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It's been a long time since we have suffered a certified blowout, but Fonar Corp. (FONR-Nasdaq) is putting our streak of fortune in severe jeopardy. The stock of our MRI maker was hammered last week to 26 cents (U.S.), as third-quarter revenue imploded to a paltry $7.1-million, compared with $25.3-million in 2005. After a nominal profit last year, losses have been mounting at a harrowing pace, now standing at $21-million over nine months.

Have North Americans suddenly become so healthy that they have no need for this miracle of medical science? Sadly, that is not the case, as demand remains strong and plenty of MRI machines continue to be sold, but it is the folks selling competing models that are buying the first round of frosty margaritas.

Fonar's flagship scanner, the "Upright," is special, different, revolutionary, superior, and fully protected by patents and the U.S. Supreme Court, or so the company says to anyone who will listen -- which does not appear to include many who make purchasing decisions of big-ticket medical equipment.

When we shelled out $1.25 a share for the company just over a year ago, there were strong indicators that U.S.-based Fonar was carving out a niche, and our $2.05 target would be a piece of cake. Sales of the Upright were on a sharp upwards trajectory, with revenue for the first six months of 2005 up by 75 per cent, compared with 2004. It takes time for any new technology to penetrate a market, and it was plausible that an MRI machine that was friendly enough to allow patients to comfortably watch television while being scanned was ready to hit its stride. And with an estimated 10 million MRI scans of the spine being performed each year in the United States, even a small slice of such a large pie would pay off handsomely.

What went wrong? We knew from the outset that Fonar was a minnow swimming in a big pond, populated by global giants like GE, Toshiba, Hitachi and Siemens. Fonar stated that "the reduction in product revenue recognition was primarily due to increased marketing and advertising pressure from our competitors attempting to minimize the unique medical benefits of the Fonar Upright." Well, that's the nature of competition, guys.

Of course, company founder and chief executive officer Dr. Raymond Damadian also took umbrage when the 2003 Nobel Prize for medicine went to Dr. Paul Lauterbur and Sir Peter Mansfield for their development of the MRI. So upset was Dr. Damadian that full-page ads in The New York Times and Washington Post appeared, pouring scorn on the Nobel committee for failing to recognize his work. Tsk, tsk.

While we recognize that inflated egos are a dime a dozen in the business world, Fonar's horrible results had us poised on the conference call to make a few inquiries. However, no shareholder questions were entertained. Not the sort of action that builds management credibility.

We have considered taking our lumps and marking this one a tax loss against our substantial gains. This option appears eminently prudent considering the discomforting fact that Fonar has failed to meet the Nasdaq Capital Market continued listing requirement. The stock price will have to be boosted to the $1 level before the end of the year, or demotion to over-the-counter hell is virtually inevitable. At this point though, we will hold.

Daniel Culver, Fonar's director of communications, was confident during our conversation that the boat will turn around and the stock will scale the wall to over-a-buck land. Dr. Damadian is putting his money where his mouth is, having purchased over 190,000 shares this year, almost half of those last week at 55 cents, after the dismal results were reported. Is this the equivalent of the maestro striking up the band to It's a Wonderful World while the ship slips slowly beneath the waves, or does he have a personal life preserver that we don't know about? One way or another, we aren't expecting a Nobel Prize in economics for this investment.

Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter. This column first appeared on GlobeinvestorGOLD.com.

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