Dear Shareholders:
For over a quarter century, FONAR has been at the forefront of magnetic resonance imaging (MRI) research and development. In recent years, we developed and commercialized the FONAR Upright™ MRI, which we believe has the potential to revolutionize the industry’s standards and practices.

This revolution was clearly evident in fiscal year 2005. Our company achieved many milestones in its most recently completed fiscal year.

Fiscal Year 2005 Financial Results Highlights

Fiscal year 2005 was remarkable for FONAR in that our revenues exceeded $100 million for the first time in our Company’s 27-year history. In light of our record revenues of approximately $105 million, which is an increase of 46% from the prior year, and nearly double that from two years earlier, we believe that the FONAR Upright™ MRI is proving to be a technology that is revolutionizing the industry.

Since the introduction of the FONAR Upright™ MRI in 2000, we are gratified to report that a total of 129 FONAR Upright™ MRI scanners have been sold, with a record 45 installations in fiscal 2005. We did not at that time have solid proof that the regional advertising campaign that had commenced in January 2002 and ended in November 2004 was contributing to our record MRI scanner sales and revenues. With the intent of achieving profitability for the first time since 1997, we ended the use of what had been an expensive advertising campaign. By the end of 2005, we realized that advertising was a key ingredient of our past success and should be reintroduced under more economically prudent terms.

Fiscal Year 2006 – The First Nine Months

For the first nine months of fiscal 2006 ended March 31, 2006, we reported a net loss of $21.0 million on revenues of $27.8 million, as compared to net income of $1.4 million on revenues of $79.9 million for the first nine months of fiscal 2005.

Notwithstanding the disappointing revenue recognition we have experienced so far in fiscal 2006, we have thus far received orders for 13 machines, have Accounts Receivable in the amount of approximately $11 million, and a backlog of approximately $16 million. In other words, we expect to receive $27 million in cash payments over the course of the next 18 months, in addition to new orders for the Upright™ MRI and the FONAR 360°™

Health Management Corporation of America (HMCA) is showing steady growth, and FONAR Field Service revenues are rising as Upright™ MRI centers complete their free, one-year service warranty periods and begin making regular payments according to their service contracts.

The Six-Point Marketing Strategy

As we previously announced, FONAR has developed a six-point marketing strategy to target five spheres of industry influence in an effort to significantly accelerate growth in revenue streams for MRI scanner equipment sales and services and related revenues that are recurring in nature. The six-point marketing strategy includes initiatives in the following areas: Advertising Campaigns; Trade Show and Industry Event Participation; Third Party Endorsements in the Form of Medical Research and Professional Testimonials; Direct Sales Efforts for U.S. Market Penetration; Distribution Channel Partnerships; and Strategic Marketing Relationships.

The Company’s marketing initiatives are listed below, along with progress made to date or plans for continued activity in the respective areas.

Five Spheres of Influence

The focus of the sales and marketing efforts is to stimulate demand and awareness of FONAR products from what we call the five spheres of influence: Patients, Surgeons and Referring Physicians, Radiologists, Independent MRI Practice Owners, and Hospitals. FONAR’s intent is to reinforce the superiority of its imaging technology for improved patient care and surgical outcomes by interacting with these groups.

Very important among these constituencies is the U.S. hospital market. This segment has traditionally been dominated by FONAR’s competitors. Therefore, successful sales to hospital customers will significantly enhance the perceived value and uniqueness of FONAR MRI technology.

We are pleased to have recently announced a milestone for FONAR in its penetration of the U.S. hospital market. In recent weeks, we announced two sales of the FONAR Upright™ MRI to hospitals, one to a substantial hospital chain and a second to a prestigious hospital in eastern Tennessee. We believe continued success in the hospital segment, as well as in our traditional scanning center market, is being achieved because FONAR’s Upright™ MRI is providing valuable medical benefits that cannot be achieved by the recumbent-only MRI products available outside of FONAR.

Creating demand for Upright™ MRI scanning centers assists in FONAR’s endeavors to generate equipment sales, as well as HMCA revenues. Those centers managed by HMCA deliver revenue to FONAR through HMCA management fees.

The “Failed Back Surgery Syndrome” Opportunity

FONAR’s Upright™ MRI is addressing a serious medical need – namely a proper medical evaluation of the approximately 800,000 patients each year in the U.S. who undergo back surgery. The failure rate of this surgery is such that the medical profession has been forced to set aside a specific acronym, FBSS (Failed Back Surgery Syndrome), to identify the high failure rate associated with back surgery.

Only FONAR’s Upright™ MRI meets the need of addressing the high surgery failure rate of back surgery by making available to surgeons the ability to visualize the patient’s fully weight-loaded spine. No other MRI product on the market, all of which are recumbent-only devices, provides this crucial feature.

Conclusion

The FONAR Upright™ MRI is in the process of reshaping the way patients and doctors are perceiving MRI. As we fulfill our mission to improve patient care through innovative products like the FONAR Upright™ and the FONAR 360°™, we expect FONAR shareholder value to reflect their benefit to patient care through increased product sales and HMCA management fees.

In conclusion, I would like to acknowledge the support of our faithful shareholders who share our vision, the FONAR team for its unwavering dedication, and our customers for their loyalty. The opportunities and challenges we face as a united force are certain to strengthen our resolve to achieve the goal of medical excellence and thus the financial success that is coupled to that goal.

Sincerely,

Raymond V. Damadian
President and Chairman

About FONAR

FONAR® was incorporated in 1978, making it the first, oldest and most experienced MRI manufacturer in the
industry. FONAR introduced the world's first commercial MRI in 1980, and went public in 1981. Since its inception, FONAR has installed hundreds of MRI scanners worldwide. Their stellar product line includes the FONAR UPRIGHT™ MRI (also known as the Stand-Up™ MRI), the only whole-body MRI that performs Position™ imaging (pMRI) and scans patients in numerous weight-bearing positions, i.e. standing, sitting, in flexion and extension, as well as the conventional lie-down position. The FONAR UPRIGHT™ MRI often sees the patient's problem that other scanners cannot because they are lie-down only. With nearly one half million patients scanned, the patient-friendly FONAR UPRIGHT™ MRI has a near zero claustrophobic rejection rate by patients. A radiologist said, "FONAR UPRIGHT™ MRI - No More Claustrophobia - The Tunnel Is Gone." As another FONAR customer states, "If the patient is claustrophobic in this scanner, they'll be claustrophobic in my parking lot." Approximately 85% of patients are scanned sitting while they watch a 42" flat screen TV. FONAR's latest MRI scanner is the FONAR 360, a room-size recumbent scanner that optimizes openness while facilitating physician access to the patient. FONAR is headquartered on Long Island, New York, and has approximately 400 employees.

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The Inventor of MR Scanning™, True Flow™ MRI, Stand-Up™ MRI, FONAR UPRIGHT™ MRI, Position™ MRI, PMRI™ and The Proof is in the Picture™ are trademarks of FONAR® Corporation.

This release may include forward-looking statements from the company that may or may not materialize. Additional information on factors that could potentially affect the company's financial results may be found in the company's filings with the Securities and Exchange Commission.
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