**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

** **

**FORM 10-QSB**

 

 

| **ý**                                                                                                                                                                                                                               |   | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**        |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                     |
| **For the quarterly period ended  March 31, 2003**                                                                                                                                                                                       |
|                                                                                                                                                                                                                                     |   |                                                                                          |
| **o**                                                                                                                                                                                                                                    |   | **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: 0-19632**                                                                                                                                                                                                      |

 

| **4-D  NEUROIMAGING**                                                               |
|-------------------------------------------------------------------------------------|
| (Exact name of small  business issuer as specified in its charter)                  |
|                                                                                |
| **California**                                                                      |   | **95-2647755** |
| (State or other jurisdiction of incorporation or  organization)                     |   | (I.R.S. Employer  Identification No.) |
|                                                                                |   |   |
| **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) |
|                                                                                     |  |  |  |  |  |

 

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

Number of shares of issuer’s Common Stock outstanding, no par value, asof April 1, 2003 was 220,838,589 shares.

 

 

Transitional Small Business Disclosure Format.             oYes      ýNo

 

 

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# **PART I  FINANCIALINFORMATION**

 

## **ITEM 1.  FINANCIALSTATEMENTS**

 

**4-DNEUROIMAGINGCONSOLIDATED BALANCE SHEETS**

**(inthousands, except share data)**

**(unaudited)**

** **
|                                                                                                                                                                                            |   | **March 31,  2003** |   | **September  30,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|--------------------------|--------|
| **ASSETS**                                                                                                                                                                                      |   |                |   |                     |   |
| Cash and cash  equivalents                                                                                                                                                                      |   | $                   | 1,254  |                     | $      | 167 |   |
| Restricted cash                                                                                                                                                                                 |   | —              |   | 17                       |   |
| Accounts  receivable, less allowance for doubtful accounts of $276 and $216   at March 31, 2003 and September 30, 2002, respectively                                                            |   | 1,129               |   | 366                      |   |
| Inventories                                                                                                                                                                                     |   | 3,466               |   | 4,138                    |   |
| Prepaid expenses  and other current assets                                                                                                                                                      |   | 105                 |   | 200                      |   |
| Total current  assets                                                                                                                                                                           |   | 5,954               |   | 4,888                    |   |
|                                                                                                                                                                                            |   |                |   |                     |   |
| Property and  equipment, net                                                                                                                                                                    |   | 195                 |   | 607                      |   |
| Goodwill, net                                                                                                                                                                                   |   | —              |   | 2,204                    |   |
| Deferred income  taxes                                                                                                                                                                          |   | —              |   | 588                      |   |
| Other assets                                                                                                                                                                                    |   | 57                  |   | 227                      |   |
| Total assets                                                                                                                                                                                    |   | $                   | 6,206  |                     | $      | 8,514 |   |
|                                                                                                                                                                                            |   |                |   |                     |   |
| **LIABILITIES AND SHAREHOLDERS’  DEFICIT**                                                                                                                                                 |   |                |   |                     |   |
| Notes payable                                                                                                                                                                                   |   | $                   | 1,000  |                     | $      | 4,040 |   |
| Accounts payable                                                                                                                                                                                |   | 1,132               |   | 1,903                    |   |
| Accrued  liabilities                                                                                                                                                                            |   | 334                 |   | 1,111                    |   |
| Accrued salaries  and employee benefits                                                                                                                                                         |   | 329                 |   | 498                      |   |
| Customer  deposits                                                                                                                                                                              |   | 1,260               |   | 536                      |   |
| Deferred  revenues                                                                                                                                                                              |   | 144                 |   | 342                      |   |
| Current portion  of royalty obligation                                                                                                                                                          |   | 312                 |   | 312                      |   |
| Current portion  of capital lease obligations                                                                                                                                                   |   | 14                  |   | 14                       |   |
| Total current  liabilities                                                                                                                                                                      |   | 4,525               |   | 8,756                    |   |
|                                                                                                                                                                                            |   |                |   |                     |   |
| Notes payable                                                                                                                                                                                   |   | —              |   | 521                      |   |
| Royalty  obligation, net of current portion                                                                                                                                                     |   | 921                 |   | 1,025                    |   |
| Customer  deposits                                                                                                                                                                              |   | 1,108               |   | 1,108                    |   |
| Deferred  revenues                                                                                                                                                                              |   | 316                 |   | 377                      |   |
| Capital lease  obligations, net of current portion                                                                                                                                              |   | —              |   | 8                        |   |
| Total  liabilities                                                                                                                                                                              |   | 6,870               |   | 11,795                   |   |
|                                                                                                                                                                                            |   |                |   |                     |   |
| **COMMITMENTS AND CONTINGENCIES**                                                                                                                                                               |   |                |   |                     |   |
|                                                                                                                                                                                            |   |                |   |                     |   |
| **SHAREHOLDERS’ DEFICIT**                                                                                                                                                                  |   |                |   |                     |   |
| Common stock —  no par value; 500,000,000 shares authorized;  220,838,589  and 160,338,589 shares  issued and outstanding as of   March 31, 2003 and September 30, 2002, respectively |   | 117,727             |   | 114,693                  |   |
| Additional  paid-in capital                                                                                                                                                                     |   | 3,007               |   | 3,007                    |   |
| Accumulated  deficit                                                                                                                                                                            |   | (121,398            | )      | (120,951                 | )      |
| Accumulated  other comprehensive loss                                                                                                                                                           |   | —              |   | (30                      | )      |
| Total  shareholders’ deficit                                                                                                                                                               |   | (664                | )      | (3,281                   | )      |
| Total  liabilities & shareholders’ deficit                                                                                                                                             |   | $                   | 6,206  |                     | $      | 8,514 |   |

 

See notes to consolidatedfinancial statements

 

2

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**4-DNEUROIMAGINGCONSOLIDATED STATEMENTS OF OPERATIONS**

**(inthousands, except per-share amounts)**

**(unaudited)**

 
|                                                                    |   | **Three Months  Ended  March 31,** |   | **Six Months  Ended  March 31,** |   |
|-------------------------------------------------------------------------|--------|------------------------------------|--------|----------------------------------|--------|
|                                                                    |   | **2003**                           |   | **2002**                         |   | **2003** |   | **2002** |   |
| **REVENUES**                                                            |   |                               |   |                             |   |   |   |   |   |
| Product sales                                                           |   | $                                  | 21     |                             | $      | 1,957 |   | $ | 497 |   | $ | 2,483 |   |
| Product services                                                        |   | 181                                |   | 254                              |   | 409 |   | 473 |   |
|                                                                    |   | 202                                |   | 2,211                            |   | 906 |   | 2,956 |   |
|                                                                    |   |                               |   |                             |   |   |   |   |   |
| **COST OF REVENUES**                                                    |   |                               |   |                             |   |   |   |   |   |
| Product                                                                 |   | 194                                |   | 1,676                            |   | 747 |   | 2,299 |   |
| Product services                                                        |   | 155                                |   | 155                              |   | 289 |   | 396 |   |
|                                                                    |   | 349                                |   | 1,831                            |   | 1,036 |   | 2,695 |   |
|                                                                    |   |                               |   |                             |   |   |   |   |   |
| **GROSS MARGIN (LOSS)**                                                 |   | (147                               | )      | 380                              |   | (130 | ) | 261 |   |
|                                                                    |   |                               |   |                             |   |   |   |   |   |
| **OPERATING EXPENSES**                                                  |   |                               |   |                             |   |   |   |   |   |
| Research and development                                                |   | 239                                |   | 224                              |   | 446 |   | 533 |   |
| Marketing and  sales                                                    |   | 448                                |   | 367                              |   | 735 |   | 882 |   |
| General and  administrative                                             |   | 311                                |   | 500                              |   | 684 |   | 1,050 |   |
|                                                                    |   | 998                                |   | 1,091                            |   | 1,865 |   | 2,465 |   |
|                                                                    |   |                               |   |                             |   |   |   |   |   |
| **OPERATING LOSS**                                                      |   | (1,145                             | )      | (711                             | )      | (1,995 | ) | (2,204 | ) |
|                                                                    |   |                               |   |                             |   |   |   |   |   |
| Interest expense                                                        |   | (23                                | )      | (69                              | )      | (57 | ) | (133 | ) |
| Interest income                                                         |   | 2                                  |   | —                           |   | 2 |   | 2 |   |
| Other income,  net                                                      |   | 73                                 |   | 198                              |   | 243 |   | 270 |   |
|                                                                    |   |                               |   |                             |   |   |   |   |   |
| **LOSS BEFORE PROVISION FOR INCOME  TAXES AND DISCONTINUED OPERATIONS** |   | (1,093                             | )      | (582                             | )      | (1,807 | ) | (2,065 | ) |
| Provision for  income taxes                                             |   | —                             |   | —                           |   | 1 |   | 1 |   |
|                                                                    |   |                               |   |                             |   |   |   |   |   |
| **NET LOSS FROM OPERATIONS**                                            |   | (1,093                             | )      | (582                             | )      | (1,808 | ) | (2,066 | ) |
|                                                                    |   |                               |   |                             |   |   |   |   |   |
| **DISCONTINUED  OPERATIONS**                                            |   |                               |   |                             |   |   |   |   |   |
| Income (loss)  from discontinued operations                             |   | —                             |   | (244                             | )      | 1,391 |   | 26 |   |
|                                                                    |   |                               |   |                             |   |   |   |   |   |
| **NET LOSS**                                                            |   | $                                  | (1,093 | )                                | $      | (826 | ) | $ | (417 | ) | $ | (2,040 | ) |
|                                                                    |   |                               |   |                             |   |   |   |   |   |
| **BASIC AND DILUTED NET LOSS PER  SHARE**                               |   |                               |   |                             |   |   |   |   |   |
| Loss from  operations                                                   |   | $                                  | (0.005 | )                                | $      | (0.004 | ) | $ | (0.009 | ) | $ | (0.014 | ) |
| Earnings (loss)  from discontinued operations                           |   | —                             |   | (0.002                           | )      | 0.007 |   | — |   |
| Loss per share                                                          |   | $                                  | (0.005 | )                                | $      | (0.006 | ) | $ | (0.002 | ) | $ | (0.014 | ) |
| Weighted average  number of common shares outstanding                   |   | 220,711                            |   | 146,814                          |   | 191,841 |   | 146,110 |   |
|                                                                    |   |                               |   |                             |   |   |   |   |   |
| COMPREHENSIVE  LOSS:                                                    |   |                               |   |                             |   |   |   |   |   |
| Net loss                                                                |   | $                                  | (1,093 | )                                | $      | (826 | ) | $ | (417 | ) | $ | (2,040 | ) |
| Cumulative  translation adjustment                                      |   | —                             |   | 7                                |   | — |   | (56 | ) |
| Comprehensive  loss                                                     |   | $                                  | (1,093 | )                                | $      | (819 | ) | $ | (417 | ) | $ | (2,096 | ) |

 

See notes to consolidatedfinancial statements

 

3

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**4-DNEUROIMAGINGCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)(unaudited)**

 
|                                                                                       |   | **Six Months  Ended  March 31,** |   |
|--------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                       |   | **2003**                         |   | **2002** |   |
| **OPERATING ACTIVITIES**                                                                   |   |                             |   |   |   |
| Net loss                                                                                   |   | $                                | (417   | ) | $ | (2,040 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in operating activities:) |   |                             |   |   |   |
| Depreciation                                                                               |   | 53                               |   | 205 |   |
| Amortization of  minimum royalty obligation                                                |   | (105                             | )      | (153 | ) |
| Gain on sale of  Neuromag Oy                                                               |   | (1,391                           | )      |   |   |
| Deferred income  taxes                                                                     |   | —                           |   | 40 |   |
| Changes in  operating assets and liabilities excluding effects of acquisition:             |   |                             |   |   |   |
| Restricted cash                                                                            |   | 17                               |   | 344 |   |
| Accounts receivable                                                                        |   | (763                             | )      | 2,562 |   |
| Inventories                                                                                |   | 196                              |   | 1,102 |   |
| Prepaid expenses  and other                                                                |   | 96                               |   | 570 |   |
| Other assets                                                                               |   | (5                               | )      | 34 |   |
| Accounts payable                                                                           |   | (50                              | )      | (140 | ) |
| Accrued  liabilities                                                                       |   | (601                             | )      | (29 | ) |
| Accrued salaries  and employee benefits                                                    |   | (169                             | )      | (51 | ) |
| Customer  deposits                                                                         |   | 724                              |   | (3,594 | ) |
| Deferred revenue                                                                           |   | (259                             | )      | 70 |   |
| Interest payable                                                                           |   | (175                             | )      | 128 |   |
| Net cash used in  operating activities                                                     |   | (2,849                           | )      | (952 | ) |
|                                                                                       |   |                             |   |   |   |
| **INVESTING ACTIVITIES**                                                                   |   |                             |   |   |   |
| Purchases of  property and equipment                                                       |   | (16                              | )      | (186 | ) |
| Proceeds from  sale of Neuromag Oy                                                         |   | 4,000                            |   | — |   |
| Net cash  provided by (used in) investing activities                                       |   | 3,984                            |   | (186 | ) |
|                                                                                       |   |                             |   |   |   |
| **FINANCING ACTIVITIES**                                                                   |   |                             |   |   |   |
| Proceeds from  notes payable                                                               |   | 1,000                            |   | 229 |   |
| Proceeds from  stock options exercised                                                     |   | —                           |   | 3 |   |
| Proceeds from  stock exchange for cancellation of debt                                     |   | —                           |   | 30 |   |
| Proceeds from  sale of common stock                                                        |   | 3,000                            |   | 1,000 |   |
| Repayment of  notes payable                                                                |   | (4,040                           | )      | — |   |
| Payments on  capital lease obligations                                                     |   | (8                               | )      | (16 | ) |
| Net cash  provided by (used in) financing activities                                       |   | (48                              | )      | 1,246 |   |
|                                                                                       |   |                             |   |   |   |
| Effect of  exchange rate changes                                                           |   |                             |   | (56 | ) |
|                                                                                       |   |                             |   |   |   |
| Net increase in  cash and cash equivalents                                                 |   | 1,087                            |   | 52 |   |
|                                                                                       |   |                             |   |   |   |
| Cash and cash  equivalents at beginning of period                                          |   | 167                              |   | 178 |   |
|                                                                                       |   |                             |   |   |   |
| Cash and cash  equivalents at end of period                                                |   | $                                | 1,254  |   | $ | 230 |   |

 

See notes to consolidatedfinancial statements

 

4

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**4-DNEUROIMAGINGCONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)**

**(inthousands)(unaudited)**

 

SCHEDULE OF NON-CASH INVESTING AND FINANCINGACTIVITIES

 
|                                      |   | **Six Months  Ended  March 31,** |    |
|-------------------------------------------|--------|----------------------------------|---------|
|                                      |   | **2003**                         |    | **2002** |   |
|                                      |   |                             |    |   |   |
| Stock exchange  for professional services |   | $                                | 34,000  |   | $ | — |   |
|                                      |   |                             |    |   |   |
| SUPPLEMENTAL  DISCLOSURES:                |   |                             |    |   |   |
| Cash paid for  interest                   |   | $                                | 114,000 |   | $ | — |   |

 

See notes to consolidatedfinancial statements

 

5

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**4-DNEUROIMAGINGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)**

 

 

### NOTE 1. BUSINESSAND BASIS OF PRESENTATION

 

4-D Neuroimaging, or 4-D, (formerly Biomagnetic Technologies, Inc.), aCalifornia corporation, originally founded in 1970 to produce equipment forphysics labs, currently develops, produces, markets and sells medicalinstrumentation that allows physicians to monitor how the body is functioning,and provides an important tool to neuroscientists, helping them to unravel howthe brain functions.  The basictechnology is referred to as Magnetoencephalography, or MEG (sometimes MagneticSource Imaging or MSI).  MEG systemsmeasure and locate magnetic fields generated by the human body, and assist inthe noninvasive diagnosis of a potentially broad range of medicaldisorders.  These measurements provideuseful information about the normal and abnormal functioning of the brain,heart, spine and other organs. Currently, we are focusing our efforts on MEG applications for thebrain.

 

The unaudited consolidated condensed financial statements of 4-DNeuroimaging and its subsidiary, Biomagnetic Technologies, GmbH, an inactivewholly owned German entity (together, the “Company”, “we”, “our”, or “4-D”),have been prepared in accordance with the rules and regulations of theSecurities and Exchange Commission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States have been condensed or omitted pursuantto such rules and regulations.  TheCompany suggests that these financial statements be read in conjunction withthe financial statements and notes thereto included in the Company’s annualreport on Form 10-K for the fiscal year ended September 30, 2002.

 

In the opinion of the Company, the accompanying unaudited consolidatedcondensed financial statements contain all adjustments, consisting only ofnormal recurring entries, necessary to present fairly its financial position atMarch 31, 2003 and the results of its operations and its cash flows for theperiods presented.

 

The preparation of financial statements, in conformity with accountingprinciples generally accepted in the United States, requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from these estimates. Results for the interim periods presented in this report are notnecessarily indicative of results which may be reported for any other interimperiod or for the entire fiscal year.

 

In June 2002, the FASB issued SFAS No. 145, “Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.”  This statement requiresthe classification of gains or losses from the extinguishments of debt to meetthe criteria of Accounting Principles Board, or APB, Opinion No. 30 “Reportingthe Results of Operations — Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions” before they can be classified as extraordinary in the incomestatement.  Those companies that usedebt extinguishments as a part of their risk management strategy are requiredto classify the gain or loss from extinguishments of debt as a part ofoperating income in the income statement. The Company adopted SFAS No. 145 during the quarter ended December 31,2002 with no material impact.

 

In September 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costsassociated with exit or disposal activities. This statement requires that a liability for a cost associated with anexit or disposal activity be recognized when the liability is incurred.  The provisions of this statement areeffective for exit or disposal activities that are initiated after December 31,2002.  The Company adopted SFAS No. 146during the quarter ended December 31, 2002. There were no additional costs associated with the sale of Neuromag Oyother than the costs reflected in the financial statements and disclosed inNote 3, Sale of Finnish Subsidiary Neuromag Oy.

 

6

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In November 2002, the FASB issued FASB Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others”.  This interpretation addresses the disclosures to be made by aguarantor in its interim and annual financial statements about its obligationsunder guarantees.  This interpretationalso clarifies the requirements related to the recognition of a liability by aguarantor at the inception of a guarantee for the obligations that theguarantor has undertaken in issuing that guarantee.  Management has assessed the impact of this interpretation andbelieves it has no material impact.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation — Transition and Disclosure.”  This statement amends FASB statement No. 123to provide accounting guidance related to stock based employeecompensation.  SFAS No. 123, as amended,encourages, but does not require, companies to record compensation cost forstock-based employee compensation plans at fair value.  The Company has chosen to continue toaccount for stock-based compensation using the intrinsic value methodprescribed in APB Opinion No. 25, “Accounting for Stock Issued to Employees”,and related interpretations for all periods presented.  Accordingly, compensation cost for stock optionsis measured as the excess, if any, of the fair value of the Company’s stock atthe date of the grant over the amount an employee must pay to acquire thestock.

 

The following table summarizes the impact on the Company’s net loss hadcompensation cost been determined based upon the fair value at the grant datefor awards under the stock option plans consistent with the methodologyprescribed under SFAS No. 123 (in thousands, except per share data):

 
|                               |                                                                                                                                  | **Three  Months Ended  March 31,** |   | **Six Months  Ended  March 31,** |   |
|------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|------------------------------------|--------|----------------------------------|--------|
|                               |                                                                                                                                  | **2003**                           |   | **2002**                         |   | **2003** |   | **2002** |   |
|                               |                                                                                                                                  |                               |   |                             |   |   |   |   |   |
| Net loss, as  reported             |                                                                                                                                  | $                                  | (1,093 | )                                | $      | (826 | ) | $ | (417 | ) | $ | (2,040 | ) |
| Deduct:                            | Total stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects |                               | 2      |                             | 6      |   | 4 |   | 13 |   |
|                               |                                                                                                                                  |                               |   |                             |   |   |   |   |   |
| Pro forma net  loss                |                                                                                                                                  | $                                  | (1,095 | )                                | $      | (832 | ) | $ | (421 | ) | $ | (2,053 | ) |
| Basic and  diluted loss per share: |                                                                                                                                  |                               |   |                             |   |   |   |   |   |
| As reported                        |                                                                                                                                  | $                                  | (0.005 | )                                | $      | (0.006 | ) | $ | (0.002 | ) | $ | (0.014 | ) |
| Pro forma                          |                                                                                                                                  | $                                  | (0.005 | )                                | $      | (0.006 | ) | $ | (0.002 | ) | $ | (0.014 | ) |
|                                    |                                                                                                                                       |                                    |        |                                  |        |  |  |  |  |  |  |  |  |  |

 

The Company accounts for stock options granted to non-employees usingthe fair value method.  Compensationexpense for options granted to non-employees has been determined in accordancewith Emerging Issues Task Force, or EITF, No. 96-18, “Accounting for EquityInstruments that are Issued to Other than Employees for Acquiring, or inConjunction with Selling, Goods or Services”, as the fair value of theconsideration received or the fair value of the equity instruments issued,whichever is more reliably measurable. Compensation expense for options granted to non-employees isperiodically remeasured as the underlying options vest and is recorded asexpense and deferred compensation in the financial statements.

 

Holders of common stock are entitled to one vote per share.  Basic earnings per share is computed bydividing net income or loss by the weighted average of common sharesoutstanding during the period.  Dilutedearnings per share reflects the potential dilution that could occur ifsecurities or other contracts to issue common stock (warrants to purchasecommon stock and common stock options using the treasury stock method) wereexercised or converted into common stock. Potential common shares in the diluted earnings per share computationare excluded when their effect would be antidilutive.

 

*RecentAuthoritative Pronouncements*

 

In January 2003, the FASB issued FASB Interpretation No. 46.“Consolidation of Variable Interest Entities”. This interpretation clarifies the application of Accounting Research BulletinNo. 51, “Consolidated Financial Statement”, to certain entities in which equityinvestors do not have the characteristics of a controlling financial interestor do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support

 

7

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from other parties.  It furtherclarifies whether an entity shall be subject to consolidation according to theprovisions of this interpretation, if by design, certain conditions exist.  Management is assessing the impact of thisinterpretation.

###  

### NOTE 2. BASICAND DILUTED NET LOSS PER SHARE

 

Shares used in computing basic and diluted net loss per share includethe weighted average number of common shares outstanding as of March 31,2003.  Potentially dilutive securities,including stock options, are antidilutive and are excluded from the computationof diluted net loss per share.

###  

### NOTE 3. SALEOF FINNISH SUBSIDIARY NEUROMAG OY

 

In December 1999, the Company acquired Neuromag Oy, located in HelsinkiFinland for $10 million in cash and an interest-free minimum royalty obligationof $312,500 per year for eight years (totaling $2.5 million) to Marconi MedicalSystems, Inc., Cleveland, Ohio. The funds for the purchase were provided by aloan from AIG Private Bank Ltd. (“AIG”) totaling $11 million secured by 100% ofthe outstanding and issued capital stock of Neuromag Oy and guaranteed by anentity unaffiliated with the Company.

** **

In April 2001, $8,951,000 of the debt to AIG was cancelled in exchangefor 42,623,810 shares of common stock of the Company as part of a privateplacement transaction with specified investors in accordance with Rule 506 ofRegulation D and Section 4(2) of the Securities Act of 1933, as amended.  The common stock was issued at a per-shareprice of $0.21.

 

The remainder of the AIG bank loan was restructured.  As restructured, the loan in the principalamount of $3,357,000 from AIG matured in July 2002 at which time the Companydefaulted on the loan.

 

Due to changes in the business environment and to satisfy the debt toAIG the Company decided to sell its Finnish subsidiary, Neuromag Oy.  The subsidiary was sold to VaandramolenHolding BV, or VHBV, in October 2002, for a total of $4,000,000 in cash.  $3,694,000 of the proceeds were used tofully pay the AIG bank debt, $100,000 were used to pay part of the existingintercompany debt and the remainder for general corporate purposes.

 

The Company had early adopted SFAS No. 142 in fiscal 2002 whichrequires that goodwill and certain intangibles no longer be amortized, butinstead be tested for impairment at least annually.  Therefore, there was no goodwill amortization in fiscal 2002,compared to $1,319,000 in fiscal 2001. In the Company’s consolidated financial statements dated September 30,2002, the Company recognized a goodwill impairment of $5,974,000 due to thesale of the Company’s Finnish subsidiary in October 2002.

 

In December 2002, the Company recorded a gain on the sale of ourFinnish subsidiary of $1,391,000 by eliminating goodwill of $2,204,000 andintercompany payables and other related accounts for $405,000.  In addition, the reduction in deferredincome taxes of $588,000 consists of deferred foreign taxes of Neuromag Oy.

# ** **

# **NOTE 4. PROFORMA FINANCIAL INFORMATION ASSUMING NEUROMAG WAS NOT ACQUIRED**

 

In October 2002, the Company sold 100% of the Company’s shares in 4-DNeuroimaging Oy, (“Asset”), to VHBV.  Aspart of an effort by the Company’s board of directors to raise additionalfinancial resources, one of the board members conveyed to the Company forconsideration an offer from VHBV to purchase the Asset for $4,000,000.

 

The pro forma financials presented below are the unaudited consolidatedstatements of operations based on the assumption that the Company had notacquired the subsidiary in December 1999.

 

8

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**CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS**

**THREE MONTHS ENDED MARCH 31, 2002**

**(in thousands, except per-share amounts)**

**(unaudited)**

 

** **
|               |   | **Consolidated** |   | **Neuromag** |     | **Pro forma  Adjustments** |   | **Pro forma  w/o  Neuromag** |   |
|--------------------|--------|------------------|--------|--------------|----------|----------------------------|--------|------------------------------|--------|
|               |   |             |   |         |     |                       |   |                         |   |
| Revenue            |   | $                | 2,386  |         | $        | 175                        |   |                         |   | $ | 2,211 |   |
| Cost of Revenues   |   | 1,963            |   | 132          |     |                       |   | 1,831                        |   |
|               |   |             |   |         |     |                       |   |                         |   |
| Gross Margin       |   | 423              |   | 43           |     |                       |   | 380                          |   |
|               |   |             |   |         |     |                       |   |                         |   |
| Operating Expenses |   | 1,367            |   | 275          |  a) | $                          | (82    | )                            | 1,010  |   |
|               |   |             |   |         |     |                       |   |                         |   |
| Operating Loss     |   | (944             | )      | (232         | )        |                       |   | (630                         | )      |
|               |   |             |   |         |     |                       |   |                         |   |
| Other              |   | 118              |   | (12          | ) b)     | $                          | 61     |                         | 191    |   |
|               |   |             |   |         |     |                       |   |                         |   |
| Net Loss           |   | $                | (826   | )            | $        | (244                       | )      |                         |   | $ | (439 | ) |

 

----

a) Administrative costs associated with additional personnel that would nothave been needed.

b)  Interest expense for AIG loan andintercompany loans

 

 

**CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS**

**SIX MONTHS ENDED MARCH 31, 2002**

**(in thousands, except per-share amounts)**

**(unaudited)**

** **
|                     |   | **Consolidated** |   | **Neuromag** |     | **Pro forma  Adjustments** |   | **Pro forma  w/o  Neuromag** |   |
|--------------------------|--------|------------------|--------|--------------|----------|----------------------------|--------|------------------------------|--------|
|                     |   |             |   |         |     |                       |   |                         |   |
| Revenue                  |   | $                | 5,068  |         | $        | 2,112                      |   |                         |   | $ | 2,956 |   |
| Cost of Revenues         |   | 4,195            |   | 1,500        |     |                       |   | 2,695                        |   |
|                     |   |             |   |         |     |                       |   |                         |   |
| Gross Margin             |   | 873              |   | 612          |     |                       |   | 261                          |   |
|                     |   |             |   |         |     |                       |   |                         |   |
| Operating  Expenses      |   | 3,025            |   | 559          |  a) | $                          | (172   | )                            | 2,294  |   |
|                     |   |             |   |         |     |                       |   |                         |   |
| Operating Income  (Loss) |   | (2,152           | )      | 53           |     |                       |   | (2,033                       | )      |
|                     |   |             |   |         |     |                       |   |                         |   |
| Other                    |   | 112              |   | (27          | )b)      | $                          | 125    |                         | 264    |   |
|                     |   |             |   |         |     |                       |   |                         |   |
| Net Income  (Loss)       |   | $                | (2,040 | )            | $        | 26                         |   |                         |   | $ | (1,769 | ) |

 

----

a) Administrative costs associated with additional personnel that would nothave been needed.

b)  Interestexpense for AIG loan and intercompany loans

###  

9

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### NOTE 5. DEBTOBLIGATIONS

 

In January 2002, 4-D obtained two $125,000 unsecured loans, one fromEnrique Maso and one from SwisspartnersInvestment Network Ltd., or Swisspartners, with an interest rate of 8% perannum.  In August 2002, 4-D obtained two$100,000 unsecured loans, one from MATRUST, S.L. and one from InternationalSequoia Investment Ltd., with an interest rate of 8% per annum.  The principal amounts of the loans wererepaid in November 2002, accrued interest for Enrique Maso was recorded as again on extinguishment of debt and is reflected in other income on thestatement of operations.  The accruedinterest for Swisspartners was due and payable in March 2003 and paid inApril 2003.

 

In November 2002, the Company entered into another line of credit withAIG Bank for $1,000,000.  The intereston the line of credit is 4.17% and initially the line of credit was due andpayable November 5, 2003.  In January2003 the maturity of the line of credit was extended until May 31, 2004.  Proceeds were used to pay off the two$125,000 unsecured loans from Enrique Maso and Swisspartners, the two $100,000unsecured loans from MATRUST, S.L. and International Sequoia Investment Ltd.and to pay certain accounts payable in the amount of $120,000 to Dr. GalleonGraetz, a member of the board of directors and a consultant for the Company.  All of these amounts, totaling $570,000,were then pledged by the respective parties as collateral against theloan.  The remaining amount was used forgeneral corporate purposes.

 

As additional collateral against the loan, Mr. Martin Egli, a member ofthe Company’s board of directors, provided a personal guarantee of $500,000 andthe Company pledged its patent portfolio and a Magnes 2500 WH system, currentlyinstalled at the University of Alabama, to which the Company retains title.

 

NOTE 6. ADDITIONAL FINANCING

 

In December 2002, the Company issued 60,000,000 shares of its commonstock representing approximately 29% of its outstanding voting securities in aprivate placement transaction with Swisspartners Investment Network AG inaccordance with Rule 506 of Regulation D and Section 4(2) of the Securities Actof 1933, as amended**. **Thecommon stock was issued at a per-share price of $0.05, in exchange for cash inthe amount of $3,000,000.

 

### NOTE 7. INVENTORIES

 

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

 
|            |   | **March 31,  2003** |   | **September  30, 2002** |   |
|-----------------|--------|---------------------|--------|-------------------------|--------|
| Raw materials   |   | $                   | 302    |                    | $      | 532 |   |
| Work-in process |   | 2,104               |   | 2,328                   |   |
| Finished goods  |   | 1,060               |   | 1,278                   |   |
|            |   | $                   | 3,466  |                    | $      | 4,138 |   |

###  

NOTE 8. SEGMENTAND GEOGRAPHIC INFORMATION

 

The Company operates in one segment that includes developing,manufacturing and selling MSI products. The Company’s operations can be divided into three markets: the basicresearch market, the clinical applications development market, and thecommercial clinical market. Substantially all of its revenues have been derived from, andsubstantially all its assets have been devoted to, the basic researchmarket.  The following table summarizesthe Company’s revenues and long lived assets, excluding intangible, deferred taxand prepaid assets:

 
|                |   | **Six Months  Ended  March 31,  (unaudited)** |    |
|---------------------|--------|-----------------------------------------------|---------|
|                |   |                                          |    |   |   |
|                |   | **2003**                                      |    | **2002** |   |
| Revenues:           |   |                                          |    |   |   |
| North America       |   | $                                             | 583,491 |   | $ | 2,095,098 |   |
| Europe              |   | 226,472                                       |    | 1,008,944 |   |
| Asia                |   | 96,243                                        |    | 1,963,964 |   |
|                |   | $                                             | 906,206 |   | $ | 5,068,006 |   |
|                |   |                                          |    |   |   |
| Long lived  assets: |   |                                          |    |   |   |
| North America       |   | $                                             | 153,733 |   | $ | 244,810 |   |
| Europe              |   | 40,969                                        |    | 639,913 |   |
|                |   | $                                             | 194,702 |   | $ | 884,723 |   |

 

10

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## **ITEM2.**                             MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following information should be read in conjunction with thecondensed consolidated financial statements and the accompanying notes includedin Item 1 of this quarterly report, and the audited financial statements,accompanying notes and Management’s Discussion and Analysis of FinancialCondition and Results of Operations contained in our annual report on Form 10-Kfor the fiscal year ended September 30, 2002. This report may contain predictions, estimates and other forward-lookingstatements that involve a number of risks and uncertainties including, but notlimited to, those discussed in “Risks and Uncertainties.”  See “Risks and Uncertainties” for adiscussion of some of the factors known to us that could cause reportedfinancial information not to be necessarily indicative of future results.  We are not obligated to publicly release theresults of any revisions to forward-looking statements to reflect events andcircumstances 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 medicalinstitutions.  The MEG systems developedby the Company measure magnetic fields created by the human body for thenoninvasive diagnosis of certain medical disorders, primarily in thebrain.  We are focusing on the use ofour technology for potential commercial market applications such as thediagnosis and planning for surgical treatment of epilepsy, and the functionalmapping of areas of the brain at risk during surgery. We continue toinvestigate the potential applications of our technology for neuro-psychiatricdisorders of the brain such as schizophrenia, as well as for problems of theheart, spine and other organs.

 

As of March 2003, thirty-three (33) of our MEG systems are installed inmedical and research institutions worldwide. Related findings by us, and ourcollaborators, have been published in more than 200 scientific and medicalpapers.  More than 200 insurance companieshave approved reimbursement on a case-by-case basis.

 

Our current Magnes product line consists of the Magnes 2500 WH, theMagnes 3600 WH, and the Magnes 1300 C, pricing for which ranges fromapproximately $1.0 to $2.5 million, depending on the configuration. Majorportions of our sales have been in foreign markets.  We have previously priced certain of our European sales in thecurrency of the country in which the product was sold and the prices of suchproducts in dollars varied as the value of the dollar fluctuated against thequoted foreign currency price.  Therecan be no assurances that currency fluctuations will not reduce the dollarreturn to us on such sales if made in the future. Although at March 31, 2003and 2002, we did not have any open forward exchange contracts, we may in thefuture enter into forward exchange contracts to partially hedge such foreigncurrency exposure, if appropriate.

 

In October 2002, we sold 100% of our shares in Neuromag Oy toVaandramolen Holding BV, or VHBV, for $4,000,000, as discussed in more detailin Note 3 of the consolidated financial statements.  We used $3,694,000 of the proceeds from the sale to fully pay theremaining debt outstanding under a loan from AIG, which had been used to fundour acquisition of Neuromag in December 1999. At that time we had acquired all of the issued and outstanding capitalstock, or Shares, of Neuromag Oy pursuant to the terms of a share purchaseagreement by and between us and Marconi Medical Systems, Inc., or Marconi.  Under the terms of the share purchaseagreement, we paid a total of $10 million in cash to Marconi for the purchaseof the Shares.  We also agreed to pay aninterest-free minimum royalty obligation of $312,500 per year (totaling$2,500,000) to Marconi under an ancillary royalty agreement over the next 8 years.  4-D retains responsibility for the royaltyagreement after the sale of Neuromag.

 

11

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We believe that to date the relatively small number of proven medicalapplications for MEG systems, the lack of routine reimbursement for MEGprocedures, and the uncertainty of product acceptance in the U.S. market havelimited system sales through fiscal 2002. With the issuance of CPT codes for MEG, the clinical acceptance of MEGsystem may begin to increase.  It is notpossible to reliably predict the timing and extent of future product sales dueto the long sales cycles and the uncertainties in the rate of impact the CPTcodes will have on the market.  We donot anticipate multiple sales to the same end-user at current sales volumes,and the sale of one MEG system may still have a significant impact on ourfinancial position and results of operations during any reporting period.  As a result, quarterly and annual operatingperformance will continue to fluctuate significantly.

 

CRITICAL ACCOUNTING POLICIES

 

Management believes there have been no material changes during thethree-month period ended March 31, 2003 to the critical accounting policiesreported in the Management’s Discussion and Analysis section of our annualreport on Form 10-K for the year ended September 30, 2002.

 

RESULTS OF OPERATIONS

 

Total revenues for the second quarter and first six months of fiscal2003 were $202,000 and $906,000, including $181,000 and $409,000 of servicerevenues, compared to $2,211,000 and $2,956,000 of total revenues, including$254,000 and $473,000 of service revenues, for the second quarter and first sixmonths of fiscal 2002.  This decrease intotal revenues was due primarily to the recognition of no revenue for MSIsystem sales in 2003 as compared to one new and one refurbished system sales in2002.  The revenues for the secondquarter of fiscal 2003 were due primarily to the recognition of revenueassociated with the completion of a previous contract.

 

Cost of revenues for the second quarter and first six months of fiscal2003 were $349,000 and $1,036,000, compared to $1,831,000 and $2,695,000 forthe second quarter and first six months of fiscal 2002.  This decrease in total cost of revenues wasdue primarily to the recognition of no revenue for MSI system sales in fiscal2003 as compared to one new and one refurbished system sales in the same prioryear period.  The cost of revenues forthe second quarter and first six months of fiscal 2003, were due primarily tocosts associated with the completion of a previous contract, and relatedunabsorbed overhead.

 

Research and development expenses for the second quarter and first sixmonths of fiscal 2003 amounted to $239,000 and $446,000, compared to $224,000and $533,000 for the second quarter and first six months of fiscal 2002. Theincrease in research and development expenses in the second quarter of fiscal2003 as compared to the second quarter of fiscal 2002 was due primarily to aone-time write-off of accounts payable in March 2002 for $60,000, associatedwith the research and development program. The reduction of research and development expenses for the first sixmonths of fiscal 2003 as compared to the first six months of fiscal 2002 wasdue to continued, incremental cost reductions in the overhead structure of thecompany and is consistent with our increased focus on marketing and sales.

 

Marketing and sales expenses amounted to $448,000 and $735,000 for thesecond quarter and first six months of fiscal 2003, compared to $367,000 and$882,000 for the second quarter and first six months of fiscal 2002. Theincrease in marketing and sales expenses in the second quarter of fiscal 2003compared to second quarter of fiscal 2002 was due primarily to higherprofessional expenses. The decrease in marketing and sales expenses in thefirst six months of fiscal 2003, compared to the first six months of fiscal2002, was due to the reduction of trade shows and other related expenses andcost reductions in the overhead structure of the company.

 

General and administrative expenses totaled $311,000 and $684,000 forthe second quarter and first six months of fiscal 2003, compared to $500,000and 1,050,000 for the second quarter and first six months of fiscal 2002. Thedecrease in general and administrative expenses in the second quarter and firstsix months of fiscal 2003 as compared to the same prior year period was due tothe reduced consulting, professional and legal expenses, and cost reductions inthe overhead structure of the company.

 

Interest expense totaled $23,000 and $57,000 for the second quarter andfirst six months of fiscal 2003, compared to $69,000 and $133,000 during thesecond quarter and first six months of fiscal 2002. The reduction in interest

 

12

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expense in the second quarter and first six months of fiscal 2003 ascompared to the second quarter and first six months of fiscal 2002 was dueprimarily to the reduction of debt following the sale of our Finnish subsidiaryin October 2002.

 

Other income totaled $73,000 in the second quarter and $243,000 in thefirst six months of fiscal 2003, compared to $198,000 in the second quarter and$270,000 in the first six months of fiscal 2002.  The decrease in other income was due to a reduction of gain onthe sale of fixed assets and foreign currency exchange effects.

 

Net loss for the second quarter and first six months ended March 31,2003 amounted to $1,093,000 and $417,000compared to a net loss of$826,000 and $2,040,000 for the comparable periods in the prior fiscalyear.  The increase in net loss for thesecond quarter in fiscal 2003 was primarily due to no system revenuerecognition as compared to one MSI system sale in the second quarter of fiscal2002.  The decrease in net loss for thefirst six months of fiscal 2003 is due to a one-time gain on the sale ofFinnish subsidiary of $1,391,000 in October 2002.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We continued to experience substantial losses of $10,038,000 and$4,501,000 in fiscal 2002 and 2001, respectively.  We had negative cash flows from operations of $2,757,000 and$4,153,000 in fiscal 2002 and 2001, respectively.

 

In December 1999, we acquired all of the issued and outstanding capitalstock, or Shares, of Neuromag Oy pursuant to the terms of a share purchaseagreement with Marconi.  Under the termsof the share purchase agreement, we paid Marconi a total of $10,000,000 in cashfor the purchase of the Shares and agreed to pay Marconi between a minimum of$2,500,000 and a maximum of $5,000,000 in royalties under an ancillary royaltyagreement over an eight-year period. The acquisition was funded by a loan from AIG.  Mr. Egli, a member of our board of directors, is also a member ofthe board of directors of AIG.

 

Interest under the AIG loan accrued at the rate of 6.8% per annum untilApril 26, 2002, at which time the interest rate was reduced to 4.4% per annumfor the remainder of the loan term.  OnMay 15, 2002 the accrued interest in the amount of $232,000 was capitalizedincreasing the principal loan balance to $3,590,000.  The AIG loan matured in July 2002. We continued in negotiationswith AIG through the end of fiscal year 2002.

 

In October 2002, we sold our Finnish subsidiary, Neuromag, toVaandramolen Holdings, BV, a Dutch company, for $4,000,000 in cash.  $3,694,000 of these funds we used to payback the $3,590,000 of principle and $94,000 of interest due on our loan fromAIG and to pay the  $10,000 bank servicefee.  See Note 3 of the consolidatedfinancial statements for additional information with regard to our sale ofNeuromag.

 

In November 2002, we entered into another line of credit with AIG Bankfor $1,000,000.  The interest on theline of credit is 4.17% and initially the line of credit was due and payableNovember 5, 2003.  In January 2003 thematurity of the line of credit was extended until May 5, 2004.  Proceeds were used to pay off the two$125,000 unsecured loans from Enrique Maso and Swisspartners and the two$100,000 unsecured loans from MATRUST, S.L. and International SequoiaInvestment Ltd.  Each loan had aninterest rate of 8% per annum.  Accruedinterest for Enrique Maso was recorded as a gain on extinguishment of debt andis reflected in other income on the statement of operations.  The accrued interest for Swisspartners wasdue and payable in March 2003 and paid in April 2003.  Proceeds were also used to pay certain accounts payable in theamount of $120,000 to Dr. Galleon Graetz, a member of the board of directorsand a consultant for the company.  Therespective parties then pledged all of these amounts, totaling $570,000 ascollateral against the loan.  Theremaining amount was used for general corporate purposes.

 

As additional collateral against the loan, Mr. Martin Egli, a member ofour board of directors, provided a personal guarantee of $500,000 and wepledged our U. S. patent portfolio and a Magnes 2500 WH system, currentlyinstalled at the University of Alabama, to which we retain title.

 

In December 2002, we were authorized to offer and issue up to an additional60,000,000 shares of our common stock at a price not less than $0.05 pershare.  During December 2002 anadditional 60,000,000 shares were issued to Swisspartners Investment Network AGin a private placement transaction in accordance with Rule 506 of Regulation Dand Section 4(2) of the Securities Act of 1933, as amended, in exchange forcash in the aggregate sum of $3,000,000.

 

13

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Capital equipment expenditures totaled $16,000 in the first six monthsof fiscal 2003 compared to $134,000 for the first six months of fiscal2002.  The decrease in the first sixmonths of fiscal 2003 can be attributed principally to a decrease in purchasesduring the year.  Capital expenditureswill continue to remain low due to our focus on the marketing of our currentproduct line to the emerging clinical market and our working capitalconstraints.

 

In February 2003, the Company signed a new five-year lease agreementwith the owners of the property, which will expire in February 2008.  The leased space has been reduced toapproximately 46,000 square feet and subleases approximately 450 square feet ofthe facility to one company, for the net monthly rent of approximately $425, ona month-to-month basis.  The averagemonthly lease payment for the first year and over the term of the lease will beapproximately $35,000 to $52,000 respectively.

 

FACTORS THAT MAY AFFECT FUTURE RESULTS

 

This quarterly report on Form 10-QSB may contain forward-lookingstatements that involve risks and uncertainties. Such statements include, butare not limited to, statements containing the words “believes”, “anticipates”,“expects”, “estimates”, and words of similar import.  The Company’s results could differ materially from anyforward-looking statements, which reflect management’s opinions only as of thedate hereof, as a result of factors, such as those more fully described under“Risks and Uncertainties.”  The Companyundertakes no obligation to publicly release the results of any revisions tothese forward-looking statements. Readers should carefully review the risk factors set forth below as wellas other factors addressed in this report, our annual report on Form 10-K andin other documents we file from time to time with the Securities and ExchangeCommission.  This caution is made underthe safe harbor provisions of the Private Securities Litigation Reform Act of1995.

 

RISKS AND UNCERTAINTIES

 

We face the following risks associated with our business operations:

 

*If wecontinue to incur operating losses and negative cash flows from operations, wemay be unable to continue our operations.*

 

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

 

•                                                                       $10,038,000of losses in fiscal 2002 and

•                                                                       $4,501,000of losses in fiscal 2001

 

In the last two years our negative cash flows from operations have beenas follows:

 

•                                                                       $2,757,000in fiscal 2002 and

•                                                                       $4,153,000in fiscal 2001

 

Our total assets have also decreased in the last two fiscal years to$8,514,000 in 2002 compared to $21,824,000 in 2001.  At September 30, 2002, our accumulated deficit was $120,952,000,our shareholders’ deficit was $3,281,000 and we had negative working capital of$3,867,000.

 

Historically, we have raised additional capital through our majorityshareholders and related parties to fund continuing operations.  There can be no assurance that these sourcesof capital will continue to be available on terms acceptable to us, if atall.   Based on the capital resourcesraised from our sale of equity and assets, the receipt of two orders for Magnes3600 WH systems with expected installations in July and September and theanticipated booking of not less than one additional MEG system, we believe wehave sufficient working capital for at least one year.

 

 

14

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*If weare unable to satisfy customer performance and service requirements, we may beunable to compete effectively.*

* *

Our success may be limited by our ability to satisfy customerperformance requirements for our systems; as well as by our ability tocomplete, in a timely fashion, product developments and enhancements to satisfycustomer requirements.  In addition, ifwe or our distributors are not able to respond in a timely manner to servicerequirements, our competitiveness may be adversely impacted.

 

*Ourmanagement and controlling shareholders, which together control a majority ofour common stock, may control our operations and make decisions that you do notconsider in your best interest.*

 

Our present directors, executive officers and principal shareholdersand their affiliates beneficially own a majority of our outstanding commonstock.  As a result, if all or some ofthese shareholders were to act together, they would be able to exercisesignificant influence over all matters requiring shareholder approval,including the election of directors and approval of significant corporatetransactions.  Such concentration ofownership may also have the effect of delaying or preventing a change in ourcontrol that may be favored by other shareholders.

 

*Ourvendors may not continue providing favorable credit terms.*

 

Due to our liquidity issues, we have extended vendor payments beyondnormal credit terms.  If our majorvendors were to decline further credit or require cash on delivery payments,our financial position, results of operations and cash flows would be adverselyimpacted.

 

*Oursuccess is dependent upon our ability to attract and retain qualifiedscientific and management personnel.*

 

The loss of services of any one of our executive management or keyscientific personnel would delay our ability to execute our business plans andreduce our ability to successfully develop and commercialize products, maintaingood customer relationships and compete in the marketplace. There can be noassurance that we will be able to hire, train or retain such qualifiedpersonnel.

 

In addition, the loss of the services of Dr. Buchanan, who currentlyserves as our President, Chief Executive Officer and Principal FinancialOfficer would have a material adverse effect on our prospects.  Currently none of the executive officers ofthe Company have an employment agreement or contract with us.  All are “at-will” and under no specifiedterm arrangements.

 

*If weare unable to identify additional clinical applications for our MEG systems,there will be no commercially viable markets for our products.*

 

Currently, there are only a few established diagnostic uses for MEGsystems known by the medical industry. A commercial market may never develop for multiple uses of ourproducts.  A continued lack of clinicalapplications and commercial market for our MEG systems will have a materialadverse impact on our financial position, results of operations and cash flows.

 

*If wefail to compete successfully, our revenues and operating results will beadversely affected.*

 

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

* *

*If weare unable to develop additional products, our ability to commercialize ourproducts will be adversely impacted.*

 

Our success may be limited by our dependence on our current line of MEGsystems.  We are currently dependent onsales of our MEG systems to basic research institutions that represent a marketof limited size.  Our current productline may not fully meet the needs of a commercial clinical market and we may berequired to develop additional products directly suited to an emerging set ofneeds from this market.  Our financialresults may be materially adversely affected if our current line of MEGproducts does not fully meet the commercial applications that emerge, or we arenot able to offer new products in a timely and cost effective manner.

 

15

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*If newgovernment 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 orFDA regulations may have on the MEG market and our financial results.  Medical industry cost containment trends mayimpose restrictions on sizeable third-party reimbursements for diagnosticprocedures, limiting the market opportunity. Further, if federal governmentagencies or any state legislature enacts legislation or guidelines relating toour business or the health care industry that create additional businesshurdles, including legislation relating to third party reimbursement, ourfinancial position and results of operations could be negatively affected.

 

*Ifforeign currency exchange rates fluctuate, our return on sales in U.S. dollarsmay suffer*

 

Significant portions of our sales to date have been in foreign markets.  Revenues from international salesrepresented 60% of our revenues of MEG systems for the fiscal year endedSeptember 30, 2002.  In fiscal 2003,through March 31, 2003, 37% of our revenues are from international sales.  We expect that revenues from internationalsales will continue to represent a significant portion of our annualrevenues.  Because we sell in foreignmarkets, we are exposed to potential risks of increases and decreases inforeign currency exchange rates. Although at March 31, 2003 and 2002 we did not have any open forwardexchange contracts, upon occasion, we may enter into forward exchange contractsto partially hedge (or protect) against such foreign currency exchangerisks.  Fluctuations may reduce thereturn in U.S. dollars that we actually receive on our sales.

 

*If ourproducts produce unreliable diagnostic information, it may result in aliability, 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 beunreliable or result in adverse effects. This possibility exposes us to the risk of product liabilityclaims.  While we carry productliability insurance, there is no assurance that such insurance will beadequate, will be available in the future at a level and cost that isappropriate, or available at all, or that a product liability claim would notadversely affect our business prospects, financial position, results ofoperations and cash flows.

 

*Ifdiscoveries or developments of new technologies occur, our products andtechnology may become obsolete.*

 

Our industry is characterized by rapid technological change, which mayalso impact our commercial success. Competitors may develop products using other technologies or may improveexisting products.  This competition mayreduce the size of the potential market for our products or make them obsoleteor non-competitive.  Competitors mayalso develop new or different products using technology or imaging modalitiesthat provide, or are perceived as providing, greater value than the Company’sproducts.  Our financial position andresults of operations will be materially adversely affected if such competitivedevelopments occur.

 

*Ourstock price is highly volatile and subject to swings based on sales and othermarket conditions.*

 

The market prices for securities of companies with newly emergingmarkets have historically been highly volatile, and their stock price from timeto time has experienced significant price and volume fluctuations that areunrelated to the operating performance of such companies. Moreover, ourrelatively low trading volume increases the likelihood and severity of volumefluctuations, which likely will result in a corresponding increase in thevolatility of our common stock price. Factors such as announcements of complex technological innovations ornew sales, governmental regulations, developments in patent or otherproprietary rights, developments in our relationships with collaborativepartners, general market conditions and the timing of decisions by our existingshareholders to sell large positions of our common stock may have a significanteffect on the market price of our common stock.  Fluctuations in financial performance from period to period, oracceleration of any of our debt by our lenders, also may have a significantimpact on the market price of our common stock.

 

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**ITEM3.  CONTROLS AND PROCEDURES**

 

*Evaluationof Disclosure Controls and Procedures*

 

Our chief executive and principal financial officer has evaluated theeffectiveness of our disclosure controls and procedures (as defined in ExchangeAct Rules 13a-14(c) and 15d-14(c)) as of a date within 90 days prior to the filingdate of this quarterly report on Form 10-QSB (the “Evaluation Date”).  Based on such evaluation, he has concludedthat, as of the Evaluation Date, our disclosure controls and procedures areeffective in alerting him on a timely basis to material information relating toour company (including our consolidated subsidiary) required to be included inour reports filed or submitted under the Exchange Act.

 

*Changesin Internal Controls*

 

Since the Evaluation Date, there have not been any significant changesin our internal controls, or in other factors that could significantly affectsuch controls, including with regard to significant deficiencies or materialweaknesses. Therefore, no corrective actions were taken.

 

**PART II.                OTHER INFORMATION**

 

## **ITEM 4.  SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS.**

 

The Company held its annual meeting of shareholders on March 14, 2003and proxies for such meeting were solicited pursuant to Regulation 14A.  There was no solicitation in opposition tothe Company’s nominees for directors as listed in the proxy statement and allsuch nominees were elected.  Inaddition, the following matters were adopted by the shareholders at the annualmeeting.

 

(a)          The following members ofthe Board of Directors were elected to serve until the next annual meeting oruntil their successors are elected and qualified:  

 

I.  Election ofDirectors:

 
| **Nominees**         |   | **Votes For** |   | **Votes Against** |   | **Votes Abstain** |   | **Unvoted** |
|----------------------|--------|---------------|--------|-------------------|--------|-------------------|--------|-------------|
|                 |   |          |   |              |   |              |   |        |
| D. Scott Buchanan    |   | 185,345,954   |   | 143,582           |   | –            |   | 34,849,053  |
| Martin P. Egli       |   | 185,345,954   |   | 143,582           |   | –            |   | 34,849,053  |
| Galleon Graetz       |   | 185,345,954   |   | 143,582           |   | –            |   | 34,849,053  |
| Hans-Ueli Rihs       |   | 185,345,954   |   | 143,582           |   | –            |   | 34,849,053  |
| Martin Velasco Gomez |   | 185,345,954   |   | 143,582           |   | –            |   | 34,849,053  |

 

(b)         To ratify the selection of Swenson Advisors,LLP as independent accountants for the fiscal year ending September 30, 2003.

 

II.       Ratification and approval of theselection of Swenson Advisors, LLP as independent accountants for the fiscalyear ending September 30, 2003.

 
| **Votes For** |   | **Votes  Against** |   | **Votes  Abstain** |   | **Unvoted** |   |
|---------------|--------|--------------------|--------|--------------------|--------|-------------|--------|
|          |   |               |   |               |   |        |   |
| 185,368,240   |   | 106,046            |   | 15,250             |   | 34,849,053  |   |

** **

(c)          To approve an amendment to the Corporation’sSixth Amended and Restated Articles of Incorporation to increase the number ofauthorized shares of common stock from 300,000,000 to 500,000,000 shares.

 

17

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III.      Ratification and approval to increase thenumber of authorized shares of common stock from 300,000,000 to 500,000,000shares.

 
| **Votes For** |   | **Votes  Against** |   | **Votes  Abstain** |   | **Unvoted** |   |
|---------------|--------|--------------------|--------|--------------------|--------|-------------|--------|
|          |   |               |   |               |   |        |   |
| 184,993,632   |   | 485,904            |   | 10,000             |   | 34,849,053  |   |

** **

(d)         To approve an amendment to the 1997 StockIncentive Plan (the “1997 Plan”) that will increase the maximum number ofshares of common stock reserved for issuance over the term of the 1997 Plan byan additional 70,000,000 shares to 80,000,000 shares and change the maximumnumber of options that may be granted to any one employee in a calendar yearfrom 500,000 to 40,000,000.

 

IV.      Ratification and approval to increase themaximum number of shares of common stock reserved for issuance over the term ofthe 1997 Plan by an additional 70,000,000 shares to 80,000,000 shares andchange the maximum number of options that may be granted to any one employee ina calendar year from 500,000 to 40,000,000.

 
| **Votes For** |   | **Votes  Against** |   | **Votes  Abstain** |   | **Unvoted** |   |
|---------------|--------|--------------------|--------|--------------------|--------|-------------|--------|
|          |   |               |   |               |   |        |   |
| 174,830,784   |   | 974,543            |   | 8,070              |   | 44,525,192  |   |

 

## **ITEM 6.  EXHIBITSAND REPORTS ON FORM 8-K.**

 
| (a) Exhibit No.         |   | Description                                                                                                                                                                                                                                                                                                                                                                                                                    |
|-------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.1                     |   | Seventh Amended and Restated Articles of  Incorporation                                                                                                                                                                                                                                                                                                                                                                        |
|                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2                     |   | Restated By-Laws 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. |
|                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.1                    |   | Letter Agreement dated on or about January 16, 2003  between 4-D and AIG Private Bank, Ltd.                                                                                                                                                                                                                                                                                                                                    |
|                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.2                    |   | Real Estate Lease, dated February 18, 2003, between  the Company and The Irvine Company, excluding certain attachments containing  information that is considered immaterial to an investment decision; they  will be provided supplementally to the Commission upon request.                                                                                                                                                  |
|                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 99.1                    |   | Certification of Chief Executive Officer and  Principal Financial Officer                                                                                                                                                                                                                                                                                                                                                      |
|                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (b) Reports on Form 8-K |
|                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| None

             |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

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**SIGNATURES**

 

In accordance with the requirements of the Exchange Act of 1934, theregistrant caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 

 
| 4-D NEUROIMAGING |
|------------------|
|             |   |
|             |   |   |
| May 13, 2003     |   | /s/  D. Scott  Buchanan |
| Date             |   | D. Scott Buchanan |
|             |   | President, Chief Executive Officer,  Principal Financial Officer |

 

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**CERTIFICATIONS**

 

I, D. Scott Buchanan, certify that:

 

1.  I have reviewed thisquarterly report on Form 10-QSB of 4-D Neuroimaging;

 

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

 

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

 

4.  The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

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

 

b)  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

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

 

5.  The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent functions):

 

a)  all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)  any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.  The registrant’s othercertifying officers and I have indicated in this quarterly report whether therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date: May 13, 2003                                           |
|--------------------------------------------------------------|
|                                                         |
|   /s/ D.  Scott Buchanan                                |   |
| D. Scott Buchanan                                            |
| **Chief  Executive Officer and Principal Financial Officer** |

 

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