<PAGE>


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

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

For the quarterly period ended          December 31, 2000
                              --------------------------------------------------

[ ]      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:                     1-10285
                       ---------------------------------------------------------

                                4-D NEUROIMAGING
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

          California                                    95-2647755
--------------------------------------------------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

9727 Pacific Heights Boulevard, San Diego, California                92121-3719
--------------------------------------------------------------------------------
(Address of principal executive offices)                             (zip code)

                                 (858) 453-6300
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)


--------------------------------------------------------------------------------
      (Former name, former address and formal fiscal year, if changed since
                                  last report)

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.

                                 [X] Yes [ ] No

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                   PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding of the registrant's Common Stock, no par value,
as of February 6, 2001 was 85,191,957 shares.


<PAGE>


PART I        FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS

                                4-D NEUROIMAGING
                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>

                                                                     DECEMBER 31,                 SEPTEMBER 30,
                                                                         2000                         2000
                                                                  -------------------           ------------------
                                                                     (unaudited)
<S>                                                               <C>                           <C>
  ASSETS
  Cash and cash equivalents                                       $        1,054                $        1,083
  Restricted cash                                                            312                           312
  Accounts receivable, less allowance for doubtful
       accounts of $210                                                    1,838                         1,246
  Inventories                                                              7,029                         6,345
  Prepaid expenses and other                                                 989                         1,068
                                                                  -------------------           ------------------
           Total current assets                                           11,222                        10,054

  Property and equipment, net                                                950                           973
  Goodwill, net                                                            9,159                         9,696
  Restricted cash                                                            313                           313
  Deferred income taxes                                                      511                           586
  Other assets                                                               561                           562
                                                                  -------------------           ------------------
                                                                  $       22,716                $       22,184
                                                                  ===================           ==================

  LIABILITIES AND SHAREHOLDERS' DEFICIT
  Notes payable                                                   $       13,035                $       13,155
  Accounts payable                                                         4,004                         3,797
  Accrued liabilities                                                      1,323                         1,452
  Accrued salaries and employee benefits                                     848                           595
  Customer deposits                                                        6,337                         4,641
  Deferred revenues                                                          262                           297
  Current portion of royalty obligation                                      312                           287
  Current portion of capital lease obligations                                16                            16
                                                                  -------------------           ------------------
           Total current liabilities                                      26,137                        24,240

  Royalty obligation, net of current portion                               1,488                         1,488
  Deferred revenues                                                           89                           134
  Capital lease obligations, net of current portion                           41                            42
                                                                  -------------------           ------------------
           Total liabilities                                              27,755                        25,904
                                                                  -------------------           ------------------

  COMMITMENTS AND CONTINGENCIES

  SHAREHOLDERS' DEFICIT
  Common stock -- no par value; 200,000,000 shares authorized;
       84,975,008 shares issued and outstanding                          100,102                       100,102
  Additional paid-in capital                                               3,008                         3,008
  Accumulated deficit                                                   (107,705)                     (106,413)
  Accumulated other comprehensive loss                                      (444)                         (417)
                                                                  -------------------           ------------------
           Total shareholders' deficit                                    (5,039)                       (3,720)
                                                                  -------------------           ------------------
                                                                  $       22,716                $       22,184
                                                                  ===================           ==================

</TABLE>


                 See notes to consolidated financial statements
                                       2
<PAGE>


                                4-D NEUROIMAGING
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                   THREE MONTHS ENDED
                                                                                       DECEMBER 31,
                                                                                2000                 1999
                                                                          ---------------       -------------
<S>                                                                       <C>                   <C>
REVENUES
     Product sales                                                        $         2,906       $         185
     Product services                                                                 224                  93
                                                                          ---------------       -------------
                                                                                    3,130                 278
                                                                          ---------------       -------------
COST OF REVENUES
     Product                                                                        1,863                 407
     Product services                                                                 123                  40
                                                                          ---------------       -------------
                                                                                    1,986                 447
                                                                          ---------------       -------------
GROSS MARGIN                                                                        1,144                (169)
                                                                          ---------------       -------------
OPERATING EXPENSES
     Research and development                                                         711                 545
     Marketing and sales                                                              514                 590
     General and administrative                                                       696                 483
     Goodwill amortization                                                            337                   -
                                                                          ---------------       -------------
                                                                                    2,258               1,618
                                                                          ---------------       -------------
OPERATING LOSS                                                                     (1,114)             (1,787)

     Interest expense                                                                (330)                  -
     Interest income                                                                   25                  16
     Other income, net                                                                202                  51
                                                                          ---------------       -------------
LOSS BEFORE PROVISION FOR INCOME TAXES                                    $        (1,217)      $      (1,720)
     Provision for income taxes                                                        75                   -
                                                                          ---------------       -------------
NET LOSS                                                                  $        (1,292)      $      (1,720)
                                                                          ===============       =============


BASIC AND DILUTED NET LOSS PER SHARE                                      $         (0.02)      $       (0.02)
                                                                          ===============       =============
Weighted average number of
     common shares outstanding                                                     84,975              83,367
                                                                          ===============       =============
COMPREHENSIVE LOSS:
     Net loss                                                             $        (1,292)      $      (1,720)
     Cumulative translation adjustment                                                (27)                  -
                                                                          ---------------       -------------
     Comprehensive loss                                                   $        (1,319)      $      (1,720)
                                                                          ===============       =============

</TABLE>

                 See notes to consolidated financial statements
                                       3
<PAGE>


                                4-D NEUROIMAGING
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                       THREE MONTHS ENDED
                                                                                          DECEMBER 31,
                                                                                   2000                 1999
                                                                             ----------------     ----------------
<S>                                                                          <C>                  <C>
  OPERATING ACTIVITIES
     Net loss                                                                $     (1,292)        $      (1,720)
     Adjustments to reconcile net loss to net
       cash provided by (used in) operating activities:
         Depreciation                                                                 135                    96
         Amortization of goodwill                                                     337                     -
         Amortization of minimum royalty obligation                                    25                     -
         Income from investment in Magnesensors                                      (200)                  (16)
         Deferred income taxes                                                         75                     -
     Changes in operating assets and liabilities excluding effects of
         acquisition:
         Restricted cash                                                                -                  (623)
         Accounts receivable                                                         (592)                  215
         Inventories                                                                 (498)                 (549)
         Prepaid expenses and other                                                    80                   (67)
         Accounts payable                                                             407                  (281)
         Accrued liabilities                                                           71                   (23)
         Accrued salaries and employee benefits                                       253                    64
         Customer deposits                                                          1,696                 1,197
         Deferred revenue                                                             (80)                  (73)
                                                                             ----------------     ----------------
           Net cash provided by (used in) operating activities                        417                (1,780)
                                                                             ----------------     ----------------

  INVESTING ACTIVITIES
     Change in short-term investments, net                                              -                 1,683
     Purchases of property and equipment                                             (298)                  (52)
     Acquisition of Neuromag, net of cash acquired                                      -                (9,507)
                                                                             ----------------     ----------------
           Net cash used in investing activities                                     (298)               (7,876)
                                                                             ----------------     ----------------

  FINANCING ACTIVITIES
     Proceeds from notes payable                                                        -                11,000
     Repayments of notes payable                                                     (123)                    -
     Payments on capital lease obligations                                             (6)                   (7)
     Borrowings on capital lease obligations                                            5                     -
                                                                             ----------------     ----------------
           Net cash (used in) provided by financing activities                       (124)               10,993
                                                                             ----------------     ----------------

           Effect of exchange rate changes                                            (24)                    -

  Net Increase (Decrease) in Cash and Cash Equivalents                                (29)                1,337
                                                                             ----------------     ----------------

  Cash and Cash Equivalents at Beginning of Period                                  1,083                   441
                                                                             ----------------     ----------------

  Cash and Cash Equivalents at End of Period                                 $      1,054         $       1,778
                                                                             ================     ================

</TABLE>

                 See notes to consolidated financial statements
                                       4
<PAGE>


                                4-D NEUROIMAGING
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                 (IN THOUSANDS)
                                   (UNAUDITED)


SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

<TABLE>
<CAPTION>

                                                                                       THREE MONTHS ENDED
                                                                                          DECEMBER 30,
                                                                                    2000                1999
                                                                             ----------------     ----------------
<S>                                                                          <C>                  <C>
Royalty obligation incurred in acquisition of Neuromag Oy                    $          -         $       1,700
Adjustment of acquisition liabilities to goodwill                            $         200        $           -
Property and equipment transfer to inventories for customer sale             $         186        $           -

SUPPLEMENTAL DISCLOSURES:
  Cash paid for interest                                                     $          56        $           -

</TABLE>



                 See notes to consolidated financial statements
                                       5
<PAGE>

                                4-D NEUROIMAGING
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE 1.       BUSINESS AND BASIS OF PRESENTATION

4-D Neuroimaging, founded in 1970 as a California corporation, is engaged
primarily in the business of developing, manufacturing and selling medical
imaging systems to medical institutions. The magnetic source imaging ("MSI")
systems developed by the Company measure magnetic fields created by the human
body for the noninvasive diagnosis of certain medical disorders.

On December 22, 1999, 4-D Neuroimaging acquired all of the issued and
outstanding capital stock ("Shares") of Neuromag Oy pursuant to the terms of a
Share Purchase Agreement, by and between Marconi Medical Systems, Inc.
("Marconi") and 4-D (the "Share Purchase Agreement"). The acquisition of
Neuromag Oy has been accounted for under the purchase method of accounting. The
Company paid $10 million in cash and agreed to pay Marconi an interest-free
minimum royalty obligation of $312,500 per year for eight years (totaling $2.5
million and a maximum of $5 million in royalties. The minimum royalty obligation
was recorded at acquisition at a net present value of $1.7 million using an
imputed interest rate of approximately 10 percent. The fair value of net assets
acquired was approximately $1,100,000. The purchase price in excess of the fair
value of net assets acquired was recorded as goodwill totaling approximately
$10.6 million and is being amortized over 8 years. Similar to 4-D, Neuromag Oy
is engaged in the research , development, manufacturing, and sales of MSI
systems.

The unaudited consolidated condensed financial statements of 4-D Neuroimaging
and its subsidiaries, Neuromag Oy, a wholly owned Finnish entity, and
Biomagnetic Technologies, GmbH, an inactive wholly owned German entity,
(together, the "Company", "we", "our", or "4-D") have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to such
rules and regulations. The Company suggests that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's annual report on Form 10-K for the fiscal year ended September 30,
2000.

In the opinion of the Company, the accompanying unaudited consolidated condensed
financial statements contain all adjustments, consisting only of normal
recurring entries, necessary to present fairly its financial position at
December 31, 2000 and the results of its operations and its cash flows for the
periods presented.

The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.

The accompanying statements of operations include the results of operations
of Neuromag Oy for the three months ended December 31, 2000. The results of
operations between December 23, 1999 and December 31, 1999 were not material
to the consolidated statements of operations (see Note 4).

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

NOTE 2.       DEBT OBLIGATIONS

To acquire the shares of Neuromag Oy, the Company obtained a loan from AIG
Private Bank Ltd. totaling $11 million (the "Neuromag Note") that is secured
by the entire share capital of Neuromag Oy and is guaranteed by an entity
affiliated with a member of the Company's Board of Directors. A member of the
Company's Board of Directors also serves on the Board of Directors of AIG
Private Bank Ltd. ("AIG Bank" or "AIG"). The $11 million loan was
restructured in July 2000 which extended the original maturity date from June
30, 2000 to December 29, 2000 and the principal amount was increased to $11.4
million. On December 29, 2000, the Company did not make payment at maturity
of the note. On February 15, 2001, the Company and AIG reached an agreement
in principle, extending the maturity date to July 20, 2001, increasing

                                       6
<PAGE>


the loan principal to approximately $12 million (capitalizing accrued interest
of approximately $550,000 into the loan principal) and obtaining additional
guarantees of indebtedness from another bank.

The Company does not currently anticipate being able to pay off the AIG loan at
the proposed maturity on July 20, 2001 without raising additional capital. The
Neuromag note is secured by the shares of Neuromag Oy. If the Company is unable
to renegotiate or pay off the AIG loan, AIG could exercise its security interest
and take ownership of Neuromag Oy.

In June 2000, the Company obtained unsecured loans totaling $835,000 from
BDN, a related party, and used approximately $485,000 of the proceeds to pay
interest due AIG at June 30, 2000 in conjunction with extending the maturity
of the Neuromag Note to December 29, 2000. BDN is a Spanish company owned by
three members of the Company's Board of Directors. The BDN loans were
originally due on September 30, 2000. During October 2000, the Company repaid
approximately $123,000 of principal and $27,000 of interest for these loans
and negotiated an extension of the maturities of the BDN notes until March
31, 2001. The Company is currently negotiating with BDN to extend the loan
maturities to September 30, 2001.

Prior to acquisition by 4-D, Neuromag borrowed a total of FIM 3,140,000
(approximately $474,000 at December 31, 2000) from TEKES. The future repayment
date for principal and related accrued interest outstanding is dependent upon
Neuromag Oy generating sufficient distributable equity, as defined, in
accordance with Finnish generally accepted accounting principles, in the future.

In September 2000, the Company obtained an unsecured loan from Swisspartners, a
related party, totaling $450,000. A member of the Company's Board of Directors
is a partner of Swisspartners. The Swisspartners loan is due on September 30,
2001.

In an event of acceleration of the Company's indebtedness, it is possible that
the Company may be required to seek protection under bankruptcy laws, either
voluntarily or involuntarily. There can be no assurance that the Company will be
able to raise additional capital to repay its indebtedness or be able to
renegotiate any of its indebtedness on terms acceptable to the Company, if at
all.

NOTE 3.       BUSINESS RISKS AND UNCERTAINTIES

The Company is experiencing serious liquidity issues and incurred net losses
of $8,127,000, $7,464,000, and $4,968,000 in fiscal 2000, 1999 and 1998,
respectively. The Company had negative cash flows from operations of
$5,217,000, $8,602,000, and $5,520,000 in fiscal 2000, 1999 and 1998,
respectively. For the quarter ended December 31, 2000, the Company incurred a
net loss of $1,292,000 and had positive cash flows from operations of
$417,000. At December 31, 2000, the Company had an accumulated deficit of
$107,705,000, a net capital deficiency of $5,039,000, and a working capital
deficiency of $14,915,000.

In an effort to address its operational and liquidity issues, management
continues to work with it lenders, is attempting to raise additional capital and
is developing cost reduction measures on a worldwide basis to bring its cost
structure more in line with expected revenues. If management is not successful
in initiating and executing its plans, management anticipates that capital,
working capital, and debt service requirements in fiscal 2001 will substantially
exceed cash projected to be generated by MSI systems sales.

Based on the Company's current expectation of anticipated cash receipts related
to firm orders received and anticipated bookings of up to two additional MSI
systems, the Company expects to have sufficient cash to continue operations
through April 2001 without taking into account cash requirements for maturities
of its notes payable. Historically, the Company has raised additional capital
through its majority shareholders and related parties to fund continuing
operations. The Company is working with these shareholders and related parties
to renegotiate, reduce or repay its debt obligations and to provide additional
funding for operations. There can be no assurance that these sources of capital
will be available, or that existing debt can be renegotiated on terms acceptable
to the Company, if at all.


                                       7
<PAGE>


Realization of the Company's operating plans is dependent upon its ability to
successfully close a number of MSI system sales in a highly competitive market
for the limited number of systems being purchased worldwide. There can be no
assurance that sufficient sales of the Company's MSI systems will be achieved in
order to realize the current operating plans. Historically, there has been
ongoing price competition from the Company's competitors for the currently
limited number of whole head systems being purchased worldwide. This competition
may affect potential future profitability of the Company's MSI systems, the
extent of which is not presently determinable.

To date, the Company has been engaged principally in research and development
and marketing activities, and has made only low volume sales to clinical
research institutions. The Company is dependent on its current MSI systems as
its principal products for which there are currently only limited clinical
applications. Additional clinical applications development needs to be conducted
with MSI systems at major medical centers before the Company can begin to
develop a commercial clinical market. There can be no assurance that a
commercial market will develop for diagnostic or monitoring uses of the
Company's MSI systems. A continued lack of clinical applications and a
commercial market for the Company's MSI systems would have a material adverse
impact on the Company's financial position, results of operations, and cash
flows.

The Company's commercial success is also highly dependent on the availability of
reimbursement for procedures performed by the Company's customers using MSI
systems. As of December 31, 2000, there have been limited reimbursements from
third party payors on a case-by-case basis. Although the number of third party
payors making reimbursements has increased, there is no assurance that third
party reimbursements will become widely available. Reimbursements are not
currently provided for MSI procedures by the United States or Japanese
governments, nor is there any assurance that these governments will authorize or
budget for such procedures in the future. If widespread availability of
reimbursements from government and private insurers is not achieved, the
Company's financial position, results of operations and cash flows would be
materially adversely affected. The Company also cannot predict what legislation
relating to its business or the health care industry may be enacted in the
future, including legislation relating to third party reimbursements, or what
effect such legislation may have on its financial position, results of
operations and cash flows.

The industry in which the Company operates is characterized by rapid
technological change. New products using other technologies or improvements to
existing products may reduce the size of the potential markets for the Company's
products, and may render them obsolete or non-competitive. Competitors may
develop new or different products using technology or imaging modalities that
may provide or be perceived as providing greater value than the Company's
products. Any such development could have a material adverse effect on the
Company's financial position, results of operations and cash flows.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed above and as
shown in the accompanying consolidated financial statements, the Company has
operating and liquidity concerns that raise substantial doubt about the
Company's ability to continue as a going concern. There can be no assurance that
the Company will be able to successfully improve its operating results and
restructure its indebtedness or that its liquidity and capital resources will be
sufficient to maintain its normal operations. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.

The report of the Company's independent public accountants on the Company's
financial statements included in its Form 10-K for the year ended September 30,
2000 contained a modification related to the Company's ability to continue as a
going concern.


                                       8
<PAGE>

NOTE 4.       ACQUISITION OF NEUROMAG OY AND PRO FORMA DATA

Unaudited condensed pro forma net revenues and net loss for the three months
ended December 31, 1999, assuming the acquisition of Neuromag Oy occurred on
September 30, 1999, are as follows (in thousands):

<TABLE>
<CAPTION>

                                                      THREE MONTHS ENDED
                                                       DECEMBER 31, 1999
                                                      ------------------
                                                          (UNAUDITED)
                       <S>                            <C>
                       Net revenues                   $            2,303
                       Net loss                       $           (1,761)

</TABLE>

NOTE 5.       BASIC AND DILUTED NET LOSS PER SHARE

Shares used in computing basic and diluted net loss per share include the
weighted average number of common shares outstanding. Potentially dilutive
securities, including stock options, are antidilutive and are excluded from the
computation of diluted net loss per share.

NOTE 6.       INVENTORIES

The composition of inventories is as follows (in thousands):

<TABLE>
<CAPTION>

                                                   DECEMBER 31, 2000     SEPTEMBER 30, 2000
                                                   -----------------     ------------------
                                                      (UNAUDITED)
                   <S>                             <C>                   <C>
                   Raw materials                   $             915     $            1,018
                   Work-in process                             4,665                  4,852
                   Finished goods                              1,449                    475
                                                   -----------------     ------------------
                                                   $           7,029     $            6,345
                                                   =================     ==================

</TABLE>

NOTE 7.       SEGMENT INFORMATION

The Company operates in one segment that includes developing, manufacturing and
selling magnetic source imaging products. The overall market for the Company's
operations can be further divided into three overlapping sub-segments: the basic
research market, the applications research market, and the commercial clinical
market. To date, substantially all of the Company's revenues have been derived
from, and substantially all of the Company's assets have been devoted to, the
basic research market. The Company also assesses its operations for 4-D and
Neuromag on a stand-alone basis. Summary data related to 4-D and Neuromag Oy is
as follows (in thousands):

<TABLE>
<CAPTION>

                                                              THREE MONTHS ENDED
                                                              DECEMBER 31, 2000
                                                         4-D                   NEUROMAG
                                                  ----------------         --------------
                 <S>                              <C>                      <C>
                 Revenues                         $          1,248         $        1,882
                 Gross margin                                  617                    527
                 Operating loss                             (1,090)                   (24)
                 Net loss                         $         (1,164)        $         (128)

</TABLE>

As of December 31, 2000, total assets for 4-D and Neuromag Oy totaled
$18,059,000 and $4,657,000, respectively.


                                       9
<PAGE>


NOTE 8.       COMPREHENSIVE INCOME

The functional currency of Neuromag Oy is the Finnish Markka. As such,
translation adjustments related to the financial statements of Neuromag Oy are
accounted for as a component of accumulated other comprehensive loss.

NOTE 9.       RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities," in June 1999 the FASB issued SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," and in June 2000 the FASB issued SFAS
No. 138 "Accounting for Derivative Instruments and Hedging Activities - An
Amendment of SFAS No. 133." These statements establish accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. They require that an entity recognize all derivatives as
either assets or liabilities and measure those instruments at fair value. The
Company adopted SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, in
the first quarter of fiscal 2001. The adoption of these standards did not have
an impact on the Company's financial position or results of operations as the
Company had not entered into any derivative instrument arrangements.

In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements", in which the SEC interprets existing accounting literature related
to revenue recognition. SAB No. 101, as amended, will be adopted by the Company
no later than the fourth fiscal quarter of fiscal 2001. The Company's adoption
of SAB No. 101 in the fourth quarter of fiscal 2001 is not expected to have a
material impact on the Company's consolidated financial position or results of
operations.

In July 2000, the Emerging Issues Task Force ("EITF") reached a consensus on
EITF No. 00-10, "Accounting for Shipping and Handling Fees and Costs." EITF
Issue No. 00-10 requires that all amounts billed to a customer in a sales
transaction related to shipping and handling, if any, represent revenue to the
vendor and should be classified as revenue. There has been no consensus at this
time on the treatment for the related costs. The Company will adopt the
provisions of EITF Issue No. 00-10 in the fourth quarter of fiscal 2001. The
Company has not yet determined what impact, if any, the adoption of EITF Issue
No. 00-10 will have on its consolidated financial position, results of
operations or related disclosures thereto.

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

The following information should be read in conjunction with the condensed
consolidated financial statements and the accompanying notes included in Item 1
of this quarterly report, and the audited financial statements, accompanying
notes and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in our annual report on Form 10-K for the fiscal
year ended September 30, 2000. See "Risks and Uncertainties" for a discussion of
some of the factors known to us that could cause reported financial information
not to be necessarily indicative of future results. We are not obligated to
publicly release the results of any revisions to forward-looking statements to
reflect events and circumstances arising after the date this report is filed.

OVERVIEW

4-D Neuroimaging is engaged primarily in the business of developing,
manufacturing and selling innovative medical imaging systems to medical
institutions. The MSI systems developed by the Company measure magnetic fields
created by the human body for the noninvasive diagnosis of certain medical
disorders.

The Company is experiencing serious operating and liquidity issues. These
issues are discussed in more detail under "Results of Operations" and "Liquidity
and Capital Resources" below.

The measurement of the body's magnetic fields by MSI provides information about
the normal and abnormal functioning of the brain, heart and other organs. The
Company is focusing on the use of its technology for potential


                                       10
<PAGE>


commercial market applications such as the diagnosis and planning for surgical
treatment of epilepsy, and the functional mapping of areas of the brain at risk
during surgery for tumors and other lesions. Currently, the medical industry is
aware of only a few established diagnostic uses for MSI Systems. The Company is
continuing to investigate the potential applications of its technology for
problems of the heart, spine, and gastrointestinal system, as well as for
disorders of the brain such as closed-head trauma, schizophrenia and other
neuro-psychiatric disorders.

As of December 31, 2000, fifty-five (55) MSI systems are installed in medical
and research institutions worldwide, and more than 5,000 MSI examinations have
been performed on patients and control subjects at the Company's application
development sites. Related findings by 4-D and its collaborators have been
published in more than 200 scientific and medical papers. Since the first
reimbursement for MSI procedures was received in September 1993, more than 200
insurance companies have approved reimbursement on a case-by-case basis for
certain MSI procedures performed with the Company's MSI systems

In fiscal 1995, 4-D announced development of the Magnes 2500 WH, an expansion of
the existing Magnes I and Magnes II systems product line. The Magnes 2500 WH
allows for examination of the entire brain at once and is designed for
evaluating ambulatory or critically ill patients in seated or fully reclined
positions. As of December 31, 2000, the Company had shipped fifteen Magnes 2500
WH systems and received thirteen final acceptances from customers. In fiscal
2000 4-D completed the development of the Magnes 3600 WH, and has shipped its
first system to a customer. The Magnes 3600 increased the sensitivity of the
Company's MSI system by increasing the number of detector channels.

On December 22, 1999, 4-D acquired all of the issued and outstanding capital
stock ("Shares") of Neuromag Oy pursuant to the terms of a share purchase
agreement, by and between Marconi Medical Systems, Inc. ("Marconi") and 4-D (the
"Share Purchase Agreement"). Under the terms of the Share Purchase Agreement,
4-D paid a total of $10 million in cash to Marconi for the purchase of the
Shares and agreed to pay between a minimum of $2,500,000 and a maximum of
$5,000,000 in royalties to Marconi under an ancillary royalty agreement over the
next 8 years. The acquisition was funded by a loan from AIG Private Bank Ltd.
("AIG").

Similar to 4-D, Neuromag Oy is engaged in the research, development and
manufacturing of MSI systems. Neuromag Oy is located in Helsinki, Finland. 4-D
operates Neuromag Oy as a subsidiary of 4-D. Neuromag Oy developed and sold its
first MSI system, the Neuromag 122 in 1994. Neuromag then introduced its next
generation product, the Vectorview, in 1997. Both are whole head systems,
designed to evaluate brain function.

The current price of 4-D's MSI systems ranges from approximately $1.0 to $2.5
million, depending upon system configuration. A major portion of the Company's
sales have been, and are expected to be, in foreign markets. Although the
distributor agreements that the Company has entered into in the Far East have
required sales to be priced in U.S. dollars, the Company has previously priced
certain of its European sales in the currency of the country in which the
product was sold and the prices of such products in U.S. dollars varied as the
value of the U.S. dollar fluctuated against the quoted foreign currency price.
Additionally, substantially all of the receivables and payables of the Company's
foreign subsidiaries are denominated in currencies other than U.S. dollars.
Consequently, the Company's reported results are subject to various risks,
including without limitation, foreign currency risks. Although at December 31,
2000 the Company did not have any open forward exchange contracts, the Company
may in the future enter into forward exchange contracts to partially hedge, or
protect against, such foreign currency exposure, if appropriate. As part of a
comprehensive approach to risk management, the Company is presently evaluating
alternatives to address this risk. See our discussion under "Risks and
Uncertainties - If foreign currency rates fluctuate our return on sales in U.S.
dollars may suffer" and Item 3 "Quantitative and Qualitative Disclosures About
Market Risk", for more detailed discussions of the quantitative and qualitative
disclosures about market risk.

The Company believes that the relatively small number of proven medical
applications for its MSI systems, the lack of routine reimbursement for MSI
procedures, and the uncertainty of product acceptance in the U.S. market have
limited system sales. Additionally, it is not possible to reliably predict the
timing and extent of future product sales due to the uncertainties of the
acceptance of medical applications, reimbursement and product acceptance. The
Company does not anticipate multiple sales to the same end-user at current sales
volumes, and the sale of one MSI system may have a significant impact on the
Company's financial position and results of operations during any reporting
period. As a result, quarterly and annual operating performance will continue to
fluctuate significantly.


                                       11
<PAGE>


RESULTS OF OPERATIONS

The Company's results of operations for the quarter ended December 31, 2000
report increased margins, reduced operating loss, and a reduction in net loss as
compared to the quarter ended December 31, 1999. These improved results are
primarily due to the favorable timing of multiple product acceptances and
associated revenue recognition. In addition, the improved margins are due to the
fact that both major sales recognized in the current quarter did not include
Magnetically Shielded Rooms ("MSR") on which the Company has historically
realized minimal margins. Additionally, one of the sales resulted from the
conversion of a system on loan for a clinical development collaboration. This
system had been depreciated on a straight line basis for 2 years (of a 5 year
estimated useful life) during the collaboration agreement prior to sale. The
results of operations for the three months ended December 31, 2000 are not
necessarily indicative of the results to be expected for the Company's fiscal
year ending September 30, 2001 or for future quarters.

Total revenues for the first quarter of fiscal 2001 were $3,130,000, including
$224,000 of service revenues, compared to $278,000 of total revenues, including
$93,000 of service revenues, for the first quarter of fiscal 2000. This increase
in total revenues was due primarily to the recognition of revenue for two MSI
systems in 2001 compared to none in 2000.

Cost of revenues for the first quarter of fiscal 2001 were $1,986,000, compared
to $447,000 for the first quarter of fiscal 2000. The increase in cost of
revenues was related to the recognition of two MSI systems in 2001 compared to
none in 2000.

Research and development expenses for the first quarter of fiscal 2001 amounted
to $711,000, compared to $545,000 for the first quarter of fiscal 2000. Research
and development expenses increased from the addition of Neuromag Oy, offset by
reductions in employee headcount from consolidation efforts and the reduction of
expenses related to development of the Company's WH 3600 system.

Marketing and sales expenses amounted to $514,000 for the first quarter of
fiscal 2001, compared to $590,000 for the first quarter of fiscal 2000.
Marketing and sales expenses decreased despite the addition of
Neuromag Oy due to the Company's consolidation efforts.

General and administrative expenses totaled $696,000 for the first quarter of
fiscal 2001, compared to $483,000 for the first quarter of fiscal 2000. This
increase is primarily attributable to additional general and administrative
expenses incurred as a result of the acquisition of Neuromag Oy.

Goodwill amortization expense totaled $337,000 in the first quarter of fiscal
2001, compared to none in the first quarter of fiscal 2000 with the acquisition
of Neuromag Oy on December 22, 1999.

Interest expense totaled $330,000 for the first quarter of fiscal 2001, compared
to none during the first quarter of fiscal 2000. The increase in the first
quarter of fiscal 2001 was the result of borrowings to acquire Neuromag Oy and
borrowings to fund operations.

Other income totaled $202,000 in the first quarter of fiscal 2001, compared
to $51,000 in the first quarter of fiscal 2000. The increase is primarily
attributable to $200,000 in income from investment in Magnesensors. During
the first quarter of fiscal 2001, 4-D notified Magnesensors that it would no
longer continue to provide a $200,000 guarantee of indebtedness due to the
termination of its contractual obligations to do so and 4-D's liquidity
concerns. 4-D had been providing the guarantee, and under the equity method
of accounting for its investment in Magnesensors, had previously recorded its
proportionate share of Magnesenors' losses to the extent of 4-D's debt
guarantee.

Provision for income taxes totaled $75,000 in the first quarter of fiscal 2001,
compared to none in the first quarter of fiscal 2000. The tax provision in the
first quarter of 2001 pertains to Finnish taxes for the Company's Neuromag Oy
subsidiary.

Net loss for the first quarter ended December 31, 2000 amounted to $1,292,000
compared to a net loss of $1,720,000 for the comparable period in the prior
fiscal year.


                                       12
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

The Company is experiencing serious liquidity issues and incurred net losses
of $8,127,000, $7,464,000, and $4,968,000 in fiscal 2000, 1999 and 1998,
respectively. The Company had negative cash flows from operations of
$5,217,000, $8,602,000, and $5,520,000 in fiscal 2000, 1999 and 1998,
respectively. For the quarter ended December 31, 2000, the Company incurred a
net loss of $1,292,000 and had positive cash flows from operations of
$417,000. At December 31, 2000, the Company had an accumulated deficit of
$107,705,000, a net capital deficiency of $5,039,000, and a working capital
deficiency of $14,915,000.

On December 29, 2000, the Company did not make payment at maturity of its note
payable to AIG originating from the acquisition of Neuromag Oy, totaling
$11,400,000 and related accrued interest of $540,000. On February 15, 2001, the
Company and AIG reached an agreement in principle, extending the maturity date
to July 20, 2001, increasing the loan principal to approximately $12 million
(capitalizing accrued interest of approximately $550,000 into the loan
principal) and obtaining additional guarantees of indebtedness from another
bank.

The Company does not currently anticipate being able to pay off the AIG loan at
the proposed maturity on July 20, 2001 without raising additional capital. The
Neuromag note is secured by the shares of Neuromag Oy. If the Company is unable
to renegotiate or pay off the AIG loan, AIG could exercise its security interest
and take ownership of Neuromag Oy.

In June 2000, the Company obtained unsecured loans totaling $835,000 from
BDN, a related party, and used approximately $485,000 of the proceeds to pay
interest due AIG at June 30, 2000 in conjunction with extending the maturity
of the Neuromag Note to December 29, 2000. BDN is a Spanish company owned by
three members of the Company's Board of Directors. The BDN loans were
originally due on September 30, 2000. During October 2000, the Company repaid
approximately $123,000 of principal and $27,000 of interest for these loans
and negotiated an extension of the maturities of the BDN notes until March
31, 2001. The Company is currently negotiating with BDN to extend the loan
maturities to September 30, 2001.

Prior to acquisition by 4-D, Neuromag borrowed a total of FIM 3,140,000
(approximately $474,000 at December 31, 2000) from TEKES. The future repayment
date for principal and related accrued interest outstanding is dependent upon
Neuromag Oy generating sufficient distributable equity, as defined, in
accordance with Finnish generally accepted accounting principles, in the future.

In September 2000, the Company obtained an unsecured loan from Swisspartners, a
related party, totaling $450,000. A member of the Company's Board of Directors
is a partner of Swisspartners. The Swisspartners loan is due on September 30,
2001.

In an event of acceleration of the Company's indebtedness, it is possible that
the Company may be required to seek protection under bankruptcy laws, either
voluntarily or involuntarily. There can be no assurance that the Company will be
able to raise additional capital to repay its indebtedness or be able to
renegotiate any of its indebtedness on terms acceptable to the Company, if at
all.

In an effort to address its operational and liquidity issues, management
continues to work with its lenders, is attempting to raise additional capital,
and is developing cost reduction measures on a worldwide basis to bring its cost
structure more in line with expected revenues. If management is not successful
in initiating and executing its plans, management anticipates that capital,
working capital, and debt service requirements in fiscal 2001 will substantially
exceed cash projected to be generated by MSI systems sales.

Based on the Company's current expectation of anticipated cash receipts related
to firm orders received and anticipated bookings of up to two additional MSI
systems, the Company expects to have sufficient cash to continue operations
through April 2001 without taking into account cash requirements for maturities
of its notes payable. Historically, the Company has raised additional capital
through its majority shareholders and related parties to fund continuing
operations. The Company is working with these shareholders and related parties
to renegotiate, reduce or repay its debt obligations and to provide additional
funding for operations. There can be no assurance that these


                                       13
<PAGE>


sources of capital and funds will be available or that existing debt can be
renegotiated on terms acceptable to the Company, if at all.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed above and as
shown in the accompanying consolidated financial statements, the Company has
operating and liquidity concerns that raise substantial doubt about the
Company's ability to continue as a going concern. There can be no assurance that
the Company will be able to successfully improve its operating results and
restructure its indebtedness or that its liquidity and capital resources will be
sufficient to maintain its normal operations. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.

The report of the Company's independent public accountants on the Company's
financial statements included in its Form 10-K for the year ended September 30,
2000 contained a modification related to the Company's ability to continue as a
going concern. In addition, the reader is encouraged to refer to the
Management's Discussion and Analysis of Financial Condition and Results of
Operation under Item 2 of Part I of this quarterly report for additional risks
or other considerations.

At December 31, 2000, the Company had a working capital deficit of $14,915,000
as compared to $14,186,00 at September 30, 2000. The Company's working capital
deficiency primarily resulted from continued losses, negative cash flows from
operations, short term financing for the acquisition of Neuromag Oy and amounts
borrowed for working capital requirements.

Capital equipment expenditures totaled $298,000 for the first quarter of fiscal
2001, compared to $52,000 for the first quarter of fiscal 2000. Capital
expenditures have been low due to the Company's liquidity concerns.

FACTORS THAT MAY AFFECT FUTURE RESULTS

This Quarterly Report on Form 10-Q may contain forward-looking statements that
involve risks and uncertainties. Such statements include, but are not limited
to, statements containing the words "believes", "anticipates", "expects",
"estimates", and words of similar import. The Company's results could differ
materially from any forward-looking statements, which reflect management's
opinions only as of the date hereof, as a result of factors, such as those more
fully described under "Risks and Uncertainties". The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements. Readers should carefully review the risk factors set
forth below as well as other factors addressed in this report, its Annual Report
on Form 10-K and in other documents the Company files from time to time with the
Securities and Exchange Commission.

RISKS AND UNCERTAINTIES

We face the following risks associated with our business operations:

WE ARE UNCERTAIN WITH RESPECT TO ADDITIONAL FUNDING AND MAY NOT BE ABLE TO MEET
FUTURE CAPITAL NEEDS. AS A RESULT, THERE IS SUBSTANTIAL DOUBT ABOUT THE
COMPANY'S ABILITY TO OPERATE AS A GOING CONCERN.

We require additional capital to fund the Company's capital, working capital and
debt service requirements on an ongoing basis. We will need to restructure our
$12 million AIG loan from the acquisition of Neuromag Oy, our $712,000 BDN notes
payable and our $450,000 Swisspartners note. We will need to obtain additional
financing to fund operations and repay the notes and related interest. We may
not be able to arrange additional financing or restructure our debt on terms
acceptable to us, if at all.

IF WE CONTINUE TO INCUR OPERATING LOSSES AND NEGATIVE CASH FLOWS FROM
OPERATIONS, WE MAY BE UNABLE TO CONTINUE OUR OPERATIONS.


                                       14
<PAGE>


Our financial position reflects that we have been focused on research and
development and a commercial MSI market has not developed, resulting in only low
volume sales to medical research institutions. Our net losses in the last three
years have been as follows:

         -        $8,127,000 of losses in fiscal 2000,
         -        $7,464,000 of losses in fiscal 1999, and
         -        $4,968,000 of losses in fiscal 1998.

In the last three years, our negative cash flows from operations have been as
follows:

         -        $5,217,000 in fiscal 2000,
         -        $8,602,000 in fiscal 1999, and
         -        $5,520,000 in fiscal 1998.

At December 31, 2000, our accumulated deficit was $107,705,000, our
shareholders' deficit was $5,039,000 and we had negative working capital of
$14,915,000. Our negative working capital at December 31, 2000 resulted
primarily from the purchase of Neuromag Oy for cash in December 1999, which was
financed by a short-term loan from AIG Private Bank, Ltd. and loans from related
parties to fund continuing operations. We are developing certain programs in an
effort to address our operational and liquidity problems and our ability to
continue operations is dependent on our maintaining adequate financing and
bringing our cost structure more in line with expected revenues. If we are not
successful in initiating and executing our plans and refinancing our debt, cash
projected to be generated from operations alone will not be sufficient to meet
our capital, working capital and debt service requirements in fiscal 2001.

IF WE ARE UNABLE TO SATISFY CUSTOMER PERFORMANCE AND SERVICE REQUIREMENTS, WE
MAY BE UNABLE TO COMPETE EFFECTIVELY.

Our success may be limited by our ability to satisfy customer performance
requirements for our systems; as well as by our ability to complete, in a
timely fashion, product developments and enhancements to satisfy customer
requirements. In addition, if we or our distributors are not able to respond
in a timely manner to service requirements, our competitiveness may be
adversely impacted.

IF WE ARE UNABLE TO IDENTIFY ADDITIONAL CLINICAL APPLICATIONS FOR OUR MSI
SYSTEMS, THERE WILL BE NO COMMERCIALLY VIABLE MARKETS FOR OUR PRODUCTS.

Currently, there are only a few established diagnostic uses for MSI systems that
the medical industry is aware of. Although we have started our own clinical
research and testing to identify new, large application areas, we cannot assure
you that a commercial market will develop for multiple uses of our products. A
continued lack of clinical applications and commercial market for our MSI
systems will have a material adverse impact on our financial position, results
of operations and cash flows.

OUR VENDORS MAY NOT CONTINUE PROVIDING FAVORABLE CREDIT TERMS.

Due to the Company's liquidity issues, the Company has extended vendor payments
beyond normal credit terms. If the Company's major vendors were to decline
further credit or require cash on delivery payments, the Company's financial
position, results of operations and cash flows would be adversely impacted.

IF WE ARE UNABLE TO DEVELOP ADDITIONAL PRODUCTS, OUR ABILITY TO COMMERCIALIZE
OUR PRODUCTS WILL BE ADVERSELY IMPACTED.

Our success may be limited by our dependence on our current line of MSI systems.
We are currently dependent on sales of our MSI systems to basic research
institutions that represent a market of limited size. Our current product line
may not fully meet the needs of a commercial clinical market and we may need to
develop additional products directly suited to an emerging set of needs from
this market. Our financial results may be materially adversely


                                       15
<PAGE>

affected if our current line of MSI products does not fully meet the needs of
commercial applications that emerge, or we are not able to offer new products in
a timely and cost effective manner that meet these emerging needs.

IF WE FAIL TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT FOR MSI PROCEDURES BY
THIRD PARTY PAYORS, SALES WILL SUFFER.

Our commercial success is also highly dependent on reimbursement for procedures
using the MSI system. Currently, Medicare, insurance companies and other
healthcare providers approve payment for MSI procedures on a case-by-case basis.
As of December 31, 2000, these third party payors have only approved limited
reimbursements in the United States. Although third party payors have
increasingly approved reimbursements, we cannot assure you that third party
reimbursements will become widely available. The United States government does
not currently reimburse for MSI procedures. If reimbursement does not become
more widely available, our financial position and results of operations will be
materially adversely affected. Further, if the Federal government or any state
legislature enacts legislation relating to our business or the health care
industry, including legislation relating to third party reimbursement, our
financial position and results of operations could be negatively affected. In
addition, there is currently no reimbursement for MSI procedures outside of the
United States.

IF DISCOVERIES OR DEVELOPMENTS OF NEW TECHNOLOGIES OCCUR, OUR PRODUCTS AND
TECHNOLOGY MAY BECOME OBSOLETE.

Our industry is characterized by rapid technological change, which may also
impact our commercial success. Competitors may develop products using other
technologies or may improve existing products. This competition may reduce the
size of the potential market for our products or make them obsolete or
non-competitive. Competitors may also develop new or different products using
technology or imaging modalities that provide, or are perceived as providing,
greater value than the Company's products. Our financial position and results of
operations will be materially adversely affected if such competitive
developments occur.

IF WE FAIL TO COMPETE SUCCESSFULLY, OUR REVENUES AND OPERATING RESULTS WILL BE
ADVERSELY AFFECTED.

Historically, our industry has been characterized by ongoing price competition.
Our competitors compete with us for the currently limited number of whole head
systems being purchased worldwide. The future profitability of our systems may
be negatively impacted by this competition.

IF NEW GOVERNMENT LEGISLATION IS ENACTED OR UNFAVORABLE MEDICAL INDUSTRY TRENDS
ARISE, WE MAY BE UNABLE TO SELL OUR PRODUCTS AND OUR REVENUES WILL SUFFER.

We cannot predict what adverse effect, if any, future legislation or FDA
regulations may have on the MSI market and our financial results. Medical
industry cost containment trends may impose restrictions on sizeable third-party
reimbursements for diagnostic procedures, limiting the market opportunity.
Further, if Federal government agencies or any state legislature enacts
legislation or guidelines relating to our business or the health care industry
that create additional business hurdles, including legislation relating to third
party reimbursement, our financial position and results of operations could be
negatively affected.

IF FOREIGN CURRENCY EXCHANGE RATES FLUCTUATE, OUR RETURN ON SALES IN U.S.
DOLLARS MAY SUFFER.

A significant portion of our sales to date have been in foreign markets.
Revenues from international sales represented 99% of our revenues of MSI systems
for the fiscal year ended September 30, 2000 compared to 71% in fiscal 1999. We
expect that revenues from international sales will continue to represent a
significant portion of our annual revenues. Revenues denominated in foreign
currencies, primarily the Finnish Markka, as a percentage of total revenues,
were 66% in fiscal 2000. Because we sell in foreign markets, we are exposed to
potential risks of increases and decreases in foreign currency exchange rates.
Although at December 31, 2000 we did not have any open forward exchange
contracts, on occasion, we may enter into forward exchange contracts to
partially hedge (or protect) against such foreign currency exchange risks.
Fluctuations may reduce the return in U.S. dollars that we actually receive on
our sales and could impact operating results through translation of the
Company's subsidiaries' financial statements. These risks may become material as
our sales increase or dramatic currency fluctuations occur from outside events.


                                       16
<PAGE>


THE COMPANY'S SUCCESS IS DEPENDENT UPON ITS ABILITY TO ATTRACT AND RETAIN
QUALIFIED SCIENTIFIC AND MANAGEMENT PERSONNEL.

The loss of services of any one of our executive management or key scientific
personnel would delay our ability to execute our business plans and reduce our
ability to successfully develop and commercialize products, maintain good
customer relationships and compete in the marketplace. We also face increasing
difficulties in recruiting qualified personnel in the software and hardware
design areas because of intense competition for such personnel in today's job
market. There can be no assurance that the Company will be able to hire, train
or retain such qualified personnel.

In addition, the loss of the services of the Chief Executive Officer and
Principal Financial Officer, D. Scott Buchanan, would have a materially adverse
effect on our prospects. Currently none of the executive officers of the Company
have an employment agreement or contract with the Company; all are "at-will" and
under no specified term arrangements.

OUR STOCK PRICE IS HIGHLY VOLATILE AND SUBJECT TO SWINGS BASED ON SALES AND
OTHER MARKET CONDITIONS.

The market prices for securities of companies with newly emerging markets have
historically been highly volatile, and their stock price from time to time has
experienced significant price and volume fluctuations that are unrelated to the
operating performance of such companies. Moreover, 4-D's relatively low trading
volume increases the likelihood and severity of volume fluctuations which likely
will result in a corresponding increase in the volatility of 4-D's common stock
price. Factors such as announcements of complex technological innovations or new
sales, governmental regulations, developments in patent or other proprietary
rights, developments in the Company's relationships with collaborative partners,
general market conditions and the timing of decisions by existing 4-D
stockholders to sell large positions of our Common Stock may have a significant
effect on the market price of the Company's common stock. Fluctuations in
financial performance from period to period, or acceleration of any of our debt
by our lenders, also may have a significant impact on the market price of the
Common Stock.

IF OUR PRODUCTS PRODUCE UNRELIABLE DIAGNOSTIC INFORMATION, IT MAY RESULT IN A
LIABILITY, WHICH WOULD ADVERSELY IMPACT OUR FINANCIAL CONDITION.

Although our products are noninvasive and diagnostic in nature, treatment
courses based on the information generated by our instruments may be unreliable
or result in adverse effects. This possibility exposes us to the risk of product
liability claims. While we carry product liability insurance, there is no
assurance that such insurance will be adequate, will be available in the future
at a level and cost that is appropriate, or available at all, or that a product
liability claim would not adversely affect our business, prospects, financial
position, results of operations, and cash flows.

INTEGRATING 4-D NEUROIMAGING AND NEUROMAG OY HAS BEEN DIFFICULT.

Our acquisition of Neuromag Oy brought together two previous international
competitors. Risks common to such mergers include:

         -        Difficulties in attempting to integrate the technologies or
                  operations.
         -        Difficulties in achieving the possible financial and strategic
                  advantages such a merger may provide or imply.
         -        New competitors enter the market.
         -        Product brand recognition and customer awareness or
                  satisfaction deteriorates.
         -        Management is unable to make the changes necessary without
                  their attention being diverted from normal business
                  operations.
         -        Employee relationships suffer, and we risk the potential loss
                  of key employees of the acquired company.
         -        Geographic separation, language barriers and cultural
                  differences inhibit effective communication and management
                  effectiveness.
         -        Increased currency risk exposure.


                                       17
<PAGE>


Also, it is possible that despite a successful integration, future results of
operations of the merged Company do not meet expectations, due to other risks
discussed in this quarterly report or other documents filed with the SEC, and
other factors.

ITEM 3.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's variable rate indebtedness is affected by the general level of
London Interbank Offered Rate ("LIBOR") interest rates. The Company had
approximately $12,600,000 outstanding under LIBOR based variable rate
indebtedness on December 31, 2000. A 2 percent increase above the interest
rate applicable at September 30, 2000 for such indebtedness would result in a
$252,000 increase in annual interest expense. Renegotiation of any of the
Company's indebtedness could also result in material changes to the interest
rates on such indebtedness.

For additional information required by this item regarding market risks related
to fluctuations in foreign currency exchange rates, see our discussion under
"Risks and Uncertainties - If foreign currency rates fluctuate, our return on
sales in U.S. dollars may suffer" under Item 2-Management's Discussion and
Analysis of Financial Condition and Results of Operations.


                                       18
<PAGE>


PART II.      OTHER INFORMATION

ITEM 3.       DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4.       EXHIBITS AND REPORTS ON FORM 8-K.

     a) EXHIBIT NO.        DESCRIPTION
              3.1 (1)      Fifth Amended and Restated Articles of Incorporation
              3.2 (2)      Restated By-Laws


                  (1)      This exhibit was previously filed as apart of, and is
                           hereby incorporated by reference to the same numbered
                           exhibit in the Quarterly Report on Form 10-Q for the
                           quarterly period ended March 31, 2000 filed with the
                           Securities and Exchange Commission on May 15, 2000.

                  (2)      This exhibit was previously filed as a part of, and
                           is hereby incorporated by reference to, the same
                           numbered exhibit in the Registration Statement filed
                           pursuant to the Securities Act of 1933 on Form S-1
                           Registration Statement No. 33-29095, filed June 7,
                           1989, as amended by Amendment No. 1, filed June 13,
                           1989, Amendment No. 2, filed July 21, 1989 and
                           Amendment No. 3, filed July 28, 1989.

     b) Reports on Form 8-K

        None.


                                       19
<PAGE>


                                   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.

4-D NEUROIMAGING

February 20  , 2001                          /s/ D. Scott Buchanan
-------------------------------              -----------------------------------
Date                                         D. Scott Buchanan
                                             President, Chief Executive Officer,
                                             Principal Financial Officer



February 20 , 2001                           /s/ Eugene C. Hirschkoff
-------------------------------              -----------------------------------
Date                                         Eugene C. Hirschkoff
                                             Vice President
                                             Corporate Secretary



                                       20