, respectively.

Amortization of deferred financing costs for the years ended June 30, 2004, 2003
and 2002 was $-0-, $-0- and $270,729, respectively.

The estimated  amortization of patents and copyrights and  capitalized  software
development costs for the five years ending June 30, 2009 is as follows:

                                                                    Capitalized
                                                                     Software
 For the Years                                        Patents and   Development
Ending June 30,                            Total      Copyrights       Costs
- ---------------                         ----------    -----------  -----------

     2005                               $  749,468    $  106,965    $  642,503
     2006                                  674,410       120,402       554,008
     2007                                  549,332       141,166       408,166
     2008                                  493,930       152,415       341,515
     2009                                  294,001       143,257       150,744
                                        ----------    ----------    ----------
                                        $2,761,141    $  664,205    $2,096,936
                                        ==========    ==========    ==========

The weighted  average  amortization  period for other  intangible  assets is 9.3
years.









                      FONAR CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2004


NOTE 11 - CAPITAL STOCK

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

Cash  dividends  payable on the common  stock shall,  in all cases,  be on a per
share basis,  one hundred twenty percent (120%) of the cash dividend  payable on
shares of Class B common stock and three  hundred  sixty  percent  (360%) of the
cash  dividend  payable  on a share of Class C common  stock.  In  addition,  as
revised,  pursuant to a legal settlement  agreement on April 29, 1997, a special
cash dividend was paid in an amount equal to 3-1/4% on first $10 million, 4-1/2%
on next $20  million,  and  5-1/2% on  amounts  in excess of $30  million of the
amount of any cash awards or  settlements  received by the Company in connection
with the  enforcement  by the  Company of United  States  Patent  No.  3,789,832
(Apparatus and Method of Detecting Cancer in Tissue).

On  June  26,  2003,  the  Company  amended  its  certificate  of  incorporation
increasing the number of authorized shares from 85,000,000 to 110,000,000.

On October 6, 2003 and June 25, 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.  During the year ended June 30, 2004, 8,927,183 shares of the Company's
common stock were issued for goods and services that were registered under these
Registration Statements.

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 4,153 of such
shares outstanding at June 30, 2004 and 2003.

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. As of June 30, 2004, the
Company does not have enough common stock  available  for the  conversion of the
Class C common stock.







                     FONAR CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                JUNE 30, 2004


NOTE 11 - CAPITAL STOCK (Continued)

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).

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, 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,  2004,  options  to  purchase
2,098,724  shares of common stock of FONAR were  available for future grant.  Of
the options granted under this plan, 2,364,122 remain outstanding.


                     FONAR CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                JUNE 30, 2004


NOTE 11 - CAPITAL STOCK (Continued)

Options (Continued)
- -------

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 Incentive  Stock Option
Plan will  terminate on June 30, 2012. As of June 30, 2004,  options to purchase
1,457,744  shares of common stock of FONAR were available for future grant under
this plan and 623,884 shares remain outstanding.

Stock option activity and weighted average exercise prices under these plans and
grants for the years ended June 30, 2004, 2003 and 2002 were as follows:

                                                              Weighted
                                                              Average
                                        Number of             Exercise
                                         Options               Price
                                        ---------            ---------

       Outstanding, June 30, 2001       3,014,059              $1.47
       Granted                              -                    -
       Exercised                          (13,868)              1.09
       Forfeited                            -                    -
                                        ---------              -----
       Outstanding, June 30, 2002       3,000,191               1.47
       Granted                            718,073               1.00
       Exercised                          (27,571)              1.13
       Forfeited                            -                    -
                                        ---------              -----
       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
                                        =========              =====
       Exercisable at:
         June 30, 2002                  1,184,811              $2.00
         June 30, 2003                  1,972,777              $1.62
         June 30, 2004                  2,425,311              $1.24








                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004


NOTE 11 - CAPITAL STOCK (Continued)

Options (Continued)
- -------

The range of exercise prices for options  outstanding as of June 30, 2004 was as
follows:

                                                        Weighted
                                                        Average
                                         Number of      Remaining
                                          Options      Contractual
           Range of Exercise Price      Outstanding   Life in Years
           -----------------------      -----------   -------------

               $0.75 - $2.00             3,047,006        6.7
                                        ===========

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,  2004,  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. As of June 30, 2004,  100,000
shares of HMCA common  stock were  available  for future  grant under this plan.
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 1997 Incentive and 1998  Non-Statutory  Stock
Option Plans.

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, 2004.  As of
June 30, 2004,  options to purchase  1,300,000  shares of HMCA common stock were
available for future grant under this plan.

Stock option share activity and weighted  average exercise prices under the HMCA
plans and grants for the three years ended June 30, 2004,  2003 and 2002 were as
follows:


                    FONAR CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                JUNE 30, 2004
NOTE 11 - CAPITAL STOCK (Continued)

Options (Continued)
- -------
                                                           Weighted
                                                           Average
                                           Number of       Exercise
                                            Options         Price
                                           ---------      ---------
    Outstanding, June 30, 2001 and 2002     2,670,000       $0.46

    Exchanged for common stock of FONAR    (2,000,000)      $0.28
                                           ----------       -----
    Outstanding, June 30, 2003                670,000       $1.00

    Forfeited                                 (10,000)      $1.00
                                           ----------       -----
    Outstanding, June 30, 2004                660,000       $1.00
                                           ==========       =====

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

On June 1, 2002, October 1, 2000 and May 9, 1997, the Board of Directors adopted
Stock  Bonus  Plans.  Under the terms of the  Plans,  2,000,000,  5,000,000  and
5,000,000  shares of common  stock,  respectively,  were  available for issuance
under each plan. The stock bonuses may be awarded no later than May 31, 2012 for
the 2002 Plan,  September  30, 2010 for the 2000 Plan and March 31, 2007 for the
1997  Plan.  As of June 30,  2004,  no  shares  of  common  stock of FONAR  were
available for future grant under these 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,  2004,  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, 2004, 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,  2004,  1,651,565  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, 2004

NOTE 11 - CAPITAL STOCK (Continued)

Warrants
- --------

In connection with the convertible  debenture financing with The Tail Wind Fund,
Ltd. (the "investor") completed in May of 2001 (Note 13), the Company granted to
the investor  and the  placement  agent  warrants to purchase a total of 959,501
common  shares at an  exercise  price of $1.801 per  share.  The  warrants  were
exercisable  over a  five-year  period.  The  fair  value  of the  warrants  was
estimated at $1.14 on the date of grant using the  Black-Scholes  pricing model.
Separately,  the Company issued to the investor  callable warrants to purchase a
total of 2,000,000 shares of common stock at fluctuating prices.

Under the terms of the callable warrant, the exercise price was variable and was
to be equal to the average  closing bid price of the Company's  common stock for
the full  calendar  month  preceding  the date of exercise  subject to a maximum
exercise  price of $6.00 per share  and a  minimum  exercise  price of $2.00 per
share, subject to adjustment.

Both the callable  warrant and the  purchase  warrants  contained  anti-dilution
provisions,  which provided 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.

During  June 2002,  the  Company  issued  1,000,000  shares of common  stock and
received  proceeds,  net of fees, of $1,500,000  upon the exercise of certain of
the callable warrants.

On September 30, 2002, the Company issued  1,000,000  shares of common stock and
received  proceeds  from the  investor,  net of  fees,  of  $1,073,072  upon the
exercise of certain of the callable warrants.

During the quarter ended  September 30, 2002, in accordance  with the agreements
with the investor,  the Company issued replacement callable warrants to purchase
2,000,000 shares on the same terms as the original warrants.

On August 27, 2003,  warrants to purchase 200,000 shares of the Company's common
stock were exercised by the investor at an exercise price of $1.42 per share for
total proceeds received of $283,340.

On January 27, 2004, warrants to purchase 200,000 shares of the Company's common
stock were exercised by the investor at an exercise price of $1.17 per share for
total proceeds received of $233,980.

On April  28,  2004,  the  investor  and the  Company  amended  the terms of the
callable warrant and purchase warrants to resolve adjustments resulting from the
anti-dilution  provisions.  The  number of shares of stock  remaining  under the
callable warrant was agreed to be 3,000,000, exercisable at a price of $1.00 per
share, provided the investor immediately exercised the callable warrant in full.
On April  28,  2004,  the  investor  exercised  the  callable  warrant  in full,
purchasing 3,000,000 shares for $3,000,000.



                     FONAR CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                JUNE 30, 2004


NOTE 11 - CAPITAL STOCK (Continued)

Warrants (Continued)
- --------

The number of shares underlying the purchase warrants was agreed to be increased
to  1,454,875  shares of common  stock at an exercise  price of $0.79 per share.
Although  the  exercise  price was reduced in  accordance  with the terms of the
purchase  warrants,  the holders of the warrants  agreed to accept an adjustment
representing  a lesser  number of shares to which it would have been entitled if
the formula  contained  in the  original  terms of the  purchase  warrants  were
strictly  followed,  in consideration,  among other things,  for the term of the
purchase warrants being extended three years, to May 24, 2009.

As a result of the extension of the term of the warrants  discussed  above,  the
Company  recorded a charge to financing  costs of $238,950 during the year ended
June 30, 2004.

As of June 30, 2004,  1,454,875  purchase warrants remain  outstanding under the
terms indicated above.



                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004


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

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

                                                               June 30,
                                                      -------------------------
                                                          2004          2003
                                                      ------------  ------------

Line of credit to a bank  expiring on March 31, 2005,  collateralized  by a $5.5
million restricted money market account, requiring monthly payments of
interest only, at a rate of 1.75%.                     $ 5,500,000  $       -

Deferred payment obligation, aggregating $5,490,000,
payable to the former shareholders of Dynamic Health
Care Management,  Inc.  ("Dynamic").  The obligation
was payable over three years,  commencing August 20,
2000. The  obligation was recorded,  net of discount
of $739,324, representing interest imputed at a rate
of 7.5%. The obligation was collateralized by all of
the assets of the acquired  business and  guaranteed
by FONAR.                                                     -          165,052

Capital lease that required monthly payments of $28,997, including interest at a
rate of 9.95% per annum through April 2004. The loan was
collateralized  by the  related  equipment.                   -          303,654

Capital lease requiring monthly payments of $8,468, including interest at a rate
of 8.63% through April 2005. The loan is collateralized by the related
equipment.                                                  73,544       164,505

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.                                         703,822       890,938

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.                                     129,491          -

Other  (including  capital  leases for  property and
equipment).                                                295,636       405,427
                                                      ------------  ------------
                                                         6,702,493     1,929,576
Less: Current maturities                                 5,982,991     1,021,952
                                                      ------------  ------------
                                                      $    719,502  $=   907,624
                                                      ============  ============



                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004


NOTE 12 - 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,
                     ------------
                        2005               $5,982,991
                        2006                  293,222
                        2007                  295,470
                        2008                  103,413
                        2009                   24,763
                      Thereafter                2,634
                                           ----------
                                           $6,702,493
                                           ==========

Modification of Notes Payable
- -----------------------------

Pursuant to a stock payment agreement  consummated  January 11, 2002 between the
Company and the former  stockholders of A&A, these stockholders agreed to accept
payment of certain debt obligations in shares of the Company's common stock. The
promissory  notes  were  initially  issued  by HMCA in  partial  payment  of the
purchase  price for the  acquisition  of A&A Services,  Inc.  Payments under the
notes were due quarterly through December 2002.

In order to induce the former A&A  stockholders to accept payment in stock,  and
in the manner provided in the stock payment agreement, the Company agreed to pay
a 15% premium on the note obligations and related accrued  interest.  On January
11, 2002, the Company issued  1,000,000  shares of common stock to each of them,
or 2,000,000 shares in the aggregate,  at $1.27 per share,  totaling $2,540,000.
The shares were issued in partial  payment of four  promissory  notes.  The debt
conversion expense of $544,370, as a result of the agreement,  has been recorded
as part of  discontinued  operations in the statement of operations for the year
ended June 30, 2002 (see Note 22).

Under the terms of the stock  payment  agreement,  the Company  was  required to
issue shares and the net  proceeds  from the sale of the shares would be applied
to the indebtedness.  The quarterly  payment due dates were waived,  but the net
proceeds  received by the selling  stockholders from the shares of the Company's
stock issued to them was required to be sufficient to pay the full  indebtedness
for each note, including the premium on the note. The notes were settled in full
in April  2003 in  connection  with the  sale by HMCA of all of its  issued  and
outstanding stock of A&A Services, Inc. (see Note 22).



                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004


NOTE 13 - CONVERTIBLE DEBENTURES

Pursuant to a securities  purchase  agreement,  dated May 24, 2001,  between the
Company  and an investor  group,  the  Company  issued and sold to the  investor
group:

- - 4%  convertible  debentures  due June 30,  2002 in the  aggregate  principal
amount of $4.5 million, convertible into shares of the Company's common stock at
a conversion price of $2.047 per share, subject to adjustment.

- - Purchase  warrants to the investor group to purchase an aggregate of 659,501
shares of the Company's  common stock at an initial exercise price of $1.801 per
share, subject to adjustment, exercisable through May 24, 2006 (Note 11).

In connection with the issuance of the debentures,  the Company paid a placement
fee in the amount of $157,500. In addition,  the Company issued 300,000 purchase
warrants to the placement agent at the same terms as to the investor group.

The debentures were convertible at the option of the holder at a price of $2.047
per share. The debentures were payable in ten monthly  installments of $450,000,
commencing  October  1,  2001.  At the  option  of the  Company,  the  principal
installments  could have been  either  paid in cash or shares of the  Company's'
common stock, valued at 90% of the market value, as defined. By amendment, dated
October 25,  2001,  however,  the  payments  originally  due October 1, 2001 and
November 1, 2001, were extended to November 5, 2001, and for those payments, the
stock was valued at the average of the two lowest closing bid prices for October
2001 less $0.25.  During the year ended June 30,  2002,  the Company  repaid the
principal  on the  debentures  of  $4,500,000  and related  accrued  interest of
$132,022 through the issuance of 4,931,576 shares of the Company's common stock.


NOTE 14 - INCOME TAXES

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

                              Years Ended June 30,
                          ----------------------------------------
                              2004         2003          2002
                          ------------  ------------  ------------
        Current:
          Federal         $   -         $  554,642    $    -
          State              (29,889)      149,229       (27,039)
                          ----------    ----------    ----------
                          $  (29,889)   $  703,871    $  (27,039)
                          ==========    ==========    ==========

During the  quarter  ended June 30,  2003,  the  Company  recorded a benefit for
federal  and  state  income  taxes  of  $554,642  and  $169,244,   respectively,
substantially  due to the  reversal of an accrual  for  corporate  income  taxes
related to the 1997 tax year, for which the statute of limitations has expired.




                     FONAR CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                JUNE 30, 2004


NOTE 14 - INCOME TAXES (Continued)


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,
                                        ------------------------------------
                                           2004          2003        2002
                                        ----------    ----------  ----------
        Taxes at federal
          statutory rate                 (34.0)%       (34.0)%       (34.0)%
        State and local income
          taxes (benefit), net
          of federal benefit               0.3          (0.9)          0.1
        Permanent differences              1.8          (2.6)          0.6
        Increase in the valuation
          allowance against
          deferred tax assets             32.2          33.1          33.5
                                        ------        ------        ------
        Effective income tax rate          0.3%         (4.4)%         0.2%
                                        ======        ======        ======

As of June 30, 2004, the Company has net operating loss ("NOL") carryforwards of
approximately  $106,887,000  that will be  available  to offset  future  taxable
income.  The  utilization of certain of the NOL's 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,
                             --------
                             2007       $    660,000
                             2008            527,000
                             2009            145,000
                             2010             32,000
                             2011            414,000
                             2012          5,842,000
                             2013            845,000
                             2019         15,852,000
                             2020         18,718,000
                             2021         19,619,000
                             2022         19,680,000
                             2023         16,228,000
                             2024          8,109,000
                                        ------------
                                        $106,671,000
                                        ============








                     FONAR CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                JUNE 30, 2004


NOTE 14 - INCOME TAXES (Continued)

The Company has, for federal income tax purposes,  research and  development tax
credit carryforwards  aggregating $3,250,107,  which are accounted for under the
flow-through method. The tax credit carryforwards expire as follows:

                             June 30,
                             --------
                             2005       $  172,207
                             2012           70,145
                             2013          402,590
                             2018          432,195
                             2019          378,193
                             2020          448,221
                             2022          441,865
                             2023          444,970
                             2024          459,721
                                        ----------
                                        $3,250,107
                                        ==========

In addition,  for New York State income tax purposes, the Company has tax credit
carryforwards  aggregating  approximately  $1,080,000,  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 that expire as of June 30, 2008.

The Company has charitable contributions of approximately $172,000, which expire
during the years ending June 30, 2005 to June 30, 2009.


                   FONAR CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                JUNE 30, 2004

NOTE 14 - INCOME TAXES (Continued)

Significant  components of the Company's  deferred tax assets and liabilities at
June 30, 2004 and 2003 are as follows:

                                                                June 30,
                                                    ----------------------------
                                                         2004            2003
                                                    ------------    ------------
Deferred tax assets:
  Allowance for doubtful accounts                   $  1,186,827    $ 1,226,941
  Non-deductible accruals                                726,668        638,198
  Net operating carryforwards                         42,668,436     39,292,945
  Tax credits                                          4,440,506      4,130,022
  Inventory capitalization for tax purposes              128,616        111,115
  Capital losses carryforwards                         1,333,663      1,333,663
  Charitable contributions                                95,481         68,686
                                                    ------------    -----------
                                                      50,580,197     46,801,570
Valuation allowance                                  (48,145,223)   (44,626,322)
                                                    ------------    -----------
Net deferred tax assets                                2,434,974      2,175,248
                                                    ------------    -----------
Deferred tax liabilities:
  Fixed assets and depreciation                       (1,409,355)    (1,373,163)
  Capitalized software development costs              (1,025,619)      (802,085)
                                                    ------------    -----------
Gross deferred tax liabilities                        (2,434,974)    (2,175,248)
                                                    ------------    -----------
Net deferred tax liabilities                        $    -          $    -
                                                    ============    ===========

The net change in the valuation  allowance for deferred tax assets  increased by
approximately $3,518,901 and $8,031,600,  respectively, for the years ended June
30, 2004 and 2003.

NOTE 15 - OTHER CURRENT LIABILITIES

Included in other current liabilities are the following:

                                            2004                 2003
                                        -----------           -----------
Royalties                               $   510,550           $    -
Current portion of deferred revenue
  - license fee                           2,340,000             2,340,000
Unearned revenue on service contracts     1,644,505               936,750
Accrued salaries, commissions and
  payroll taxes                           1,858,904             1,015,534
Accrued interest                            502,609               519,741
Litigation judgements                       430,207               281,549
Sales tax payable                         1,667,088             1,443,388
Other                                     1,050,936             1,015,261
                                        -----------           -----------
                                        $10,004,799           $ 7,552,223
                                        ===========           ===========

                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004


NOTE 16 - COMMITMENTS AND CONTINGENCIES

Leases
- ------

The Company rents its operating  facilities and certain  equipment,  pursuant to
operating lease agreements  expiring at various dates through February 2009. The
leases for certain  facilities  contain escalation clauses relating to increases
in real property taxes as well as certain maintenance costs.

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,  2004 and 2003  amounted to $39,971 and
$39,775, respectively.

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, 2004 and 2003  amounted to  approximately
$130,000 and $18,000, respectively.

Future  minimum  operating and capital lease  commitments,  along with sub-lease
income consisted of the following at June 30, 2004:

                                   Facilities
                                       And
                                          Equipment                  Equipment
         Year Ending                     (Operating   Sub-Lease       Capital
          June 30,                          Lease)    (Income)         Lease
         -----------                    ------------  ---------     -----------

            2005                        $ 2,685,922   $(212,978)    $   268,533
            2006                          2,638,577    (214,346)         86,541
            2007                          2,402,695     (84,000)         66,505
            2008                          2,147,022     (84,000)         66,504
            2009                          1,504,289     (84,000)         25,358
         Thereafter                       1,520,979     (91,000)          2,914
                                        -----------   ---------     -----------
 Total minimum obligations              $12,899,484   $(770,324)        516,355
                                        ===========   =========
 Less: Amount representing interest                                     (65,168)
                                                                    -----------
 Present value of net minimum lease
   obligations                                                      $   451,187
                                                                    ===========

Rent  expense for  operating  leases  approximated  $3,286,000,  $3,166,000  and
$3,227,000 for the years ended June 30, 2004, 2003 and 2002, respectively.


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004


NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)

License Agreements and Self-Insurance
- -------------------------------------

The Company has license  agreements with two separate  companies,  which require
the  Company  to pay a royalty on the  Company's  future  sales of  certain  MRI
imaging  apparatus.  Royalty  expense  charged to operations for the years ended
June 30,  2004,  2003 and 2002  approximated  $802,000,  $126,000  and  $70,000,
respectively.

The Company is self-insured with respect to product liability. During the fiscal
years ended June 30, 2004, 2003 and 2002, no material claims arose.

In July 2000, the Company entered into a license agreement, pursuant to which it
licensed  certain  of  its  intellectual   assets  on  a  non-exclusive   basis.
Remuneration  payable to the Company under this agreement is $11.7  million,  of
which $9.0 million was received in September of 2000 and $2.7 million in January
of 2001. The license fee of $11.7 million is being  recognized as income ratably
over the five-year period ending June 30, 2005.

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

On  August  20,  1998,  a  wholly-owned  subsidiary  of HMCA  entered  into  two
employment agreements with the former owners of Dynamic. Each agreement provides
for base  compensation  of  $150,000  during the first year with  annual cost of
living  increases for the first five years.  Each agreement also provides for an
increase in base  compensation  of $100,000  per annum  commencing  in the sixth
year. In addition, the agreements provide for bonus compensation contingent upon
pretax  earnings of Dynamic.  The  employment  agreements  expire ten years from
August 20, 1998.

Minimum  annual  payments,  excluding  bonuses,  incentives  and cost of  living
increases under these contracts are as follows:

                                  Years Ending
                                    June 30,
                                  ------------
                                      2005                    $  500,000
                                      2006                       500,000
                                      2007                       500,000
                                      2008                       500,000
                                      2009                        83,334
                                                              ----------
                                                              $2,083,334
                                                              ==========



                     FONAR CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                JUNE 30, 2004


NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)

Employee Benefit Plans
- ----------------------

The Company has a non-contributory 401(k) plan (the "Plan"). The Plan covers all
non-union  employees  who are at least 21 years of age with no  minimum  service
requirements.  There were no  employer  contributions  to the Plan for the years
ended June 30, 2004, 2003 and 2002.

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%.  The Plan has not been put into effect as of June
30, 2004.

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.


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

Other income (expense) consists of:

                                            For the Years Ended June 30,
                                        ------------------------------------
                                            2004          2003         2002
                                        ------------  ------------  ------------

      Other income (expense)            $  248,356    $  (15,499)   $  (19,133)
      Litigation settlement                (32,109)      (10,000)      (50,000)
      Litigation reserve                  (200,000)       -             -
                                        ----------    ----------    ----------
                                        $   16,247    $  (25,499)   $  (69,133)
                                        ==========    ==========    ==========

Advertising expense approximated  $2,576,000,  $3,558,000 and $2,076,000 for the
years ended June 30, 2004, 2003 and 2002,  respectively.  Maintenance and repair
expenses  totaled  approximately  $598,000,  $625,000 and $656,000 for the years
ended June 30, 2004, 2003 and 2002, respectively.

NOTE 18 - SUPPLEMENTAL CASH FLOW INFORMATION

During the years ended June 30, 2004,  2003 and 2002, the Company paid $264,819,
$1,142,741 and $799,600 for interest, respectively.  During the years ended June
30,  2004,  2003 and 2002,  the Company  paid  $14,459,  $30,233 and $32,420 for
income taxes, respectively.


                     FONAR CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                JUNE 30, 2004


NOTE 18 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)

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

- -    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.

- -    During the year ended June 30, 2003:

a)   The Company issued 1,125,000 shares at a value of $1,226,251 as part of the
     consideration  issued in exchange  for options  held by a related  party to
     acquire approximately 20% of the stock of HMCA.

b) The Company acquired equipment of $207,254 under capital lease obligations.

c)   The Company  issued  15,000 shares of its common stock valued at $21,750 in
     connection with the repayment of a note payable.

d)   The Company  issued  97,850 shares of its common stock valued at $99,180 in
     connection with distributions made to its minority stockholders.

e)   The Company  transferred  equipment  in  satisfaction  of a note payable of
     $10,123.

f)   The  Company  offset  notes  payable of  $145,386  in  connection  with the
     acquisition of Central Health Care Management,  Inc. against the impairment
     of its management contracts.

- -    During the year ended June 30, 2002:

a)   The  Company  issued  2,045,000  shares  of its  common  stock,  valued  at
     $2,602,596, in connection with the repayment of notes payable.

b) The Company acquired equipment of $357,056 under capital lease obligations.

c)   The Company  issued 98,000 shares of its common stock,  valued at $116,623,
     in connection with the acquisition of equipment.

d)   The Company issued  3,832,073 shares of its common stock in connection with
     repayment of $4,500,000 of convertible debentures.


                     FONAR CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                JUNE 30, 2004


NOTE 19 - ADVANCES AND NOTES TO RELATED PARTIES

Effective  December 1, 1993,  Albany  Magnetic  Imaging  Center,  P.C.  ("Albany
Center"),  a Georgia professional  corporation,  of which Raymond V. Damadian is
the sole stockholder,  purchased the scanner being utilized at its site from the
Company for a purchase price of  $1,128,844.  In June of 1997, the payment terms
for the  outstanding  balance of $344,766  were  restructured  to provide for 60
equal  monthly  payments  (including  interest  at the rate of 10% per annum) of
$7,325 each,  commencing  July 1997.  The balance due under this note as of June
30, 2003 was $84,951.  The note was repaid in full in September  2003.  Interest
income on this note for the years ended June 30, 2004, 2003 and 2002 amounted to
$5,277, $-0- and $-0-, respectively.

During 1994,  Melville MRI, P.C.  ("Melville  Center"),  a New York professional
corporation, of which Raymond V. Damadian is the sole shareholder,  director and
president,  purchased  an MRI scanner  from the Company for a purchase  price of
$1,011,431.  Of the purchase price, $900,000 is to be paid by the assumption and
payment of the  Company's  indebtedness  to the lender  secured by the  scanner,
pursuant to a note,  bearing  interest at 14% per annum,  and  providing  for 60
monthly  payments of $20,700 each. The remaining  $111,431 of the purchase price
was to be paid concurrently  with the payments to the lender.  The payment terms
for the principal  balance,  plus accrued  interest (in the aggregate  amount of
$139,290), were restructured to provide for 60 equal monthly payments (including
interest at the rate of 10% per annum) of $2,959.50 each,  commencing July 1998.
In fiscal 2001,  the balance  outstanding  on the obligation was paid in full by
the Company as guarantor of the indebtedness due to the lender. This resulted in
a balance of $893,606  owing to the Company by the Melville  Center.  The $2,959
monthly  payment to the Company has been  increased by an  additional  principal
payment of $10,000 per month to be applied  toward the balance  due. In March of
2004, the Company received a refund of accrued interest from the original lender
of $163,471,  which was applied to the outstanding  principal  balance.  At this
time,  the note was  restructured  to  provide  for 18  equal  monthly  payments
(including  interest  at the rate of 5% per annum) of  $15,418.  The balance due
under this note, as of June 30, 2004,  was $223,749,  the payment terms of which
were restructured to be $16,314 per month,  inclusive of interest at the rate of
5% per annum, over a three-year period commencing July 2003.  Interest income on
this note for the years ended June 30, 2004,  2003 and 2002 amounted to $19,649,
$3,993 and $2,900, 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  entered into an agreement to purchase a QUAD MRI
scanner  from  the  Company,  recognizing  on a  percentage-of-completion  basis
revenue of $636,121.  The agreement  provides for a purchase  price of $850,000,
payable as follows: (1) $400,000 downpayment (received April 2001); (2) $450,000
in 84 equal  monthly  installments,  including  interest  at 6%,  pursuant  to a
promissory note to be executed upon acceptance of the scanner. Timothy Damadian,
the son of Raymond V. Damadian, is the sole stockholder,  Director and President
of  Specialties.  The  balance  due  under  this  note as of June  30,  2004 was
$305,404.  Interest  income on this note for the years ended June 30, 2004, 2003
and 2002 amounted to $20,247, $23,654 and $15,292, respectively.



                     FONAR CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                JUNE 30, 2004

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

The maturities of advances and notes to related medical  practices over the next
five years are as follows:
                              Years Ending June 30,
                                     ---------------------
                                              2005                $240,127
                                              2006                 303,653
                                              2007                  70,172
                                              2008                  74,500
                                              2009                  32,382
                                                                  --------
                                                                  $720,834
                                                                  ========
NOTE 20 - 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 physician practices, including diagnostic
imaging services.

The accounting  policies of the segments are the same as those  described in the
summary  of  significant   accounting  policies.   All  intersegment  sales  are
market-based.  The Company  evaluates  performance  based on income or loss from
operations.

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

                                          FONAR       Physician
                                         Medical      Management
                                        Equipment      Services       Totals
                                       ------------  ------------  -----------
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   $ 3,415,012



                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004


NOTE 20 - SEGMENT AND RELATED INFORMATION (Continued)

Fiscal 2003:
- -----------
Net revenues from external customers   $ 29,958,698  $ 22,932,837  $ 52,891,535
Intersegment net revenues              $  2,041,080  $    -        $  2,041,080
Loss from operations                   $(11,324,562) $ (3,822,683) $(15,147,245)
Depreciation and amortization          $  2,628,826  $  1,804,664  $  4,433,490
Compensatory element of stock
  issuances                            $  1,330,767  $  3,511,981  $  4,842,748
Total identifiable assets              $ 30,378,270  $ 28,370,391  $ 58,748,661
Capital expenditures                   $    583,190  $  1,409,032  $  1,992,222

                                           FONAR       Physician
                                         Medical      Management
                                        Equipment      Services       Totals
                                       ------------  ------------  ------------
Fiscal 2002:
- -----------

Net revenues from external
  customers                            $ 16,153,131  $ 27,007,974  $ 43,161,105
Intersegment net revenues              $  1,050,599  $    -        $  1,050,599
Operating (loss) income                $(15,433,351) $  1,052,544  $(14,380,807)
Depreciation and amortization          $  2,804,669  $  2,081,674  $  4,886,343
Compensatory element of stock
  issuances                            $  1,715,678  $  2,996,485  $  4,712,163
Total identifiable assets              $ 40,179,100  $ 32,949,723  $ 73,128,823
Capital expenditures                   $  2,107,509  $  1,463,682  $  3,571,191


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 1.0%, 6.2% and 26.6%
of product  sales  revenues to third  parties for the years ended June 30, 2004,
2003 and 2002, respectively.

The  foreign  product  sales,  as a  percentage  of product  sales to  unrelated
parties, were made to customers in the following countries:

                                         2004          2003          2002
                                        ------        ------        ------

                   Puerto Rico              .3%          -  %          -  %
                   Scotland                -              .4          26.6
                   Spain                    .7           5.8           -
                                        ------        ------        ------
                                           1.0%          6.2%         26.6%
                                        ======        ======        ======




                     FONAR CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                JUNE 30, 2004


NOTE 20 - SEGMENT AND RELATED INFORMATION (Continued)

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 12.5%,  12.2% and 27.7% of consolidated net service and repair fees
for the years  ended June 30,  2004,  2003 and 2002,  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,
                                        -----------------------------------
                                         2004          2003          2002
                                        -------       -------       -------

                     Korea                 2.2%          2.8%          9.3%
                     Spain                 3.5           1.9           3.7
                     Mexico                -             -             3.0
                     Puerto Rico           -             -             3.5
                     Saudi Arabia          2.5           3.0           4.5
                     Poland                2.8           2.6           3.7
                     Scotland              3.3           1.9           -
                                        ------        ------        ------
                                          14.3%         12.2%         27.7%
                                        ======        ======        ======

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


                       FONAR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2004


NOTE 21 - QUARTERLY FINANCIAL DATA (UNAUDITED)

                                  (000's omitted, except per share data)

                                         For the Quarters Ended
                             ------------------------------------------------
                              Sep. 30,     Dec. 31,     Mar. 31,     June 30,
                               2003           2003          2004        2004
                             ---------    ---------    ---------    ---------
Total Revenues - Net         $ 13,302     $ 17,889     $ 19,353     $ 21,065

Total Costs and Expenses       17,041       20,352       20,759       21,928

Net Loss from Continuing
  Operations                   (3,843)      (2,630)      (1,484)      (1,537)

Basic and Diluted Net
  Loss Per Share from
  Continuing Operations      $  (0.05)    $  (0.03)    $  (0.02)    $  (0.02)

Basic and Diluted Net
  Loss Per Share from
  Discontinued Operations    $   -        $   -        $   -        $   -

Selling, general and administrative expenses for the quarter ended June 30, 2004
reflect  approximately  $344,000 of expenses,  which  relates to the prior three
quarters.   Other  income  for  the  quarter   ended  June  30,  2004   reflects
approximately $215,000 of income, which relates to the prior three quarters.

                                  (000's omitted, except per share data)

                                         For the Quarters Ended
                             ------------------------------------------------
                              Sep. 30,     Dec. 31,     Mar. 31,     June 30,
                                2002         2002         2003         2003
                             ---------    ---------    ---------    ---------
Total Revenues - Net         $ 13,277     $ 15,954     $  9,775     $ 13,886

Total Costs and Expenses       15,730       18,707       15,221       18,381

Net Loss from Continuing
  Operations                   (2,597)      (2,805)      (6,256)      (3,543)

Net (Loss) Gain from
  Discontinued Operations        (109)        (116)         (70)         490

Basic and Diluted Net
  Loss Per Share from
  Continuing Operations      $  (0.04)    $  (0.04)    $  (0.08)    $  (0.04)

Basic and Diluted Net
  Loss Per Share from
  Discontinued Operations    $    -       $    -       $    -       $    -


                     FONAR CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                JUNE 30, 2004


NOTE 21 - QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)

Loss per  share  from  continuing  operations  for  each  quarter  was  computed
independently using the weighted-average number of shares outstanding during the
quarter.  However,  loss per share from continuing  operations for the year were
computed  using the  weighted-average  number of shares  outstanding  during the
year.  As a result,  the sum of the loss per share for the four quarters may not
equal the full year loss per share.


NOTE 22 - SALE OF MANAGEMENT COMPANY AND DISCONTINUED OPERATIONS

On April 8,  2003,  HMCA sold all of its  issued  and  outstanding  stock of A&A
Services,  Inc.  ("A&A  Services"),  a physician  practice  management  services
organization  engaged in the business of managing  four  primary care  practices
located in Queens County, New York (the  "Practices").  The sale was made to the
former owners (the  "Buyers"),  for a purchase price of  $3,000,000,  payable as
follows: $500,000 at closing,  $2,350,000 due 75 days after closing and $150,000
six months following the closing, together with a release of indebtedness in the
approximate amount of approximately $913,000, which remained owing to the Buyers
by HMCA as a result of the original  acquisition.  The note  receivable from the
buyers of A&A  Services  of $150,000  was repaid  during the year ended June 30,
2004.

A&A Services had provided the Practices with management services,  office space,
equipment,  repair and  maintenance  service for the  equipment and clerical and
other non-medical personnel. All services were terminated upon the sale.

This  reporting  unit  of  the  Company's   operations  has  been  reflected  as
discontinued operations for the years ended June 30, 2003 and 2002. Accordingly,
operating  results  have been  segregated  from  continuing  operations  and are
reported  as  discontinued   operations  in  the   consolidated   statements  of
operations,  comprehensive income (loss) and cash flows for the years ended June
30, 2003 and 2002.

As a result of this sale, the Company realized a gain of approximately $510,000,
which was recognized in discontinued  operations  during the year ended June 30,
2003.


                     FONAR CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                JUNE 30, 2004


NOTE 22 - SALE OF MANAGEMENT COMPANY AND DISCONTINUED OPERATIONS (Continued)

Summarized financial information of discontinued operations is as follows:

                                                         For the Years Ended
                                                              June 30,
                                                     --------------------------
                                                         2003          2002
                                                     ------------  ------------
Management and other fees - related medical
  practices - net                                    $  1,179,095  $  1,517,465
                                                     ------------  ------------
Costs and Expenses:
  Costs related to management and other fees -
    related parties                                     1,271,121     1,638,354
  Amortization of management agreement                    220,404       522,407
  Interest expense                                          2,933       583,285
  Loss on impairment of management contract                -          4,700,000
                                                     ------------  ------------
      Total Costs and Expenses                          1,494,458     7,444,046
                                                     ------------  ------------
Loss from Discontinued Operations                    $   (315,363) $ (5,926,581)
                                                     ============  ============

Gain on Sale of Discontinued Operations Sales price:
  Cash proceeds, net of closing costs                $  2,821,564
  Note receivable                                         150,000
  Settlement of liabilities                               913,492
                                                     ------------
      Total Selling Price                               3,885,056

  Investment in discontinued operations                 3,375,242
                                                     ------------
Gain on Sale of Discontinued Operations              $    509,814
                                                     ============



                    FONAR CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                JUNE 30, 2004


NOTE 23 - ALLOWANCE FOR DOUBTFUL ACCOUNTS

The following  represents a summary of allowance  for doubtful  accounts for the
years ended June 30, 2004, 2003 and 2002, respectively:


                                      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
Receivables from related medical
  Practices                           1,296,390   (1),(2) 578,000          -        1,874,390
Advance and notes to related
  Parties                               446,035                    (1)   81,244       364,791




                                      Balance                                      Balance
Description                        June 30, 2002     Additions      Deductions   June 30, 2003
- -----------                        -------------  ---------------  ------------  -------------
                                                                    
Receivables from equipment sales
  and service contracts             $   382,437   (1)$     60,000     $    -     $    442,437
Receivables from equipment sales
  and service contracts - related
  parties                               694,655              -             -          694,655
Receivables from related medical
  Practices                           1,096,390           200,000          -        1,296,390
Advance and notes to related
  Parties                               366,035            80,000          -          446,035




                                      Balance                                       Balance
Description                        June 30, 2001     Additions      Deductions   June 30, 2002
- -----------                        -------------  ---------------  ------------  -------------
                                                                    
Receivables from equipment sales
  and service contracts             $   338,676   (1)$     43,761     $    -      $   382,437
Receivables from equipment sales
  and service contracts - related
  parties                               694,655              -             -          694,655
Receivables from related medical
  Practices                             538,297           558,093          -        1,096,390
Advance and notes to related
  Parties                               316,035   (1)      50,000          -          366,035



(1) Included in provision for bad debts.

(2) Excludes bad debt recoveries of $152,220.


                     FONAR CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                JUNE 30, 2004


NOTE 24 - SUBSEQUENT EVENT

Issuances of Common Stock
- -------------------------

During the period from July 1, 2004 through August 31, 2004:

a)   The  Company  issued  468,249  shares  of  common  stock  to  employees  as
     compensation of $539,233 under stock bonus plans.

b)   The Company issued 82,102 shares of common stock to consultants  and others
     at a value of $92,520.

c)   The Company issued 308,457 shares of common stock for costs and expenses of
     $2,004,970.

d)   The Company  issued  151,625  shares of common  stock upon the  exercise of
     warrants resulting in proceeds of $119,784.

e)   The Company  issued 6,410 shares of common stock upon the exercise of stock
     options resulting in proceeds of $7,500.



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

In performing their audit of our consolidated  financial statements for the year
ended June 30, 2004, our  independent  registered  public  accounting firm noted
that certain  royalties  under a patent  license had not been accrued during the
first three quarters. This was corrected through appropriate adjustments and our
internal  procedures and controls  modified to assure that such accruals will be
made on an ongoing basis. Having made these  modifications,  we believe that our
disclosure  controls  and  procedures  in place are  effective  to  ensure  that
material information relating to FONAR, including its consolidated subsidiaries,
is made known to us by others in FONAR and these  entities in a timely manner so
that  appropriate  disclosures can be made and appropriate  corporate  action be
taken.

Based upon the controls evaluation, we have concluded that, as of the end of the
period covered by this annual report,  except as described above, our disclosure
controls  are  effective  to ensure that  material  information  relating to our
company is made known to management,  including our chief executive  officer and
principal accounting personnel, particularly during the period when our periodic
reports are being  prepared,  and that our internal  controls  are  effective to
provide  reasonable  assurance that our  consolidated  financial  statements are
fairly presented in conformity with generally accepted accounting principles.

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.     68          President, Treasurer,
                                          Chairman of the Board
                                 and a Director

David B. Terry                57          Senior Vice President
                                  and Secretary

Claudette J.V. Chan           66          Director

Robert J. Janoff              77          Director

Charles N. O'Data             68          Director

Robert Djerejian              72          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 only
of a salary  which has  remained  constant  for more than the past three  fiscal
years.

The Board of Directors  does not have a compensation  Committee.  Dr. Raymond V.
Damadian, President, Chief Executive Officer and Chairman of the Board, 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 2004 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 2004.



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. 2004  $86,799.99    -      -           -        -        -       -
Damadian,  2003  $86,799.98    -      -           -        -        -       -
CEO        2002  $86,799.96    -      -           -        -        -       -
----------  ----  ----------  ----- -------  ---------- -------  ------- -------



II.  OPTION/SAR GRANTS IN LAST FISCAL YEAR


                                                               Potential
                                                               Realizable
                                                               Value at Assumed
                                                               Annual Rates of    Alternative
                                                               Stock Price        to (f) and
                                                               Appreciation for   (g): Grant
                   Individual Grants                           Option Term        Date  Value
- -----------------------------------------------------------    ----------------   -----------
    (a)         (b)         (c)          (d)         (e)          (f)      (g)         (h)
                        % of Total
                        Options/
                         SARs
             Options/   Granted to   Excercise
                SARs     Employees       or                                       Grant Date
              Granted   in Fiscal    Base 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, 2004

                      (a)                (b)             (c)
Plan category         Number of          Weighted-       Number of securities
                      securities         average         remaining available
                      to be issued       exercise price  for future issuance
                      upon exercise      of outstanding  under equity
                      of outstanding     options,        compensation plans
                      options, warrants  warrants        (excluding securities
                      and rights         and rights      reflected in column (a)
                      -----------------  --------------  -----------------------
Equity compensation      3,047,006           $1.22               3,556,468
  plans approved by
  security holders

Equity compensation           -               N/A                     -
  plans not approved
  by security holders

Total                    3,047,006           $1.22               3,556,468

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




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,  2004,  options  to  purchase
2,098,724  shares of Common Stock of FONAR were  available for future grant.  Of
the options granted under this plan, 2,364,122 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, 2004,  options to purchase  1,457,744
shares of Common Stock of Fonar were  available for future grant under the plan.
Of the options granted under this plan 623,884 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,  2004 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,  2004,  1,651,565  shares of Common Stock of Fonar
were available for future grant under the 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, 2004,  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, 2004,  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, 2004,  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 16, 2004.

Name and Address of           Shares            Percent
Beneficial Owner (1)     Beneficially Owned    of Class

Raymond V. Damadian, M.D.
c/o FONAR Corporation
Melville, New York
 Director, President
 CEO, 5% + Stockholder
    Common Stock            2,488,274             2.50%
    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               80,000               *
    Class A Preferred           1,999               *

Charles N. O'Data
Director
    Common Stock                  700               *

All Officers and Directors
as a Group (5 persons) (2) (3)
    Common Stock            2,588,843             2.60%
    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  16,928  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, 11 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.  Dynamic
performed management services for two New York professional service corporations
having three office locations:  Hempstead, New York, Bellmore, New York and Deer
Park, New York. These  professional  service  corporations are Alliance Physical
Medicine  and  Rehabilitation,  P.C.  and  Bellmore  Medical  Practice,  P.C. In
addition, HMCA performs management services for Superior Medical Services, P.C.,
a New York professional service corporation, which conducts physical therapy and
rehabilitation  at three locations in Elmont,  Elmhurst and the Bronx, New York.
Dr. Damadian is the  stockholder,  director and President of each of these three
physical therapy and rehabilitation professional service corporations.

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  range  from  $250 to $550  per MRI  scan.  The fees to HMCA  under  the
management agreements with the physical therapy and rehabilitation practices are
flat fees charged on a monthly basis.  The monthly fees to the physical  therapy
and rehabilitation facilities range from approximately $90,000 to $285,000.

During the fiscal  years ended June 30, 2004 and June 30, 2003 the net  revenues
received by HMCA from the MRI Centers owned by Dr.  Damadian were  approximately
$13.3 million and $13.5 million respectively, and the net revenues received from
the physical  therapy and  rehabilitation  practices  were $9.7 million and $9.4
million, respectively.

OTHER TRANSACTIONS

Effective  December  1, 1993,  one of the  Centers,  Albany  Magnetic  Resonance
Imaging,  P.C., also referred to as the "Albany Center", a Georgia  professional
corporation of which Raymond V. Damadian is the sole  shareholder,  director and
President, purchased the scanner being utilized at its site from the Company for
a purchase  price of  $1,128,844,  which in Fonar's  opinion  represented a fair
market price based on sales of like equipment by Fonar to its customers.  Of the
purchase  price,  $574,077  was  paid  by  the  assumption  and  payment  of our
indebtedness  to the lender  secured by the scanner.  Such  indebtedness  to the
lender was retired pursuant to a new equipment  finance lease between the lender
and the Albany Center,  guaranteed by us,  providing for 18 monthly  payments of
$35,000 each.  Following  payment of the lease,  the  remaining  $554,767 of the
purchase price due to us was required to be paid pursuant to a promissory  note,
with interest at 10% per annum, over an 18 month term, consisting of 17 payments
of $35,000 each and one final payment of $2,454.08.  In June,  1997, the payment
terms for the outstanding  balance of $344,766 were  restructured to provide for
60 equal monthly payments,  including  interest at the rate of 10% per annum, of
$7,325.27 each, commencing July, 1997. The Albany Center has been closed and the
remaining amounts due were paid in the first quarter of fiscal 2004.

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
pursuant  to a note  bearing  interest  at 14% per  annum and  providing  for 60
monthly  payments of $20,700  each.  The remaining  $111,431.12  of the purchase
price was to be paid concurrently  with the payments to the lender.  The payment
terms for the principal balance,  plus accrued interest, in the aggregate amount
of  $139,290,  were  restructured  to  provide  for 60 equal  monthly  payments,
including  interest at the rate of 10% per annum,  of $2,959.50 each  commencing
July,  1998.  In  fiscal  2001,  following  the  payment  in full by  FONAR,  as
guarantor,  of the  indebtedness  due to the  lender,  there  was as a  result a
balance of $893,606  then owing to FONAR by the Melville  Center.  The $2,959.50
monthly  payment to FONAR was  increased by an  additional  principal  amount of
$10,000 per month to be applied toward the balance due. The outstanding  balance
of June 30, 2004 was  $223,744.  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.

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,
2003 through June 30,  2004.  The service  contract has been renewed at the same
rate for the period July 1, 2004 through June 30, 2005.

Pursuant to an agreement dated February 1, 2000,  Deerfield  Magnetic  Resonance
Imaging,  P.A.,  also  referred  to  as  "Deerfield",   a  Florida  professional
association of which Raymond V. Damadian is the sole  stockholder,  director and
President,  agreed to lease a Fonar  QUAD(TM) 12000 MRI Scanner from the Company
for a term of five  years at a  monthly  rental of  $12,356.09.  The term of the
lease  commenced  on July  18,  2000  upon the  acceptance  of the  scanner.  In
September,  2002,  Deerfield  purchased the Scanner,  paying $800,000 toward the
purchase  price.  A balance of $14,285 owing as of June 30, 2003 was paid in the
first quarter of fiscal 2004.

Subsequently,  Deerfield obtained new premises, changed its name to Stand-Up MRI
of Boca  Raton,  P.A.,  also  referred to as Boca  Raton,  and  entered  into an
agreement to purchase a  Stand-Up(TM)  MRI scanner from FONAR for  $1,500,000 in
October,  2003.  The  installation  has been  completed  and the  balance of the
purchase price was paid in June, 2004.

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,  2004  through  March 23,
2005. 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, 2004, was $305,404.  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
Stand-Up(TM) MRI scanner.  The service  agreement  commenced on December 3, 2003
and runs through December 12, 2004. 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, 2003 at the
rate of $85,000 per annum for a Stand-Up(TM) MRI scanner.  It was renewed for an
additional one-year period at the same price on July 13, 2004. It is anticipated
that the service  agreement will be renewed upon its  expiration in July,  2005.
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 Stand-Up(TM) MRI at a fee of $85,000 per annum. The
term runs from November 23, 2003 through  November 22, 2004. 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.

During  fiscal  2002,  Damadian  MRI at  Elmhurst,  P.C.,  also  referred  to as
"Elmhurst",  a New York professional corporation of which Raymond V. Damadian is
the sole  stockholder,  director and President,  agreed to lease an Echo(TM) MRI
scanner from FONAR on a fee per scan basis of $200 per MRI scan performed.

Bronx MRI 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  Stand-Up(TM)  MRI scanner  running from March 23,
2004 through March 22, 2005 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.

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  Stand-Up(TM)  MRI scanner  running  from May 1, 2004 through
April 30,  2005 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, 2004 through  September 9, 2005 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,  purchased a  Stand-Up(TM)  MRI from Fonar on which the  warranty  will
expire in October, 2004. It is anticipated that Miami will enter into a one year
service agreement with FONAR at that time at a rate of $85,000 per annum.  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.

During the second quarter in fiscal 2003, 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,  agreed to
purchase a Stand-Up(TM)  MRI from Fonar for a purchase price of $1,400,000.  The
construction  and  installation of this scanner was completed in December,  2003
and  payment  has  been  made in full.  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.

During the fourth quarter of fiscal 2003, 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,  agreed to purchase a
Stand-Up(TM) MRI from Fonar for $1,400,000. The construction and installation of
this scanner was completed in February, 2004, and payment has been made in full.
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.

During the third quarter of fiscal 2004, 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,  agreed to
purchase a Stand-Up(TM) MRI from FONAR for $1,400,000 payable in installments as
the work progresses in accordance with FONAR's usual terms. The construction and
installation of this scanner has not yet been  completed.  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.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees

The  aggregate  fees billed by Marcum & Kliegman LLP for the audit of our annual
financial  statements for the fiscal year ended June 30, 2004 and the reviews of
the  financial  statements  included in our Forms 10-Q for the fiscal year ended
June 30, 2004 were $418,276.

The  aggregate  fees billed by Marcum & Kliegman LLP for the audit of our annual
financial  statements for the fiscal year ended June 30, 2003 and the reviews of
the financial  information  included in our Forms 10-Q for the fiscal year ended
June 30, 2003 were $460,805.

Audit Related Fees

No fees were billed by Marcum & Kliegman LLP for the fiscal years ended June 30,
2004 or June 30,  2003 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,
2004 or June 30, 2003 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, 2004 were $172,542.

The  aggregate  fees  billed by Marcum & Kliegman  LLP for tax  compliance,  tax
advice and tax planning in the fiscal year ended June 30, 2003 were $189,094.

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, 2004 and June 30, 2003
were $106,452 and $124,417,  respectively, which included services in connection
with the registration of securities, and financing transactions.

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 2004 and 2003 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.

     Independent Auditors' Report.

     Consolidated Balance Sheets as at June 30, 2004 and 2003.

     Consolidated  Statements of  Operations  for the Three Years Ended June 30,
     2004, 2003 and 2002.

     Consolidated  Statements of Stockholders'  Equity for the Three Years Ended
June 30, 2004, 2003 and 2002.

     Consolidated  Statements  of Cash Flows for the Three  Years Ended June 30,
2004, 2003 and 2002.

     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 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.

     10.28  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.

     10.29 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.

     10.30  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.

     10.31 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.

     14.1 Code of Ethics. See Exhibits.

     21.1 Subsidiaries of the Registrant. See Exhibits.

     23.1 Independent Registered Public Accounting Firm's Consent. See Exhibits.

     31.1 Section 302 Certification. See Exhibits.

     32.1 Section 906 Certification. 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 15, 2004

                               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 15, 2004
Raymond V. Damadian         Board of Directors,
                            President, Director
                            Principal Executive
                            Officer and Acting
                            Principal Financial
                            Officer)

/s/ Claudette J.V. Chan     Director                September 15, 2004
Claudette J.V. Chan


/s/ Robert J. Janoff        Director                September 15, 2004
Robert J. Janoff

/s/ Charles N. O'Data       Director                September 15, 2004
Charles N. O'Data

/s/ Robert Djerejian        Director                September 15, 2004
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
Vice President of Administration and Secretary