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<SEC-DOCUMENT>0000355019-03-000011.txt : 20030515
<SEC-HEADER>0000355019-03-000011.hdr.sgml : 20030515
<ACCEPTANCE-DATETIME>20030515173442
ACCESSION NUMBER:		0000355019-03-000011
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		1
CONFORMED PERIOD OF REPORT:	20030331
FILED AS OF DATE:		20030515

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			FONAR CORP
		CENTRAL INDEX KEY:			0000355019
		STANDARD INDUSTRIAL CLASSIFICATION:	SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093]
		IRS NUMBER:				112464137
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			0630

	FILING VALUES:
		FORM TYPE:		10-Q
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-10248
		FILM NUMBER:		03706242

	BUSINESS ADDRESS:	
		STREET 1:		110 MARCUS DR
		CITY:			MELVILLE
		STATE:			NY
		ZIP:			11747
		BUSINESS PHONE:		6316942929

	MAIL ADDRESS:	
		STREET 1:		110 MARCUS DRIVE
		CITY:			MELVILLE
		STATE:			NY
		ZIP:			11747
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>final10q.txt
<TEXT>
                              FORM 10-Q
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

      [X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
           OF THE SECURITIES EXCHANGE ACT OF 1934

      For the quarterly period ended      MARCH 31, 2003
                                       --------------------

      [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
           For the transition period from    to
                                         ----   ----
                         Commission file number 0-10248
                         ------------------------------

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

           DELAWARE                                     11-2464137
- -------------------------------             ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

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

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

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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).     YES  X     NO
                                                    ----     ----

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the close of the latest practicable date.


            Class                          Outstanding at May 9, 2003
- --------------------------------    ---------------------------------------
Common Stock, par value $.0001                      80,661,084
Class B Common Stock, par value $.0001                   4,153
Class C Common Stock, par value $.0001               9,562,824
Class A Preferred Stock, par value $.0001            7,836,287





<PAGE>


FONAR CORPORATION AND SUBSIDIARIES
INDEX


PART I - FINANCIAL INFORMATION                                       PAGE
                                                                     ----
Item 1.  Financial Statements

   Condensed Consolidated Balance Sheets - March 31, 2003
     (Unaudited) and June 30, 2002                                     3

   Condensed Consolidated Statements of Operations for
     the Three Months Ended March 31, 2003 and
     March 31, 2002 (Unaudited)                                        5

   Condensed Consolidated Statements of Operations for
     the Nine Months Ended March 31, 2003 and
     March 31, 2002 (Unaudited)                                        6

   Condensed Consolidated Statements of Comprehensive
     Income (Loss) for the Three Months Ended
     March 31, 2003 and March 31, 2002 (Unaudited)                     7

   Condensed Consolidated Statements of Comprehensive
     Income (Loss) for the Nine Months Ended
     March 31, 2003 and March 31, 2002 (Unaudited)                     8

   Condensed Consolidated Statements of Cash Flows for
     the Nine Months Ended March 31, 2003 and
     March 31, 2002 (Unaudited)                                        9


   Notes to Condensed Consolidated Financial Statements (Unaudited)   10

Item 2. Management's Discussion and Analysis of Financial             23
        Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About
        Market Risk

Item 4. Controls and Procedures


PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities

Item 3. Defaults Upon Senior Securities

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)

ASSETS                                                    March 31,     June 30,
                                                            2003          2002
                                                         (UNAUDITED)
Current Assets:                                          ----------- -----------
  Cash and cash equivalents                                 $ 4,050     $ 7,461

  Marketable securities                                       5,797       5,573

  Restricted cash                                             5,500       5,500

  Accounts receivable - net                                   1,360         781

  Accounts receivable - related medical practices - net      12,395      12,939

  Costs and estimated earnings in excess
    of billings on uncompleted contracts                      1,302       1,153

  Inventories                                                 5,064       4,664

  Investment in sales-type leases with related parties           29       1,797

  Investment in sales-type lease                                132         120

  Prepaid expenses and other current assets                   1,604       1,102

  Assets from discontinued operations                         3,632       4,007
                                                         ----------- -----------
        Total current assets                                 40,865      45,097
                                                         ----------- -----------

Property and equipment - net                                  8,651      10,535

Advances and notes to related parties - net                   1,299       1,497

Investment in sales-type leases - related parties                 -         815

Investment in sales-type lease                                  642         741

Notes receivable                                                 60         175

Management agreements - net                                  10,479      11,001

Other intangible assets - net                                 3,210       2,649

Other assets                                                    329         320
                                                         ----------- -----------
                                                           $ 65,535    $ 72,830
                                                         =========== ===========


See  accompanying   notes  to  condensed   consolidated   financial   statements
(unaudited).


                                     Page 3
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
                                                          March 31,    June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY                        2003         2002
                                                         (UNAUDITED)
Current Liabilities:                                     ----------- -----------
  Current portion of long-term debt and capital leases      $ 7,287     $ 8,813
  Accounts payable                                            5,269       3,999
  Other current liabilities                                   7,845       7,485
  Customer advances                                           4,798       4,308
  Customer advances - related parties                           798       3,400
  Billings in excess of costs and estimated
    earnings on uncompleted contracts                         1,529       1,115
  Income taxes payable                                          734         745
  Liabilities from discontinued operations                    1,097       1,125
                                                         ----------- -----------
      Total Current Liabilities                              29,357      30,990

Long-term debt and capital leases
   less current portion                                         991         833
Unearned revenue - license fee                                2,925       4,680
Other non-current liabilities                                   319         360
                                                         ----------- -----------
      Total Liabilities                                      33,592      36,863
                                                         ----------- -----------
Minority interest                                               257         272
                                                         ----------- -----------
STOCKHOLDERS' EQUITY

Class A  non-voting  Preferred  Stock  $.0001 par value;
8,000,000  authorized, 7,836,287 issued and outstanding
at March 31, 2003 and at June 30, 2002                            1           1

Common Stock $.0001 par value; 85,000,000 shares
authorized; 78,690,551 outstanding at March 31, 2003
and 71,582,243 at June 30, 2002                                   8           7

Class B Common Stock $ .0001 par value; 4,000,000 shares
authorized, (10 votes per share), 4,153 issued and
outstanding at March 31, 2003 and 4,211 at June 30, 2002          -           -

Class C Common Stock $.0001 par value;  10,000,000 shares
authorized,  (25 votes per share), 9,562,824 issued and
outstanding at March 31, 2003 and at June 30, 2002                1           1

Paid-in capital in excess of par value                      127,792     120,156
Accumulated other comprehensive income                           65          85
Accumulated deficit                                         (94,835)    (82,883)
Notes receivable from stockholders                          (   671)    (   997)
Treasury stock, at cost - 291,064 shares of common stock
  at March 31, 2003 and at June 30, 2002                    (   675)    (   675)
                                                         ----------- -----------
      Total Stockholders' Equity                             31,686      35,695
                                                         ----------- -----------
      Total Liabilities and Stockholders' Equity           $ 65,535    $ 72,830
                                                         =========== ===========
See  accompanying   notes  to  condensed   consolidated   financial   statements
(unaudited).                      Page 4
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
                                                      FOR THE THREE MONTHS ENDED
                                                               MARCH 31,
                                                         -----------------------
                                                             2003        2002
REVENUES                                                 ----------- -----------
  Product sales - net                                       $ 2,519     $ 1,897
  Product sales - related parties - net                         746       1,101
  Service and repair fees - net                                 516         468
  Service and repair fees - related parties - net                80          59
  Management and other fees-related medical practices-net     5,329       6,341
  License fees and royalties                                    585         585
                                                         ----------- -----------
     Total Revenues - Net                                     9,775      10,451
                                                         ----------- -----------
COSTS AND EXPENSES
  Costs related to product sales                              1,717       1,411
  Costs related to product sales - related parties              417         625
  Costs related to service and repair fees                      654         538
  Costs related to service and repair
    fees - related parties                                      191          67
  Costs related to management and other
    fees - related parties                                    3,324       3,477
  Research and development                                    1,271       1,193
  Selling, general and administrative                         5,538       5,137
  Compensatory element of stock issuances for
    selling, general and administrative expenses              2,324       1,606
  Provision for bad debts                                        54          13
  Amortization of management agreements                         174         174
                                                         ----------- -----------
     Total Costs and Expenses                                15,664      14,241
                                                         ----------- -----------
Loss From Operations                                        ( 5,889)    ( 3,790)

Financing Costs Paid in Stock and Warrants                        -     (   626)
Interest Expense                                            (   117)    (    62)
Interest Income                                                 123         185
Other Income (Expense)                                      (   156)    (    11)
Minority Interest in Income of Partnerships                 (   201)    (    46)
                                                         ----------- -----------
Loss Before Provision for Income Taxes                      ( 6,240)    ( 4,350)
Provision for Income Taxes                                       16          10
                                                         ----------- -----------
Net Loss from Continuing Operations                         ( 6,256)    ( 4,360)
Net Loss from Discontinued Operations                       (    70)    (   690)
                                                         ----------- -----------
NET LOSS                                                   $( 6,326)   $( 5,050)
                                                         =========== ===========
Net Loss per share Continuing Operations                     $(.08)      $(.07)
Net Loss per share Discontinued Operations                       -        (.01)
                                                         ----------- -----------
Basic and Diluted Net Loss per share                         $(.08)      $(.08)
                                                         =========== ===========
Weighted average number of shares outstanding                76,653      63,200
                                                         =========== ===========
See  accompanying   notes  to  condensed   consolidated   financial   statements
(unaudited).                        Page 5
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
                                                       FOR THE NINE MONTHS ENDED
                                                               MARCH 31,
                                                         -----------------------
                                                             2003         2002
REVENUES                                                 ----------- -----------
  Product sales - net                                      $ 11,252     $ 3,413
  Product sales - related parties - net                       6,727       3,534
  Service and repair fees - net                               1,567       1,440
  Service and repair fees - related parties - net               243         168
  Management and other fees-related medical practices-net    17,252      18,993
  License fees and royalties                                  1,965       1,818
                                                         ----------- -----------
     Total Revenues - Net                                    39,006      29,366
                                                         ----------- -----------
COSTS AND EXPENSES
  Costs related to product sales                              7,702       2,478
  Costs related to product sales - related parties            4,000       2,545
  Costs related to service and repair fees                    2,035       1,632
  Costs related to service
    and repair fees - related parties                           406         190
  Costs related to management
    and other fees - related parties                         10,014      10,999
  Research and development                                    3,875       3,653
  Selling, general and administrative                        17,198      14,987
  Compensatory element of stock issuances for
    selling, general and administrative expenses              4,130       3,311
  Provision for bad debts                                       222         197
  Amortization of management agreements                         522         522
                                                         ----------- -----------
     Total Costs and Expenses                                50,104      40,514
                                                         ----------- -----------
Loss From Operations                                        (11,098)    (11,148)

Financing Costs Paid in Stock and Warrants                        -     ( 1,641)
Interest Expense                                            (   481)    (   592)
Interest Income                                                 570         718
Other Income (Expense)                                      (   158)          5
Minority Interest in Income of Partnerships                 (   470)    (   147)
                                                         ----------- -----------
Loss Before Provision for Income Taxes                      (11,637)    (12,805)
Provision for Income Taxes                                       20          27
                                                         ----------- -----------
Net Loss from Continuing Operations                         (11,657)    (12,832)
Net Loss from Discontinued Operations                       (   295)    (   775)
                                                         ----------- -----------
NET LOSS                                                   $(11,952)   $(13,607)
                                                             =======     =======
Net Loss per share Continuing Operations                     $(.16)      $(.21)
Net Loss per share Discontinued Operations                       -        (.01)
                                                         ----------- -----------
Basic and Diluted Net Loss per share                         $(.16)      $(.22)
                                                         =========== ===========
Weighted average number of shares outstanding                74,276      61,731
                                                         =========== ===========
See  accompanying   notes  to  condensed   consolidated   financial   statements
(unaudited).                        Page 6
<PAGE>

FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(000'S OMITTED)
                                                      FOR THE THREE MONTHS ENDED
                                                                MARCH 31,
                                                         -----------------------
                                                             2003      2002
                                                         ----------- -----------
Net loss                                                    $(6,326)    $(5,050)

Other comprehensive income (loss), net of tax:
    Unrealized gains (losses) on securities,
      net of tax                                                  4      (   68)
                                                         ----------- -----------
Total comprehensive loss                                    $(6,322)    $(5,118)
                                                         =========== ===========



FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(000'S OMITTED)


                                                       FOR THE NINE MONTHS ENDED
                                                                MARCH 31,
                                                         -----------------------
                                                            2003       2002
                                                         ----------- -----------
Net loss                                                   $(11,952)   $(13,607)

Other comprehensive income, net of tax:
    Unrealized gains on securities,
      net of tax                                                65          82
                                                         ----------- -----------
Total comprehensive loss                                   $(11,887)   $(13,525)
                                                         =========== ===========
















See  accompanying   notes  to  condensed   consolidated   financial   statements
(unaudited).
                                     Page 7
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(000'S OMITTED)

                                                       FOR THE NINE MONTHS ENDED
                                                                MARCH 31,
                                                         -----------------------
                                                             2003       2002
                                                         ----------- -----------
Cash Flows from Operating Activities
 Net loss                                                  $(11,952)  $(13,607)
 Loss from discontinued operations                              295        775
                                                         ----------- -----------
 Loss from continuing operations                            (11,657)   (12,832)
 Adjustments to reconcile net loss to net cash
  provided by (used in) operating activities:
    Minority interest in net income of partnerships             470        147
    Depreciation and amortization                             3,200      3,436
    Provision for bad debts                                     222        197
    Compensatory element of stock issuances                   4,130      3,311
    Stock issued for professional services                    2,450        586
    Interest expense paid in stock                               10          -
    Financing costs paid in stock and warrants                    -      1,641
    Amortization of unearned license fee                    ( 1,755)   ( 1,755)
    (Increase) decrease in operating assets, net:
       Accounts and notes receivable                        (    25)       634
       Costs and estimated earnings in excess of
         billings on uncompleted contracts                  (   149)       873
       Inventories                                          (   400)   (   563)
       Principal payments on sales type lease-related
         parties                                              2,583         31
       Principal payments on sales type lease                    87         92
       Prepaid expenses and other current assets            (   502)   (   342)
       Other assets                                         (     9)         7
       Receivables and advances to related parties              178    ( 1,211)
    Increase (decrease) in operating liabilities, net:
       Accounts payable                                       1,270    (   436)
       Other current liabilities                                527        160
       Customer advances                                    ( 2,112)     3,275
       Billings in excess of costs and estimated
         earnings on uncompleted contracts                      414        488
       Other liabilities                                    (    41)        28
       Income taxes payable                                 (    11)        17
                                                         ----------- -----------
Net cash used in continuing operations                      ( 1,120)   ( 2,216)
Net cash provided by discontinued operations                     62    (   733)
                                                         ----------- -----------
Net cash used in operating activities                       ( 1,058)   ( 2,949)
                                                         ----------- -----------





See  accompanying   notes  to  condensed   consolidated   financial   statements
(unaudited).

                                     Page 8
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(000'S OMITTED)

                                                       FOR THE NINE MONTHS ENDED
                                                                MARCH 31,
                                                         -----------------------
                                                              2003       2002
                                                         ----------- -----------
Cash Flows from Investing Activities:
  Sales (purchases) of marketable securities                (   244)        212
  Purchases of property and equipment                       (   602)    ( 2,119)
  Costs of capitalized software development                 (   627)    (   616)
  Cost of patents and copyrights                            (   223)          -
                                                         ----------- -----------
Net cash used in investing activities                       ( 1,696)    ( 2,523)
                                                         ----------- -----------

Cash Flows from Financing Activities:
  Distributions to holders of minority interests            (   405)    (   201)
  Proceeds from long-term debt                                  950           -
  Repayment of long-term debt and capital
    leases                                                  ( 2,296)    ( 3,470)
  Proceeds from exercise of stock options
     and warrants                                             1,104           -
                                                         ----------- -----------
Net cash used in financing activities                       (   647)    ( 3,671)
                                                         ----------- -----------

Decrease in Cash and Cash Equivalents                       ( 3,401)    ( 9,143)

Cash of Continuing Operations Beginning of Period             7,461      13,935
Cash of Discontinued Operations Beginning of Period              33         105
                                                         ----------- -----------
Cash and Cash Equivalents Beginning of Period                 7,494      14,040

Cash of Continuing Operations End of Period                   4,050       4,882
Cash of Discontinuing Operations End of Period                   43          15
                                                         ----------- -----------
Cash and Cash Equivalents End of Period                     $ 4,093     $ 4,897
                                                         ==========  ===========

See  accompanying   notes  to  condensed   consolidated   financial   statements
(unaudited).













                                     Page 9
<PAGE>
                       FONAR CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2003
                                   (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-Q and Article 10 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes  required by accounting  principles  generally  accepted in the United
States for complete  financial  statements.  In the opinion of  management,  all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair  presentation  have been  included.  Operating  results for the  nine-month
period ended March 31, 2003 are not  necessarily  indicative of the results that
may be  expected  for  the  fiscal  year  ending  June  30,  2003.  For  further
information,  refer  to the  consolidated  financial  statements  and  footnotes
thereto included in the Company's Annual Report on Form 10-K filed on October 7,
2002 for the fiscal year ended June 30, 2002.

NOTE 2 - 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.

In March 2003, the Company decided to sell its reporting unit which manages four
primary  care  medical  practices.  In  accordance  with  Statement of Financial
Accounting Standards ("SFAS") No. 144, the results of these operations have been
accounted  for as a  discontinued  operation.  Accordingly,  all  prior  periods
presented have been restated,  where applicable,  to reflect this reporting unit
as a discontinued operations.  In April 2003, this reporting unit was sold. (See
Note 12.)



                                     Page 10
<PAGE>
                       FONAR CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2003
                                   (UNAUDITED)

NOTE 3 - 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.

The Company does not consolidate the medical  practices which it manages,  as it
has previously  determined that  consolidation of such medical  practices is not
appropriate because the underlying  management agreements do not meet all of the
six criteria of Emerging Issues Task Force ("EITF") Consensus No. 97-2.

Use of Estimates

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

Inventories

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

Management Agreements

Management  agreements are being amortized using the  straight-line  method over
20-year term of the agreements.

Long-Lived Assets

The Company  periodically  assesses the  recoverability  of  long-lived  assets,
including  property and equipment,  intangibles and management  contracts,  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.






                                     Page 11
<PAGE>
                       FONAR CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2003
                                   (UNAUDITED)

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings (Loss) Per Share

Basic  earnings  (loss) per share is computed  based on weighted  average shares
outstanding and excludes any potential  dilution.  In accordance with 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 or diluted
earnings per share since they are  antidilutive.  In accordance  with EITF Topic
D-95, prior period's  earnings per share were restated.  Diluted earnings (loss)
per share 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.

Options and warrants to purchase approximately 6,535,000 and 4,036,000 shares of
common stock were  outstanding  at March 31, 2003, and 2002,  respectively,  but
were not included in the computation of diluted earnings per share due to losses
for all periods, as a result of the options and warrants being antidilutive.

At March 31, 2003, 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 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.  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:


















                                     Page 12
<PAGE>
                       FONAR CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2003
                                   (UNAUDITED)

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings (Loss) Per Share (Continued)

                                                  ( 000's Omitted)
                                      ------------------------------------------
                                       For the Nine Months  For the Three Months
                                         Ended March 31,       Ended March 31,
                                      --------------------  --------------------
                                         2003       2002       2003       2002
                                      ---------  ---------  ---------  ---------
Net (Loss) as Reported                $(11,952)  $(13,607)  $ (6,326)  $ (5,050)

Deduct:
   Total stock-based employee
     compensation expense
     determined under fair value
     based method for all awards           613        589       -          -
                                      ---------  ---------  ---------  ---------
Pro Forma Net (Loss)                  $(12,565)  $(14,196)  $ (6,326)  $ (5,050)
                                      =========  =========  =========  =========

Basic Net (Loss) Per Share as
    Reported                             $(.16)     $(.22)     $(.08)     $(.08)
                                      =========  =========  =========  =========


Basic Pro Forma Net (Loss) Per           $(.17)     $(.23)     $(.08)     $(.08)
     Share                            =========  =========  =========  ========


Diluted Net (Loss) Per Share as          $(.16)     $(.22)     $(.08)     $(.08)
    Reported                          =========  =========   ========   ========



Diluted Pro Forma Net (Loss)             $(.17)     $(.23)     $(.08)     $(.08)
    Per Share                         =========  =========   ========   ========

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 Nine Months
                                         Ended March 31,
                                      --------------------
                                         2003       2002
                                      ---------  ---------
Expected Life (Years)                      3          3
Interest Rate                           4.00%      4.00%
Annual Rate of Dividends                   0%         0%
Volatility                                92%        92%

                                     Page 13

<PAGE>
                       FONAR CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2003
                                   (UNAUDITED)

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings (Loss) Per Share (Continued)

The fair  value of options at date of grant  using the fair value  based  method
during fiscal 2003 is estimated at $1.00.

Recent Accounting Pronouncements

In June 2001, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
141,  "Accounting for Business  Combinations" and SFAS No. 142,  "Accounting for
Goodwill and Other Intangible  Assets".  SFAS No. 141 requires that all business
combinations  be  accounted  for using the  purchase  method of  accounting  and
prohibits   the   pooling-of-interests   method  of   accounting   for  business
combinations initiated after June 30, 2001. According to SFAS No. 142, goodwill,
which  arises  from  business  combinations  after  June  30,  2001,  cannot  be
amortized.  In addition,  SFAS No. 142 requires the  discontinuation of goodwill
amortization and the amortization of intangible assets with indeterminate  lives
effective the date the Company  adopts the statement.  The Company  adopted SFAS
No. 141 and SFAS No. 142 on July 1, 2001.

In October 2001, the FASB issued SFAS No. 144 ("SFAS 144"),  "Accounting for the
Impairment  or Disposal of Long-Lived  Assets,"  which  supersedes  SFAS No. 121
("SFAS  121"),  "Accounting  for the  Impairment  of  Long-Lived  Assets and for
Long-Lived  Assets to be Disposed Of" and certain  provisions of APB Opinion No.
30,  "Reporting  Results of  Operations - Reporting the Effects of Disposal of a
Segment of a Business,  and  Extraordinary,  Unusual and Infrequently  Occurring
Events  and  Transactions."  SFAS 144  requires  that  long-lived  assets  to be
disposed of by sale, including discontinued operations, be measured at the lower
of the carrying  amount or fair value,  less cost to sell,  whether  reported in
continuing operations or in discontinued operations.  SFAS 144 also broadens the
reporting  requirements of discontinued  operations to include all components of
an entity that have operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
The  provisions  of SFAS 144 have been adopted by the Company as of July 1,2001.
The adoption of SFAS 144 did not have a significant  impact to the  consolidated
financial statements.

In April 2002,  the FASB issued SFAS No. 145 ("SFAS 145"),  "Rescission  of FASB
Statement  No. 4, 44 and 64,  Amendment of FASB  Statement No. 13, and Technical
Corrections."  The  rescission of SFAS No. 4,  "Reporting  Gains and Losses from
Extinguishments",  and SFAS No.  64,  "Extinguishments  of Debt Made to  Satisfy
Sinking Fund  Requirements",  which amended SFAS No. 4, affects income statement
classification  of gains and losses  from  extinguishment  of debt.  The Company
adopted SFAS 145 on January 1, 2002 on a prospective  basis and the adoption did
not have a significant impact to the consolidated financial statements.

In June 2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with Exit or Disposal  Activities"  ("SFAS 146").  SFAS 146 addresses  financial
accounting and reporting for costs  associated with exit or disposal  activities
and nullified Emerging Issues Task Force Issue No. 94-3, "Liability  Recognition
for Certain  Employee  Termination  Benefits and Other Costs to Exit an Activity

                                     Page 14
<PAGE>
                       FONAR CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2003
                                   (UNAUDITED)

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a
liability  for a cost  associated  with  an  exit  or  disposal  activity  to be
recognized when the liability is incurred.  A fundamental  conclusion reached by
the FASB in this statement is that an entity's  commitment to a plan, by itself,
does not create a present  obligation  to others that meets the  definition of a
liability.  SFAS 146 also  establishes  that  fair  value is the  objective  for
initial  measurement  of the  liability.  The  provisions of this  statement are
effective for exit or disposal  activities that are initiated after December 31,
2002, with early application encouraged. The adoption of SFAS 146 did not have a
significant impact to the consolidated financial statements.

On December 31, 2002,  the FASB issued SFAS No.148 ("SFAS 148"),  Accounting for
stock-Based Compensation-Transition and Disclosure. SFAS 148 amends SFAS No. 123
("SFAS  123"),   Accounting  for  Stock  -Based  Compensation,   to  provide  an
alternative  method of  transition to SFAS 123's fair value method of accounting
for  stock-based  employee  compensation.  SFAS 148 also  amends the  disclosure
provisions of SFAS 123 and APB opinion No. 28, Interim Financial  Reporting,  to
require  disclosure  in the  summary of  significant  accounting  polices of the
effects of an entity's  accounting  policy with respect to stock-based  employee
compensation on reported net income and earnings per share in annual and interim
financial  statements.  While the  statement  does not amend SFAS 123 to require
companies to account for employee stock options using the fair value method, the
disclosure  provisions  of  SFAS  148  are  applicable  to  all  companies  with
stock-based employee  compensation,  regardless of whether they account for that
compensation  using the fair value  method of SFAS 123, or the  intrinsic  value
method of APB opinion No. 25. The Company  continued to account for  stock-based
compensation  according  to APB opinion No. 25,  while its  adoption of SFAS 148
requires the Company to provide  prominent  disclosures about the effect of SFAS
123 on reported income and requires the Company to disclose these effects in the
interim  financial  statements as well starting with the quarter ended March 31,
2003.  The  adoption  of SFAS  148  did not  have a  significant  impact  to the
consolidated financial position or results of operations.

In  November  2002,  The FASB  issued FASB  Interpretation  No.45,  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  including  Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a company,  at
the time it issues a guarantee,  to recognize an initial  liability for the fair
value of  obligations  assumed under the  guarantee  and  elaborates on existing
disclosure  requirements  related to  guarantees  and  warranties.  The  initial
recognition  requirements  of FIN 45 were  effective  for  guarantees  issued or
modified after December 31, 2002 and adoption of the disclosure requirement were
effective for the Company  during the Company's  third quarter  ending March 31,
2003.  The  adoption  of FIN  45  will  not  have a  significant  impact  on its
consolidated financial position or results of operations.

In January 2003, the FASB issued FASB  Interpretation  No. 46 " Consolidation of
Variable Interest Entities,  an Interpretation of ARB No. 51" ("FIN 46"). FIN 46
requires  certain variable  interest  entities to be consolidated by the primary

                                     Page 15
<PAGE>
                       FONAR CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2003
                                   (UNAUDITED)

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

beneficiary of the entity if the equity  investors in the entity do not have the
characteristics  of a 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. The
provisions  of FIN 46 must be applied  for the first  interim  or annual  period
beginning  after June 15, 2003.  The Company is currently  evaluating the effect
that the adoption of FIN 46 will have on its results of operations and financial
condition.

Reclassifications

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

NOTE 4 - MARKETABLE SECURITIES

The following is a summary of marketable securities at March 31, 2003:

                                                    (000's omitted)

                                                       Unrealized          Fair
                                                        Holdings         Market
                                             Cost         Gains           Value
                                            ------     ----------        -------
U.S. Government Obligations                 $3,783       $   16           $3,799
Corporate bonds                              1,949           49            1,998
                                            ------       ------           ------
                                            $5,732       $   65           $5,797
                                            ======       ======           ======

NOTE 5 - ACCOUNTS RECEIVABLE, NET

Accounts receivable, net is comprised of the following at March 31, 2003:

                                 (000's omitted)

                                                    Allowance for
                                                      Doubtful
                                                    Accounts  and
                                          Gross      contractual
                                        Receivable   allowances            Net
                                        ----------  -------------        -------
Receivable from equipment
  Sales and service contracts            $ 2,437       $ 1,077           $ 1,360
                                         =======       =======           =======

Receivables from related PC's            $14,574       $ 2,179           $12,395
                                         =======       =======           =======
                                    Page 16
<PAGE>
                       FONAR CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2003
                                   (UNAUDITED)

NOTE 5 - ACCOUNTS RECEIVABLE, NET (Continued)

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

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

Collection  by the  Company of its  accounts  receivable  may be impaired by the
uncollectibility of medical fees from third party payors, particularly insurance
carriers covering  automobile  no-fault and workers  compensation  claims due to
longer payment cycles and rigorous informational requirements. Approximately 59%
and 56% of the PC's net  revenues  for the nine months  ended March 31, 2003 and
2002,  respectively,  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 takes all legally  available steps,  including  legally
prescribed  arbitrations,  to collect its receivables.  Credit losses associated
with the receivables are provided for in the consolidated  financial  statements
and have historically been within management's expectations.

Net revenues  from the related  PC's,  including  product  sales,  accounted for
approximately  62% and 77% of the  consolidated net revenues for the nine months
ended March 31, 2003 and 2002, respectively.

Unaudited Financial Information of Unconsolidated Managed Medical Practices

Summarized  income  statement  data for the nine  months  ended  March 31,  2003
related to the 21 unconsolidated  medical practices managed by the Company is as
follows:

                                       (000's omitted)
Patient Revenue - Net                      $25,156
                                           =======
Income from Operations                     $   683
                                           =======
Net Income                                 $    10
                                           =======

NOTE 6 - INVENTORIES

Inventories included in the accompanying consolidated balance sheet consist of:

                                                     (000's omitted)
                                                     March 31, 2003
                                                     --------------
Purchased parts, components and supplies                 $3,612
Work-in-process                                           1,452
                                                         -------
                                                         $5,064
                                                         =======
                                     Page 17
<PAGE>
                       FONAR CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2003
                                   (UNAUDITED)

NOTE 7 - COSTS AND  ESTIMATED  EARNINGS ON  UNCOMPLETED  CONTRACTS  AND CUSTOMER
ADVANCES

                                       (000's omitted)

1)  Information  relating to  uncompleted  contracts  as of March 31, 2003 is as
follows:

Costs incurred on uncompleted Contracts    $5,978
Estimated earnings                          3,782
                                           -------
                                            9,760

Less:     Billings to date                  9,987
                                           -------
                                           $ (227)
                                           =======

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

     Costs and estimated earnings in excess of
       Billings on uncompleted contracts             $1,302
     Billings in excess of  costs and estimated
       Earnings on uncompleted contracts             (1,529)
                                                     -------
                                                     $ (227)
                                                     =======

2) Customer advances consist of the following:

                                                   As of March 31, 2003
                                           -------------------------------------
                                                         Related
                                            Total        Parties          Other
                                           -------       --------        -------
Total advances from customers              $15,583        $ 3,798        $11,785
Less:  Advances from customers
       on contracts under construction       9,987          3,000          6,987
                                           -------       --------         ------
                                           $ 5,596       $   798         $ 4,798
                                           =======       ========         ======











                                     Page 18
<PAGE>

                       FONAR CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2003
                                   (UNAUDITED)

NOTE 8 - STOCKHOLDERS' EQUITY

Common Stock

During the nine months ended March 31, 2003:

a) The  Company  issued  1,756,119  shares  of  common  stock  to  employees  as
compensation of $2,024,204 under stock bonus plans.

b) The Company  issued  717,796  shares of common  stock  valued at $ 741,937 to
consultants and others

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

d) The  Company  issued  2,394,264  shares  of  common  stock  for  services  of
$2,450,254.

e) The Company  issued  27,571  shares of common stock and received  proceeds of
$31,203 upon the exercise of stock options.

f) The Company issued 1,000,000 shares of common stock and received  proceeds of
$1,125,000 upon the exercise of warrants.

Subsequent to March 31, 2003, the Company issued approximately  1,971,000 shares
of common stock to employees,  consultants and for professional  services and to
vendors and other suppliers of goods and services.

Warrants

During the first quarter of fiscal 2003 in accordance  with the agreements  with
The Tail Wind Fund, Ltd., the Company issued  replacement  callable  warrants to
purchase  2,000,000  shares,  on the same terms as the  original  warrants.  The
exercise price of these replacement callable warrants will vary depending on the
market price of the stock,  subject to a minimum  exercise price of $2 per share
and maximum of $6 per share.

NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION

During  the nine  months  ended  March  31,  2003 and  2002,  the  Company  paid
approximately $481,000 and $700,000 for interest,  respectively,  of which $ -0-
and  $101,000,   respectively,  were  related  to  discontinued  operations.  In
addition,  during  the nine  months  ended  March 31,  2003,  the  Company  paid
approximately $25,000 and $8,000 for income taxes, respectively.

During the nine months ended March 31, 2003, the Company issued 87,500 shares of
the common stock, valued at $90,125, as compensation to the holder of a minority
interest in certain limited partnerships involving MRI facilities.



                                     Page 19
<PAGE>

                       FONAR CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2003
                                   (UNAUDITED)

NOTE 10 - SEGMENT 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 as disclosed in the Company 10-K as
of June  30,  2002.  All  inter-segment  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:

                                 (000's omitted)
                                                        Physician
                                           Medical      Management
                                          Equipment      Services       Total
                                          ---------     ----------     --------
For the nine months ended March 31, 2003:

Net revenue from external customers        $21,754        $17,252      $ 39,006
Inter-segment net revenues                 $ 1,941           ---       $  1,941
Operating loss                             $(8,674)       $(2,424)     $(11,098)
Depreciation and amortization              $ 1,902        $ 1,298      $  3,200
Compensatory element of stock issuances    $ 1,067        $ 3,063      $  4,130
Capital expenditures                       $   247        $   355      $    602
Total identifiable assets                  $34,027        $31,508      $ 65,535

For the nine months ended March 31, 2002:

Net revenue from external customers        $ 10,373       $18,993      $ 29,366
Inter-segment net revenues                 $    765         ---        $    765
Operating (loss) income                    $(11,930)      $   782      $(11,148)
Depreciation and amortization              $  1,941       $ 1,495      $  3,436
Compensatory element of stock issuances    $  1,645       $ 1,666      $  3,311
Capital expenditures                       $  1,204       $   915      $  2,119
Total identifiable assets at June 30, 2002 $ 40,179       $32,651      $ 72,830

NOTE 11 - FOREIGN SALES

During the nine months  ended  March 31, 2003 and 2002,  the Company had foreign
revenues of approximately $1,043,000 and $1,763,000, respectively.









                                    Page 20
<PAGE>

NOTE 12 - SALE OF MANAGEMENT COMPANY

On April 8, 2003, the Company's  wholly-owned  subsidiary,  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  $909,000,  which remained owing to the Buyers by HMCA as a result
of the original acquisition.

The repurchase by the Buyers of the stock was the principal part of a settlement
of three  lawsuits  which  had been  instituted  by the  parties.  The first was
instituted  by  HMCA  and  Fonar  against  the  Buyers  for  fraud,  failure  of
consideration   and  breach  of  the  contract  with  respect  to  the  original
acquisition  by  HMCA  of  A&A  Services,  and  the  second  was  instituted  by
professional corporations managed by HMCA against the Buyers for breach of their
employment  agreements.  The third  case was  commenced  by a limited  liability
company  in  which  the  Buyers  have an  interest,  against  A&A  Services  for
nonpayment of rent. The case was settled before the defending  parties  answered
the complaints.  As part of the settlement,  the parties  released each other of
all claims,  including all remaining  balances due to the Buyers with respect to
the purchase of A&A Services and $21,167 owed to the limited liability  company,
by A&A Services for past due rents.

There is no family,  business or other material  relationship  between either of
the  Buyers  and any of  Fonar,  HMCA,  or any of their  respective  affiliates,
directors, officers or any associate of any such director or officer.

A&A Services  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 all periods presented.  Accordingly,  the assets and
liabilities  of this  reporting  unit have been  segregated  from the assets and
liabilities  from continuing  operations in the  consolidated  balance sheets at
March  31,  2003  and June  30,  2002 and  their  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 three and nine  months  ended  March 31,  2003 and
2002.

As a result of this sale, the Company  realized a pre-tax gain of  approximately
$500,000 which will be recognized in discontinued  operation  during the quarter
ended June 30, 2003.









                                    Page 21
<PAGE>

Summarized financial information of the discontinued operations are as follows:

                                                  ( 000's Omitted)
                                      ------------------------------------------
                                      For the Three Months  For the Nine Months
                                         Ended March 31,       Ended March 31,
                                      --------------------  --------------------
                                         2003       2002       2003       2002
                                      ---------  ---------  ---------  ---------
Management and other fees - related
medical practices - net                 $  373     $  502     $1,148     $1,506
                                      ---------  ---------  ---------  ---------
Costs and Expenses:
   Costs related to management
     and other fees -related parties       372        432      1,226      1,228
   Amortization of management
      agreements                            71        131        215        392
   Interest expenses                         -        629          2         661
                                      ---------  ---------  ---------  ---------

         Total Costs and Expenses          443      1,192      1,443      2,281
                                      ---------  ---------  ---------  ---------
Loss from Discontinued
   Operations                           $  (70)    $ (690)   $  (295)   $  (775)
                                      =========  =========  =========  =========

                                         March 31,       June 30,
                                           2003            2002
Assets from Discontinued                 ---------       ---------
  Operations:

Cash                                       $   43          $   33
Accounts receivable - related
   medical practices - net                    236             372
Property and equipment - net                   27              62
Management agreements - net                 3,304           3,519
Other assets                                   22              21
                                         ---------       ---------

Total Assets from
   Discontinued Operations                 $3,632          $4,007
                                         =========       =========

Liabilities from
  Discontinued Operations:
Long-term debt and capital leases          $  909          $  963
Accounts payable                              122              78
Other current liabilities                      66              84
                                         ---------       ---------

Total Liabilities from
  Discontinued Operations                  $1,097          $1,125
                                         =========       =========




                                     Page 22
FONAR CORPORATION AND SUBSIDIARIES

Item 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
     OF OPERATIONS.

     For the fiscal quarter ended March 31, 2003 (third quarter of fiscal 2003),
the Company  reported a net loss of $6.3  million on revenues of $9.8 million as
compared  to a net loss of $5.1  million on  revenues  of $10.5  million for the
third quarter of fiscal 2002.

     For the nine month period ended March 31, 2003, the Company  reported a net
loss of $12.0  million on revenues of $39 million,  as compared to a net loss of
$13.6 million on revenues of $29.4 million for the nine month period ended March
31, 2002.

Overview and Trends

     For the nine month  period  ended March 31,  2003,  as compared to the nine
month period ended March 31, 2002, revenues increased significantly by 33%, most
dramatically  in MRI equipment sales ($18 million  compared to $6.9 million,  an
increase of 161%)  including both  unrelated  party scanner sales ($11.3 million
compared to $3.4  million,  an increase of 232%) and related party scanner sales
($6.7 million compared to $3.5 million,  an increase of 91%).  Overall,  for the
first nine months of fiscal  2003,  revenues for the medical  equipment  segment
increased by 109% to $21.7  million from $10.4 million for the first nine months
of fiscal 2002.  The  revenues  generated by Health  Management  Corporation  of
America ("HMCA"),  the Company's  physician and diagnostic  management  services
segment,  however,  declined by 9% to $17.3 million for the first nine months of
fiscal 2003 as compared to $19 million for the first nine months of fiscal 2002.

     The Company's  revenues in the third quarter of fiscal 2003 ($9.8  million)
decreased  by 40% from $16.3  million for the second  quarter of fiscal 2003 (on
which the Company  recognized a net loss of $2.9 million) and by 28% as compared
to $13.7  million  for the first  quarter of fiscal  2003 (on which the  Company
recognized a net loss of $2.7 million).

     Notwithstanding  the overall  decrease in revenues in the third  quarter of
fiscal 2003 from the prior year ($9.8  million as compared to $10.5  million) as
well as from the  preceding  two  quarters of fiscal  2003,  the decrease in the
third  quarter of fiscal 2003 as compared  to fiscal  2002  reflect  declines in
revenue in two areas: a decline of 16% in HMCA's revenues, from $6.3 million for
the third  quarter for fiscal 2002 to $5.3 million for fiscal 2003 and a decline
of 32% in revenues from scanner sales to related parties,  from $1.1 million for
the third  quarter of fiscal  2002 to $746,000  for the third  quarter of fiscal
2003.  At the same time,  however,  revenues  from  scanners  sales to unrelated
parties  increased by 32% from $1.9 million for the third quarter of fiscal 2002
to $2.5 million for the third quarter of fiscal 2003.

     We recognize MRI scanner sales  revenues on the  "percentage of completion"
basis,  which  means  the  revenues  are  shown  as  earned  as the  scanner  is
manufactured.  Revenues  recognized in a particular  quarter do not  necessarily
reflect new orders or progress  payments made by customers in that  quarter.  In
the third  quarter of fiscal 2003,  the decrease in revenues  recognized  was in
part the  indirect  result of delays in  customer  site  preparations  which are
necessary  to enable us to deliver and install  the  scanner and  recognize  the
revenue.  We build the scanners as the customer meets certain  benchmarks in its
site preparation in order to minimize the time lag between incurring expenses of
manufacturing  and our receipt of the cash  progress  payments from the customer
which are due only upon delivery. During the first nine months of fiscal 2003 we
received  orders  for 12  Stand-Up  MRI  scanners  as  compared  to orders for 8
Stand-Up MRI scanners during the first nine months of fiscal 2002. For the third
quarter  of fiscal  2003 we  received  orders  for 4 Stand-Up  MRI  scanners  as
compared to orders for 4 Stand-Up MRI  scanners for the third  quarter of fiscal
2002.

     In addition revenues recognized by HMCA in the third quarter of fiscal 2003
were $5.3  million as  compared to $6.3  million in the third  quarter of fiscal
2002.  This was  principally  the result of the closing of two MRI sites and one
physical  therapy and  physical  rehabilitation  facility  during the nine month
period ended March 31, 2003 and the reduction of revenues at two MRI sites while
they were installing new Stand-Up(TM) MRI scanners.

     In addition to the  decline of  revenues by 7% in the third  quarter,  from
$10.5 million in fiscal 2002 to $9.8 million in fiscal 2003, the total costs and
expenses for the quarter  increased by 11% from $14.2  million in fiscal 2002 to
$15.7  million in fiscal 2003.  Although  changes in costs  related to producing
revenues   essentially   tracked  changes  in  revenues,   selling  general  and
administrative  expenses  increased 8% from $5.1 million in the third quarter of
fiscal  2002 to $5.5  million  in the  third  quarter  of  fiscal  2003  and the
compensatory  element of stock issuances for selling general and  administrative
expenses  increased 44% from $1.6 million in the third quarter of fiscal 2002 to
$2.3 million in the third quarter of fiscal 2003, reflecting an increased use of
the Company's  common stock in lieu of cash to pay  employees,  consultants  and
professionals for services.  As a result the Company's  operating and net losses
were $5.9  million  and $6.3  million,  respectively,  for the third  quarter of
fiscal 2003 as compared to $3.8 million and $5 million,  respectively for fiscal
2002.

     For the nine months ended March 31, 2003, however,  the Company's loss from
operations improved slightly, from an operating loss of $11,148,000 for the nine
months ended March 31, 2002 to a operating loss  $11,098,000 for the nine months
ended March 31, 2003. The Company's net loss for the nine months ended March 31,
2003  improved,  at $12 million,  as compared to $13.6 for the nine months ended
March 31, 2002.

     The overall  trends  reflected in the third  quarter and nine month results
for fiscal 2003 are the  absolute  increase in revenues  from the MRI  equipment
segment of the Company's business, as compared to fiscal 2002 ($21.7 million for
the first nine months of fiscal 2003 as compared to $10.4  million for the first
nine months of fiscal  2002),  the relative  increase in MRI  equipment  segment
revenues  relative to HMCA revenues  ($21.7  million or 56% as compared to $17.3
million or 44%,  for the first nine  months of fiscal  2003 as compared to $10.4
million or 35% from the MRI equipment segment and $19 million or 65%, from HMCA,
for the first nine months of fiscal 2002).  In addition a reduced  dependence on
related party scanner sales revenues ($11.3 million or 63% to unrelated  parties
and $6.7  million or 37% to related  parties for the first nine months of fiscal
2003 as compared to $3.4 million,  or 49% to unrelated  parties and $3.5 million
or 51% to  related  parties  for the  first  nine  months  of  fiscal  2002) was
observed.

     Following  the end of the third  quarter,  on April 8, 2003,  HMCA sold its
wholly-owned  subsidiary,  A&A  Services,  Inc.  ("A&A  Services")  a  physician
practice  management  services  organization  which  managed  four  primary care
practices  located in Queens  County,  New York. The sale was made to the former
owners for a purchase  price of $3 million  plus the  elimination  of a $909,000
balance  due by HMCA to the  former  owners  under  the  terms  of the  original
acquisition. Because of the declining performance by A&A Services through fiscal
2002,  the  Company  recognized  a loss of $4.7  million  in fiscal  2002 on the
impairment  of  A&A  Services'  management  agreements  with  the  primary  care
practices.  Consequently,  notwithstanding  HMCA  had  originally  acquired  A&A
Services for a $10 million  purchase  price,  the Company has realized a pre-tax
gain of approximately $500,000 from the sale as a result of the prior write down
and amortization of the management  agreements,  which will be recognized during
the fourth quarter of fiscal 2003.

Results of Operations

     The  Company  operates  in  two  industry  segments:  the  manufacture  and
servicing of medical (MRI) equipment,  the Company's  traditional business which
is  conducted  directly  by Fonar and in  physician  and  diagnostic  management
services,  which is conducted through Fonar's  wholly-owned  subsidiary,  Health
Management Corporation of America ("HMCA").

     MRI equipment sales  increased  dramatically by 161%, from $6.9 million for
the first nine months of fiscal 2002 to $18.0  million for the first nine months
of fiscal 2003, reflecting increased sales of the Stand-Up MRI scanners. Service
and repair  revenues  increased  by 13%,  from $1.6  million  for the first nine
months of fiscal  2002 to $1.8  million for the first nine months of fiscal 2003
and license fees and royalties  increased by 11% from $1.8 million for the first
nine months of fiscal  2002 to $2.0  million for the first nine months of fiscal
2003.  Consequently,  overall revenues recognized by the Company's MRI equipment
manufacturing  and service business  increased by 109% from $10.4 million in the
first nine  months of fiscal  2002 to $21.7  million in the first nine months of
fiscal 2003. There were significant increases in scanner sales to both unrelated
parties,  from $3.4  million  in the first nine  months of fiscal  2002 to $11.3
million in the first nine months of fiscal  2003 (232%) and to related  parties,
from $3.5 million in the first nine months of fiscal 2002 to $6.7 million in the
first nine months of fiscal 2003 (91%). As a result, the operating loss from the
Company's MRI equipment manufacturing and service business improved to a loss of
$8.7  million  for the first  nine  months  of fiscal  2003 from a loss of $11.9
million for the first nine months of fiscal 2002.

     The increase in product sales reflected continuing market acceptance of the
Company's  Stand-Up(TM)  MRI  scanners.  During the first nine  months of fiscal
2003,  revenues of  approximately  $17.3 million were  recognized  from sales of
Stand-Up(TM)  MRI scanners and $100,000 from the sale of a refurbished  Beta MRI
scanner.  During the first nine months of fiscal  2002,  the Company  recognized
revenues  of  approximately  $6.9  million  from  the sale of  Stand-Up(TM)  MRI
scanners.

     There were approximately $1 million in foreign sales revenues for the first
nine months of fiscal 2003 as compared to approximately  $1.8 million in foreign
sales revenues for the first nine months in fiscal 2002.

     HMCA,  which  provides  physician  and  diagnostic   management   services,
experienced  an  operating  loss of $2.4  million  for the first nine  months of
fiscal 2003  compared to operating  income of $782,000 for the first nine months
of fiscal 2002.  The decline in HMCA income was  attributable  to lower revenues
reflecting a decline in management fees ($17.3 million for the first nine months
of fiscal  2003  compared  to $19.0  million for the first nine months of fiscal
2002) from the facilities and medical  practices  managed by HMCA. The principal
cause for the decline in HMCA revenues was the closing of nine  facilities  (six
in fiscal  2002 and three in fiscal  2003) and reduced  revenues  from two sites
while they were in the process of installing two new  Stand-Up(TM) MRI scanners.
Shortly  following  the end of the third fiscal  quarter of 2003,  HMCA sold A&A
Services  for  $3.0  million  (payable  pursuant  to a  promissory  note) to the
original owners of A&A Services plus  forgiveness by the buyers of approximately
$909,000 remaining due to them by HMCA on account of the original purchase.

     Accordingly,  the Company's  consolidated  operating loss was $11.1 million
for the first nine months of fiscal 2003 as compared to a consolidated operating
loss of $11.1 million for the first nine months of fiscal 2002,  which  although
rounding to the same figure represented a slight improvement of $50,000.

     Although the Company's  scanner sales increased  significantly  from fiscal
2002,  increased  costs and expenses,  together with a decline in management fee
revenues  recognized by HMCA, are among the principal  reasons for the Company's
continuing  operating  losses.   Product  sales  revenues  attributable  to  the
Company's  medical (MRI) equipment  business were $18 million for the first nine
months of fiscal 2003 as  compared to $6.9  million for the first nine months of
fiscal 2002. Costs of revenues  attributable to the Company's product sales were
$11.7  million  for the first nine  months of fiscal  2003 as  compared  to $5.0
million for the first nine months of fiscal 2002.

     As a result,  the Company  recognized a gross profit from product  sales of
$6.3  million  and a gross  profit  margin of 35% for the first  nine  months of
fiscal  2003 as compared to a gross  profit of $1.9  million and a gross  profit
margin of 28% for the first nine months of fiscal 2002.  Our gross profit margin
on product  sales  increased as a result of greater  efficiencies  realized as a
result of our increased sales volume and production levels.

     The Company's  efforts to improve  equipment  sales volume have  emphasized
increased  marketing and sales efforts and research and  development  to improve
the competitiveness of its products.

     As a result, we incurred expenses of approximately  $2.3 million in our new
advertising program, which includes television and radio advertising, during the
first nine months of fiscal 2003. This was the principal reason selling, general
and  administrative  expenses  increased  from  $15.0  million in the first nine
months of fiscal 2002 to $17.2  million in the first nine months of fiscal 2003.
Research and development  expenditures  increased slightly by 5% to $3.9 million
for the first nine months of fiscal  2003 as compared to $3.7  million the first
nine months of fiscal 2002.

     Compensatory  element of stock issuance  increased by 24% to  approximately
$4.1  million for the first nine months of fiscal 2003 from  approximately  $3.3
million for the first nine months of fiscal  2002,  reflecting  a greater use of
Fonar's stock plans.

     Interest  expense  of  $481,000  in the first  nine  months of fiscal  2003
decreased  by 23% as compared  to  $592,000  for the first nine months of fiscal
2002 due to the repayment of indebtedness.  In addition,  we had financing costs
of $1.6  million  paid in stock and warrants in the first nine months of 2002 as
compared to no such costs in the first nine months of 2003.

     Cash and cash  equivalents  decreased  by 45% from $7.5 million at June 30,
2002 to $4.1 million at March 31, 2003,  reflecting  costs of building  scanners
and increased  expenses,  while cash receipts from deliveries were in many cases
delayed because of customer delays in site preparation  necessary for deliveries
to be made.

     Inventories  increased  by 9% to $5.1 million at March 31, 2003 as compared
to $4.7 million at June 30, 2002 as the  Company's new purchases of parts in the
manufacturing of scanners  exceeded  utilization in part as a result of customer
delays.

     Accounts  receivable  increased to $13.8  million as at March 31, 2003 from
$13.7 million as at June 30, 2002,  primarily due to decreased  receivables from
HMCA's physician and diagnostic  management  business although accounts received
from service contracts on MRI scanners increased from $781,000 to $1.4 million.

     In July,  2000 General  Electric and the Company  entered into an agreement
under which General  Electric  agreed to act as a sales  representative  for the
Company's  Stand-Up(TM)  MRI  scanners.  Fonar has been working  closely with GE
Medical  Systems to assist  them in  marketing  the  Stand-Up(TM)  MRI.  General
Electric  has  purchased a total of four  Stand-Up MRI scanners to resell to its
customers.

     The  Company's  Stand-Up(TM),  QUAD(TM)  and  Fonar-360(TM)  MRI  scanners,
together with the Company's  works-in-progress  (QUAD-S(TM) MRI) and other works
in progress,  are intended to  significantly  improve the Company's  competitive
position. In addition,  the Company offers a low cost open scanner, the Echo(TM)
MRI, operating at .3 Tesla field strength for its cost conscious customers.

     The Company's Stand-Up(TM) scanner, which operates at 6000 gauss (.6 Tesla)
field strength,  allows patients to be scanned while standing or reclining. As a
result,  for the first time,  MRI is able to be used to show  abnormalities  and
injuries  under  full  weight-bearing  conditions,  particularly  the  spine and
joints. A floor-recessed  elevator brings the patient to the height  appropriate
for the targeted image region. A custom-built adjustable bed will allow patients
to  sit  or  lie  on   their   backs,   sides   or   stomachs   at  any   angle.
Full-range-of-motion  studies of the joints in virtually any  direction  will be
possible, an especially promising feature for sports injuries.

     The  Stand-Up(TM)  will  also be  useful  for MRI  directed  neuro-surgical
procedures  as the surgeon would have  unhindered  access to the patient with no
restrictions  in the vertical  direction.  This  easy-entry,  mid-field-strength
scanner  should be ideal for trauma centers where a quick  MRI-screening  within
the first critical hour of treatment will greatly improve  patients' changes 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  the
Company's engineers to control, contour and direct the magnet's lines of flux in
the patient gap where  wanted and almost none outside of the steel of the magnet
where not wanted.  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  Stand-Up(TM)  and QUAD(TM) MRI scanner,  is 0.6
Tesla.

     In the  future,  we may also  develop  the Fonar  360(TM) to function as an
operating  room. We sometimes  refer to this  contemplated  version of the Fonar
360(TM) as the OR-360(TM).  In its OR-360(TM) version,  which is in the planning
stages, the enlarged room sized magnet and 360 access to the patient afforded by
the Fonar  360(TM)  would permit  full-fledged  surgical  teams to walk into the
magnet and perform  surgery on the patient inside the magnet.  Most  importantly
the  exceptional  quality of the MRI image and its  capacity  to exhibit  tissue
detail on the image,  can then be obtained real time during surgery to guide the
surgeon  in  the  surgery.  Thus  surgical  instruments,   needles,   catheters,
endoscopes  and the like could be  introduced  directly  into the human body and
guided  to the  malignant  lesion  by  means of the MRI  image.  The  number  of
inoperable  lesions should be greatly  reduced by the  availability  of this new
capability.  Most  importantly  treatment can be carried  directly to the target
tissue. The  interventional  OR-360(TM) version of the Fonar 360(TM) is still in
the planning  stages.  There is not a prototype.  A full range of MRI compatible
surgical instruments using ceramic cutting tools and beryllium-copper  materials
are commercial available.

     The QUAD(TM)MRI  scanner also utilizes a 0.6 Tesla iron core  electromagnet
and is accessible from four sides.  The QUAD(TM)was the first "open" MRI scanner
at high field.

     The  Company's  works in  progress  include  an  in-office  weight  bearing
extremities  scanner  which will be able to be used to examine  the knee,  foot,
elbow,  hand and wrist.  This  scanner will allow scans to be performed in under
both weight- bearing and non-weight-bearing conditions.

     The Company expects marked demand for its most commanding MRI products, the
Stand-Up(TM)  and the Fonar  360(TM),  first for their  exceptional  features in
patient diagnosis and treatment.  These scanners  additionally  provide improved
image quality and higher imaging speed because of their higher field strength of
..6 Tesla.

Liquidity and Capital Resources

     Cash, cash equivalents and marketable  securities decreased by 25% from $13
million at June 30, 2002 to $9.8  million at March 31, 2003.  Principal  uses of
cash during the first nine months of fiscal 2003 included  capital  expenditures
of $602,000,  repayment of  indebtedness  and capital lease  obligations  in the
amount of $2.3 million,  capitalized  software development costs of $627,000 and
capitalized patent and trademark costs of $223,000.

     Marketable  securities  approximated  $5.8 million as at March 31, 2003, as
compared to $5.6 million at June 30, 2002. At March 31, 2003, our investments in
U.S. Government  obligations were approximately $3.8 million and our investments
in corporate and government agency bonds were approximately $2 million. This has
had the intended  effect of reducing the volatility of the Company's  investment
portfolio.

     Cash used by operating  activities for the first nine months of fiscal 2003
approximated  $1.1 million.  Cash used by operating  activities was attributable
substantially to our net loss for the period reduced by prepayments from related
parties on certain sales-type leases.

     Cash used in investing  activities for the first nine months of fiscal 2003
approximated $1.7 million.  The principal uses of cash from investing activities
during  the first nine  months of fiscal  2003  consisted  of  expenditures  for
property  and  equipment of  approximately  $602,000,  capitalized  software and
patent costs of approximately  $850,000 and additional investments in marketable
securities of $244,000.

     Cash used by financing  activities for the first nine months of fiscal 2003
approximated $647,000. The principal uses of cash in financing activities during
the first six months of fiscal 2003  consisted  of  repayment  of  principal  on
long-term debt of approximately  $2.3 million and the principal sources were net
proceeds  from  exercises  of stock  options and  warrants  of $1.1  million and
proceeds from long-term debt of $950,000.

     Total  liabilities  decreased  by 9% during the first nine months of fiscal
2003, from approximately  $36.9 million at June 30, 2002 to approximately  $33.6
million at March 31, 2003.

     The decrease in liabilities was  attributable  principally to a decrease in
the  current  portion of long term debt ($8.8  million  to $7.3  million)  and a
decrease in customer advances of $2.1 million from $7.7 million at June 30, 2002
to $5.6  million at March 31,  2003 and a decrease  in the  unearned  portion of
prepaid  license fees from $4.7 million to $2.9  million.  The decrease in total
liabilities  was offset by an increase in accounts  payable from $4.0 million at
June 30, 2002 to $5.3  million at March 31,  2003 and an  increase in  long-term
debt from $833,000 at June 30, 2002 to $991,000 at March 31, 2003.

     As of March 31, 2003, our obligations  included  approximately $7.8 million
in other current  liabilities  including  deferred  revenue from license fees of
$2.3 million,  unearned  revenue on service  contracts of $1.6 million,  accrued
salaries  and payroll  taxes of $1.9  million and excise and sales taxes of $1.9
million.

     As of March 31, 2003, we had a bank credit facility of $5,500,000 which was
utilized in full.  The  interest on loans made under the  facility is either the
bank's  prime rate,  as in effect from time to time or 0.5% plus the bank's cost
of funds rate, as selected by Fonar when the loan is made.

     Our working  capital  approximated  $11.5  million as of March 31, 2003, as
compared to working  capital of $14.1 million as of June 30, 2002,  declining by
18%. This reflects,  with respect to current  assets,  principally a decrease in
cash of $3.4 million  ($7.5 million at June 30, 2002 as compared to $4.1 million
at March 31,  2003) and a decrease  in the  current  portion of  investments  in
sales-type  leases  ($1.9  million at June 30,  2002 as  compared to $161,000 at
March 31, 2003 resulting  from  prepayments of the leases) offset by an increase
($1.2 million at June 30, 2002 as compared to $1.3 million at March 31, 2003) in
costs and  estimated  earnings in excess of billings  on  uncompleted  contracts
(this  item  represents  the extent to which the  revenues  earned on a contract
exceed the  advances we received  from the  customer)  and prepaid  expenses and
other current  assets ($1.1 million at June 30, 2002 as compared to $1.6 million
at March  31,  2003),  as a  result  of  advances  made to  suppliers.  Accounts
receivable  remained  relatively constant increasing slightly from $13.7 million
as at June 30, 2002 to $13.8 as at March 31 2003.

     With respect to current liabilities,  the current portion of long-term debt
decreased  by $1.5 million from $8.8 million at June 30, 2002 to $7.3 million at
March 31, 2003 as a result of repayment  of debt.  Customer  advances  decreased
from $7.7 million at June 30, 2002 to $5.6 million at March 31, 2003 as a result
of  existing  orders  being  put into  production.  Accounts  payable,  however,
increased  from $4.0  million at June 30, 2002 to $5.3 million at March 31, 2003
as the Company incurred  obligations in connection with increased  manufacturing
and advertising activities.

     In order to conserve  our capital  resources,  we have issued  common stock
under  our stock  bonus  and stock  option  plans to  compensate  employees  and
non-employees  for services  rendered.  In first nine months of fiscal 2003, the
compensatory  element of stock  issuances  was $4.1  million as compared to $3.3
million for the first nine months of fiscal 2002.  Utilization of equity in lieu
of cash  compensation  has  improved  our  liquidity  since  it  increases  cash
available for other expenditures.

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

     Fonar has not committed to making  additional  capital  expenditures in the
2003 fiscal year other than its intention to continue  research and  development
expenditures  at current  levels.  HMCA also  expects to incur  expenditures  of
approximately $350,000 to refurbish and improve one MRI facility.

     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  into the  physician  and  diagnostic
management services business through our subsidiary, HMCA.

     HMCA is in the process of upgrading  the MRI  facilities  which it manages,
most  significantly  by the  replacement  of  existing  MRI  scanners  with  new
Stand-Up(TM)  MRI  scanners.  To  date,  Stand-Up(TM)  MRI  scanners  have  been
installed  at four  MRI  facilities  managed  by HMCA and one  Stand-Up(TM)  MRI
scanner is in the process of being  installed at one other MRI facility  managed
by HMCA.

     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.

     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 our operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Our  investments  are in fixed  rate  instruments.  None of the fixed  rate
instruments in which we invest extend beyond March 31, 2009.  Below is a tabular
presentation of the maturity profile of the fixed rate instruments held by us at
March 31, 2003.

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

                                  Investments
                                  in Fixed Rate    Weighted Average
                Date              Instruments      Interest Rate

                3/31/04           $4,280,038            2.02%
                3/31/05              453,984            5.39%
                3/31/06              400,000            4.97%
                3/31/07              200,000            5.25%
                3/31/08              297,771            5.55%
                3/31/09              100,000            3.38%

                Total:            $5,731,793
                                  ==========

                 Fair Value
                  at 3/31/03      $5,796,877
                                  ==========

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

     See Note 11 to the consolidated Financial Statements in our Form 10-K as of
and for the year ended June 30, 2002 for information on long term debt.

Item 4. Controls and Procedures

(a)  Evaluation of disclosure  controls and  procedures.  The Company  maintains
     controls and procedures designed to ensure that information  required to be
     disclosed  in the  reports  that it files or submits  under the  Securities
     Exchange Act of 1934 is recorded, processed, summarized and reported within
     the time  periods  specified in the rules and forms of the  Securities  and
     Exchange  Commission.  Based upon their  evaluation  of those  controls and
     procedures  performed within 90 days of the filing date of this report, the
     principal  executive and acting principal  financial officer of the Company
     concluded that disclosure controls and procedures were adequate.

(b)  Change in internal controls. The Company made no significant changes in its
     internal controls or in other factors that could significantly affect these
     controls  subsequent to the date of the evaluation of those controls by the
     principal executive and acting principal officer.


PART II - OTHER INFORMATION

Item 1 - Legal Proceedings:

     There were no material  changes in  litigation  for the first six months of
fiscal 2003.

Item 2 - Changes in Securities: None

Item 3 - Defaults Upon Senior Securities: None

Item 4 -  Submission of Matters to a Vote of Security Holders:  None

Item 5 -  Other Information:  None

Item 6 -  Exhibits and Reports on Form 8-K:  None.

SIGNATURES

Pursuant  to the  requirements  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
                                                    (Registrant)

                                                    By:  /s/ Raymond V. Damadian
                                                         Raymond V. Damadian
                                                         President & Chairman
Dated:   May 15, 2003

                                  CERTIFICATION

I,   Raymond V. Damadian, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Fonar Corporation;

2.   Based on my knowledge,  this  quarterly  report does not contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report;

4.   I am responsible for establishing and maintaining  disclosure  controls and
     procedures  (as  defined in Exchange  Act Rules  13a-14 and 15d-14) for the
     registrant and we have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during  the  period in which  this  quarterly
          report is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and  procedures  as of a date  within 90 days prior the filing date of
          this quarterly report (the "Evaluation Date"); and

     c)   presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   I have disclosed,  based on our most recent evaluation, to the registrant's
     auditors and the audit  committee of  registrant's  board of directors  (or
     person performing the equivalent function);

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   I have  indicated  in this  quarterly  report  whether  or not  there  were
     significant  changes in internal  controls or in other  factors  that could
     significantly  affect internal controls  subsequent to the date of our most
     recent  evaluation,   including  any  corrective  actions  with  regard  to
     significant deficiencies and material weaknesses.

Date:    May 15, 2003

/s/ Raymond V. Damadian
Raymond V. Damadian
President, Principal Executive Officer and Acting Principal
Financial Officer


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