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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q

(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2001

or

|/ / | 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

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

California(State or other jurisdiction of incorporation or organization)

95-2647755(IRS Employer Identification No.)9727 Pacific Heights Boulevard,
San Diego, California(Address of principal executive offices)

92121-3719(Zip code)


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

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

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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /x/  No / /

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

The
number of shares outstanding of the registrant's common stock, no par value, as of August 17, 2001 was 145,018,629 shares.

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PART I  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

4-D NEUROIMAGING  CONSOLIDATED BALANCE SHEETS  (in thousands, except share data)

|                                                                                                    |                                      | June 30,
2001 |          | September 30,
2000 |  
|--------------------------------------------------------------------------------------------------- | ------------------------------------ | ------------- | -------- | ------------------ | -
|
|ASSETS                                                                                              |                                      |               |          |                    |  
|Cash and cash equivalents                                                                           |                                      | $             | 1,025    |                    | $
|Restricted cash                                                                                     |                                      |               | 470      |                    |  
|Accounts receivable, less allowance for doubtful accounts of $210                                   |                                      |               | 847      |                    |  
|Inventories                                                                                         |                                      |               | 6,828    |                    |  
|Prepaid expenses and other                                                                          |                                      |               | 1,504    |                    |  
|                                                                                                    |                                      |               |          |                    |  
|                                                                                                    | Total current assets                 |               |          | 10,674             |  
|Property and equipment, net                                                                         |                                      |               | 1,535    |                    |  
|Goodwill, net                                                                                       |                                      |               | 8,504    |                    |  
|Restricted cash                                                                                     |                                      |               |         |                    |  
|Deferred income taxes                                                                               |                                      |               | 568      |                    |  
|Other assets                                                                                        |                                      |               | 461      |                    |  
|                                                                                                    |                                      |               |          |                    |  
|                                                                                                    |                                      | $             | 21,742   |                    | $
|                                                                                                    |                                      |               |          |                    |  
|LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)                                                      |                                      |               |          |                    |  
|Notes payable                                                                                       |                                      | $             |         |                    | $
|Accounts payable                                                                                    |                                      |               | 2,485    |                    |  
|Accrued liabilities                                                                                 |                                      |               | 804      |                    |  
|Accrued salaries and employee benefits                                                              |                                      |               | 698      |                    |  
|Customer deposits                                                                                   |                                      |               | 5,669    |                    |  
|Deferred revenues                                                                                   |                                      |               | 360      |                    |  
|Current portion of royalty obligation                                                               |                                      |               | 312      |                    |  
|Current portion of capital lease obligations                                                        |                                      |               | 16       |                    |  
|                                                                                                    |                                      |               |          |                    |  
|                                                                                                    | Total current liabilities            |               |          | 10,344             |  
|Notes payable                                                                                       |                                      |               | 3,806    |                    |  
|Customer Deposits                                                                                   |                                      |               | 1,707    |                    |  
|Royalty obligation, net of current portion                                                          |                                      |               | 1,102    |                    |  
|Deferred revenues                                                                                   |                                      |               | 247      |                    |  
|Capital lease obligations, net of current portion                                                   |                                      |               | 21       |                    |  
|                                                                                                    |                                      |               |          |                    |  
|                                                                                                    | Total liabilities                    |               |          | 17,227             |  
|                                                                                                    |                                      |               |          |                    |  
|COMMITMENTS AND CONTINGENCIES                                                                       |                                      |               |          |                    |  
|SHAREHOLDERS' EQUITY (DEFICIT)                                                                      |                                      |               |          |                    |  
|Common stockno par value; 200,000,000 shares authorized; 145,018,629 shares issued and outstanding |                                      |               | 112,700  |                    |  
|Additional paid-in capital                                                                          |                                      |               | 3,008    |                    |  
|Accumulated deficit                                                                                 |                                      |               | (110,863 | )                  |  
|Accumulated other comprehensive loss                                                                |                                      |               | (330     | )                  |  
|                                                                                                    |                                      |               |          |                    |  
|                                                                                                    | Total shareholders' equity (deficit) |               |          | 4,515              |  
|                                                                                                    |                                      |               |          |                    |  
|                                                                                                    |                                      | $             | 21,742   |                    | $
|                                                                                                    |                                      |               |          |                    |  

See
notes to consolidated financial statements

2

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4-D NEUROIMAGING  CONSOLIDATED STATEMENTS OF OPERATIONS  (in thousands, except per-share amounts)  (unaudited)

|                                                     |                                      | Three Months Ended
June 30, |         | Nine Months Ended
June 30, |  
|---------------------------------------------------- | ------------------------------------ | --------------------------- | ------- | -------------------------- | -
|
|REVENUES                                             |                                      |                             |         |                            |  
|                                                     | Product sales                        |                             | $       | 996                        |  
|                                                     | Product services                     |                             |         | 169                        |  
|                                                     |                                      |                             |         |                            |  
|                                                     |                                      |                             | 1,165   |                            |  
|                                                     |                                      |                             |         |                            |  
|COST OF REVENUES                                     |                                      |                             |         |                            |  
|                                                     | Product                              |                             |         | 694                        |  
|                                                     | Product services                     |                             |         | 152                        |  
|                                                     |                                      |                             |         |                            |  
|                                                     |                                      |                             | 846     |                            |  
|                                                     |                                      |                             |         |                            |  
|GROSS MARGIN                                         |                                      |                             | 320     |                            |  
|                                                     |                                      |                             |         |                            |  
|OPERATING EXPENSES                                   |                                      |                             |         |                            |  
|                                                     | Research and development             |                             |         | 458                        |  
|                                                     | Marketing and sales                  |                             |         | 449                        |  
|                                                     | General and administrative           |                             |         | 817                        |  
|                                                     | Goodwill amortization                |                             |         | 327                        |  
|                                                     |                                      |                             |         |                            |  
|                                                     |                                      |                             | 2,051   |                            |  
|                                                     |                                      |                             |         |                            |  
|OPERATING PROFIT (LOSS)                              |                                      |                             | (1,731  | )                          |  
|                                                     | Interest expense                     |                             |         | (190                       | )
|                                                     | Interest income                      |                             |         | (17                        | )
|                                                     | Loss from investment in Magnesensors |                             |         |                           |  
|                                                     | Other income (expense), net          |                             |         | 196                        |  
|                                                     |                                      |                             |         |                            |  
|LOSS BEFORE PROVISION FOR INCOME TAXES               |                                      | $                           | (1,742  | )                          | $
|                                                     | Provision(Benefit) for income taxes  |                             |         | 17                         |  
|                                                     |                                      |                             |         |                            |  
|NET LOSS                                             |                                      | $                           | (1,759  | )                          | $
|                                                     |                                      |                             |         |                            |  
|BASIC AND DILUTED NET LOSS PER SHARE                 |                                      | $                           | (0.01   | )                          | $
|                                                     |                                      |                             |         |                            |  
|Weighted average number of common shares outstanding |                                      |                             | 127,537 |                            |  
|                                                     |                                      |                             |         |                            |  
|COMPREHENSIVE LOSS:                                  |                                      |                             |         |                            |  
|                                                     | Net loss                             |                             | $       | (1,759                     | )
|                                                     | Cumulative translation adjustment    |                             |         | (18                        | )
|                                                     |                                      |                             |         |                            |  
|                                                     | Comprehensive loss                   |                             | $       | (1,777                     | )
|                                                     |                                      |                             |         |                            |  

See
notes to consolidated financial statements

3

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4-D NEUROIMAGING  CONSOLIDATED STATEMENTS OF CASH FLOWS  (in thousands)  (unaudited)

|                                                     |                                                                                           | Nine Months Ended
June 30,                 |                                                    
|---------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------ | ---------------------------------------------------
|
|OPERATING ACTIVITIES                                 |                                                                                           |                                            |                                                    
|                                                     | Net loss                                                                                  |                                            | $                                                  
|                                                     | Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                            |                                                    
|                                                     |                                                                                           | Depreciation                               |                                                    
|                                                     |                                                                                           | Amortization of goodwill                   |                                                    
|                                                     |                                                                                           | Amortization of minimum royalty obligation |                                                    
|                                                     |                                                                                           | Deferred income taxes                      |                                                    
|                                                     | Changes in operating assets and liabilities excluding effects of acquisition:             |                                            |                                                    
|                                                     |                                                                                           | Restricted cash                            |                                                    
|                                                     |                                                                                           | Accounts receivable                        |                                                    
|                                                     |                                                                                           | Inventories                                |                                                    
|                                                     |                                                                                           | Prepaid expenses and other                 |                                                    
|                                                     |                                                                                           | Other assets                               |                                                    
|                                                     |                                                                                           | Accounts payable                           |                                                    
|                                                     |                                                                                           | Accrued liabilities                        |                                                    
|                                                     |                                                                                           | Accrued salaries and employee benefits     |                                                    
|                                                     |                                                                                           | Customer deposits                          |                                                    
|                                                     |                                                                                           | Deferred revenue                           |                                                    
|                                                     |                                                                                           | Interest payable                           |                                                    
|                                                     |                                                                                           |                                            |                                                    
|                                                     |                                                                                           |                                            | Net cash provided by (used in) operating activities
|                                                     |                                                                                           |                                            |                                                    
|INVESTING ACTIVITIES                                 |                                                                                           |                                            |                                                    
|                                                     | Change in short-term investments, net                                                     |                                            |                                                    
|                                                     | Purchases of property and equipment                                                       |                                            |                                                    
|                                                     | Loss from investment in Magnesensors                                                      |                                            |                                                    
|                                                     | Acquisition of Neuromag, net of cash acquired                                             |                                            |                                                    
|                                                     |                                                                                           |                                            |                                                    
|                                                     |                                                                                           |                                            | Net cash used in investing activities              
|                                                     |                                                                                           |                                            |                                                    
|FINANCING ACTIVITIES                                 |                                                                                           |                                            |                                                    
|                                                     | Proceeds from notes payable                                                               |                                            |                                                    
|                                                     | Notes payable restructured                                                                |                                            |                                                    
|                                                     | Repayments of notes payable                                                               |                                            |                                                    
|                                                     | Payments on capital lease obligations                                                     |                                            |                                                    
|                                                     | Proceeds from stock options exercised                                                     |                                            |                                                    
|                                                     | Proceeds from stock exchange for debt cancellation                                        |                                            |                                                    
|                                                     |                                                                                           |                                            |                                                    
|                                                     |                                                                                           |                                            | Net cash (used in) provided by financing activities
|                                                     |                                                                                           |                                            |                                                    
|                                                     |                                                                                           |                                            | Effect of exchange rate changes                    
|Net increase (decrease) in cash and cash equivalents |                                                                                           |                                            | (58                                                
|                                                     |                                                                                           |                                            |                                                    
|Cash and cash equivalents at beginning of period     |                                                                                           |                                            | 1083                                               
|                                                     |                                                                                           |                                            |                                                    
|Cash and cash equivalents at end of period           |                                                                                           | $                                          | 1025                                               
|                                                     |                                                                                           |                                            |                                                    

See
notes to consolidated financial statements

4

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4-D NEUROIMAGING  CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)  (in thousands)  (unaudited)

SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

|                                                                         |                        | Nine Months Ended
June 30,
|------------------------------------------------------------------------ | ---------------------- | --------------------------
|
|Minimum royalty obligation incurred in acquisition of Neuromag Oy        |                        | $                         
|Adjustment of acquisition liabilities to goodwill                        |                        | $                         
|Property and equipment transfer from inventories for customer sale/lease |                        | $                         
|SUPPLEMENTAL DISCLOSURES:                                                |                        |                           
|                                                                         | Cash paid for interest |                           

See
notes to consolidated financial statements

5

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

NOTE 1.  BUSINESS AND BASIS OF PRESENTATION

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

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

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

In
the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments, consisting only of normal recurring entries, necessary
to present fairly its financial position at June 30, 2001 and the results of its operations and its cash flows for the periods presented.

The
preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates. Results for the interim periods presented in this report are not necessarily indicative of results which may be reported
for any other interim period or for the entire fiscal year.

The
accompanying statements of operations include the results of operations of Neuromag Oy for the nine months ended June 30, 2001.

NOTE 2.  BASIC AND DILUTED NET LOSS PER SHARE

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

6

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NOTE 3.  BUSINESS RISKS AND UNCERTAINTIES

The Company has experienced serious liquidity issues over the last few years and has incurred net losses of $8,127,000, $7,464,000, and $4,968,000 in fiscal
2000, 1999 and 1998, respectively. The Company had negative cash flows from operations of $5,217,000, $8,602,000, and $5,520,000 in fiscal 2000, 1999 and 1998, respectively. For the quarter ended
June 30, 2001, the Company incurred a net loss of 1,759,000. At June 30, 2001, the Company had an accumulated deficit of $110,863,000, a net capital equity of $4,515,000, and positive
working capital of $330,000. The increase in net equity and working capital as compared to prior periods was due primarily to the issuance of common stock in exchange for cancellation of indebtedness
(See Note 4) and a reclassification of notes payable.

The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed below and as shown in the accompanying
consolidated financial statements, the Company has operating and liquidity concerns that raise substantial doubt about the Company's ability to continue as a going concern. There can be no assurance
that the Company will be able to successfully improve its operating results and further restructure its indebtedness (See Note 4) or that its liquidity and capital resources will be sufficient
to maintain its normal operations. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification
of liabilities that might result should the Company be unable to continue as a going concern.

Based
on the Company's current expectation of anticipated cash receipts related to firm orders received and anticipated bookings of additional MSI systems, the Company expects to have
sufficient cash to continue operations through at least the end September 2001. Historically, the Company has raised additional capital through its majority shareholders and related parties to
fund continuing operations. There can be no assurance that these sources of capital will continue to be available.

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

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

The
Company's commercial success is also highly dependent on the availability of reimbursement for procedures performed by the Company's customers using MSI systems. As of
June 30, 2001, there have been limited reimbursements from third party payors on a case-by-case basis. In February 2001, the American Medical Association approved
the issuance of billing codes, commonly referred to as Current Procedural Terminology ("CPT") codes, for the use of MEG (also known as MSI), in the planning for the surgical treatment of epilepsy and
for pre-surgical functional mapping of the brain prior to neurosurgery. 4-D regards the issuance of CPT codes to be a significant step in establishing routine reimbursement for
MEG in the United States. Although the number of third party payors making reimbursements has increased, there is no assurance that third party reimbursements will become widely available. Routine
reimbursements are not currently provided for MSI procedures by

7

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the United States or Japanese governments or the governments in our other markets. If widespread availability of reimbursements from government and private insurers is not achieved, the Company's
financial position, results of operations and cash flows would be materially adversely affected. The Company also cannot predict what legislation relating to its business or the health care industry
may be enacted in the future, including legislation relating to third party reimbursements, or what effect such legislation may have on its financial position, results of operations and cash flows.
The industry in which the Company operates is characterized by rapid technological change. New products using other technologies or improvements to existing products may reduce the size of the
potential markets for the Company's products, and may render them obsolete or non-competitive. Competitors may develop new or different products using technology or imaging modalities that
may provide or be perceived as providing greater value than the Company's products. Any such development could have a material adverse effect on the Company's financial position, results of operations
and cash flows.

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

In
April 2001, the Company retired approximately $10.5 million of its debt, raised $2 million of working capital and restructured approximately $3 million
of its remaining debt owed to AIG Private Bank Ltd. See Note 4 and Part II, Item 2 of this report for additional information regarding the debt restructuring and the related private
placement.

NOTE 4.  DEBT OBLIGATIONS

To acquire the shares of Neuromag Oy, the Company obtained a loan from AIG Private Bank Ltd., or AIG, totaling $11 million that is secured by the
entire share capital of Neuromag Oy and is guaranteed by an entity affiliated with Martin Egli, a member of the Company's board of directors. Mr. Egli also serves on AIG's board of directors.
The $11 million loan was restructured in July 2000 which extended the original maturity date from June 30, 2000 to December 29, 2000 and the principal amount was increased
to $11.4 million. On December 29, 2000, the Company did not make payment at maturity of the loan. Effective February 15, 2001, the Company and AIG reached an agreement in
principle, extending the maturity date to July 20, 2001, increasing the loan principal to approximately $12 million (capitalizing accrued interest of approximately $550,000 into the loan
principal) and obtaining additional guarantees of indebtedness from another bank. On April 26, 2001 the Company reached an agreement with AIG in which $8.951 million of the principle and
accrued interest of the loan was converted into shares of the Company's common stock as part of a private placement. The remainder, approximately $3 million of the loan, was restructured. As
restructured, the loan in the principal amount of $3.357 million from AIG matures in July 2002 and the interest rate is currently set at 6.8% per annum until April 26, 2002, at
which time the interest accrued on the loan through such date will be due and payable and the interest rate will be readjusted for the remainder of the loan term. As amended, the AIG loan is secured
by a pledge and assignment by Scaloway Co. Ltd., or Scaloway, a guarantee in the amount of USD $2,200,000 by Bank Julius Baer & Co. AG in Zurich, Switzerland, and all of the issued
and outstanding shares of Neuromag Oy, 4-D's wholly-owned subsidiary located in Helsinki, Finland. If 4-D defaults under the AIG loan, then AIG has the right to exercise its
security interest and take ownership of Neuromag Oy. In connection with the private placement transaction, Scaloway agreed to convert certain assets pledged and assigned by Scaloway into an indirect
ownership of all 42,623,810 shares of 4-D's common stock issued to AIG, Scaloway has sole voting and disposititve power over these shares. Martin Velasco, a member of 4-D's board of directors, is the
beneficial owner of Scaloway.

In
June 2000, the Company obtained unsecured loans totaling approximately $835,000 from BDN and used approximately $485,000 of the proceeds to pay interest due under the AIG
loan at June 30, 2000 in conjunction with extending the maturity of the loan from AIG to December 29, 2000. BDN is a Spanish company owned by three members of the Company's board of
directors, Martin Egli, Enrique

8

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Maso and Martin Velasco. The BDN loans were originally due on September 30, 2000. During October 2000, the Company repaid approximately $123,000 of principal and $27,000 of interest for
these loans and negotiated an extension of the maturity's of the BDN loans until March 31, 2001. As part of a reduction in its capital BDN reassigned its rights under the BDN loans to Amaldos,
S.A., MATRUST, S.L., International Sequoia Investments Limited and Swisspartners Investment Network Ltd. Dr. Maso is a majority shareholder in MATRUST, S.L. Mr. Velasco is a major
investor in International Sequoia Investments Limited, or Sequoia. Mr. Egli is a member of the board of directors and a managing partner of Swisspartners Investment Network Ltd., or
Swisspartners. An additional $18,500 of interest and $1,500 of principal was repaid before the majority of these loans were reassigned to the principals of BDN on April 15, 2001, excluding
$30,000. Subsequently these reassigned loans were converted to equity on April 26, 2001 as part of a private placement, and the remaining $30,000 of principal was repaid to BDN at that time.

In
September 2000, the Company obtained an unsecured loan from Swisspartners. In March 2001 Swisspartners loaned an additional $400,000 to the Company under the same
loan arrangement. On April 26, 2001, Swisspartners converted the entire principal and all accrued interest of the loan to equity as part of a private placement.

Prior
to its acquisition by 4-D, Neuromag Oy borrowed a total of 3,140,000 in Finnish Markka, or FIM, which equaled approximately $449,000 USD at June 30, 2001,
from TEKES at the Finnish state base interest rate minus 1%, subject to a minimum rate of 3%. The future repayment date for principal and related accrued interest outstanding under this loan is
dependent upon Neuromag Oy generating sufficient distributable equity based upon the statutory final accounts prepared in accordance with Finnish generally accepted accounting principles, in the
future.

4-D
issued 59,549,081 shares of its common stock representing approximately 41% of its outstanding voting securities in a private placement transaction with specified
investors in accordance with Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended, which was consummated on
or about April 26, 2001.  The common stock was issued at a per-share price of $0.21, in exchange for cancellations of indebtedness in the aggregate amount of
$10,505,307 and cash in the aggregate sum of $2,000,000, as described in more detail in Part II, Item 2 of this report.

NOTE 5.  INVENTORIES

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

June 30,
2001

September 30,
2000(unaudited)Raw materials

$
410

$
1,018Work-in process


4,884


4,852Finished goods


1,534


475$
6,828

$
6,345


NOTE 6.  RESTATEMENT AND REISSUANCE OF THE FIRST AND SECOND QUARTER ENDED DECEMBER 31, 2000 AND MARCH 31, 2001 FINANCIAL
STATEMENTS

The Company expensed certain project costs, which are associated with the production of Neuromag Oy's Vectorview units, during the quarter ended,
December 31, 2000, thereby, overstating cost of revenues and understating inventory by approximately $482,000. These project costs should have been capitalized as inventory costs. These goods
are currently being installed and the associated costs will be expensed when the associated revenue is recognized. Therefore, inventory and costs of revenues for the quarter ended December 31,
2000 and the six month period ended March 31, 2001 were restated to capitalize these project costs as inventory; accordingly, inventory at June 30, 2001 reflects the inclusion of these
project costs.

9

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

The following information should be read in conjunction with the condensed consolidated financial statements and the accompanying notes included in Item 1 of
this quarterly report, and the audited financial statements, accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our annual report
on Form 10-K for the fiscal year ended September 30, 2000. This report may contain predictions, estimates and other forward-looking statements that involve a number of risks
and uncertainties including, but not limited to, those discussed at "Risks and Uncertainties" below. This outlook represents our current judgement on the future direction of our business. See "Risks
and Uncertainties" for a discussion of some of the factors known to us that could cause reported financial information not to be necessarily indicative of future results. We are not obligated to
publicly release the results of any revisions to forward-looking statements to reflect events and circumstances arising after the date this report is filed.

RESTATEMENT AND REISSUANCE OF THE FIRST AND SECOND QUARTER ENDED DECEMBER 31, 2000 AND MARCH 31, 2001 FINANCIAL STATEMENTS

The
Company expensed certain project costs, which are associated with the production of Neuromag Oy's Vectorview units, during the quarter ended, December 31, 2000, thereby,
overstating cost of revenues and understating inventory by approximately $482,000. These project costs should have been capitalized as inventory costs. These goods are currently being installed and
the associated costs will be expensed when the associated revenue is recognized. Therefore, the quarter ended, December 31, 2000 and the six months period ended March 31, 2001, inventory
and cost of revenues were restated to capitalize these project costs as inventory; accordingly, inventory at June 30, 2001 reflects the inclusion of these project costs.

OVERVIEW

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

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

The
measurement of the body's magnetic fields by MSI provides information about the normal and abnormal functioning of the brain, heart and other organs. The Company is focusing on
the use of its technology for potential commercial market applications such as the diagnosis and planning for surgical treatment of epilepsy, and the functional mapping of areas of the brain at risk
during surgery for tumors and other lesions. Currently, the medical industry is aware of only a few established diagnostic uses for MSI Systems. The Company is continuing to investigate the potential
applications of its technology for problems of the heart, spine, and gastrointestinal system, as well as for disorders of the brain such as closed-head trauma, schizophrenia and other
neuro-psychiatric disorders.

As
of June 30, 2001, 56 MSI systems are installed in medical and research institutions worldwide, and more than 5,000 MSI examinations have been performed on patients and
control subjects at the Company's application development sites. Related findings by 4-D and its collaborators have been published in more than 200 scientific and medical papers. Since the
first reimbursement for MSI procedures was received in September 1993, more than 200 insurance companies have approved reimbursement on a case-by-case basis for certain
MSI procedures performed with the Company's MSI systems.

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In fiscal 1995, 4-D announced development of the Magnes 2500 WH, an expansion of the existing Magnes I and Magnes II systems product line. The Magnes 2500 WH allows for
examination of the entire brain at once and is designed for evaluating ambulatory or critically ill patients in seated or fully reclined positions. As of June 30, 2001, the Company had shipped
15 Magnes 2500 WH systems and received 14 final acceptances from customers. In fiscal 2000, 4-D completed the development of the Magnes 3600 WH, and shipped its first system to a customer.
The Magnes 3600 increased the sensitivity of the Company's MSI system by increasing the number of detector channels.

On
December 22, 1999, 4-D acquired all of the issued and outstanding capital stock ("Shares") of Neuromag Oy pursuant to the terms of a share purchase agreement, by
and between Marconi Medical Systems, Inc. ("Marconi") and 4-D (the "Share Purchase Agreement"). Under the terms of the Share Purchase Agreement, 4-D paid a total of
$10 million in cash to Marconi for the purchase of the Shares and agreed to pay between a minimum of $2,500,000 and a maximum of $5,000,000 in royalties to Marconi under an ancillary royalty
agreement over the next 8 years. A royalty payment in the amount of $430,683 was made on March 19, 2001 for royalties due for the first year ended December 21, 2000. The
acquisition was funded by a loan from AIG Private Bank Ltd.

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

The
current price of 4-D's MSI systems ranges from approximately $1.0 to $2.5 million, depending upon system configuration. A major portion of the Company's sales
have been, and are expected to be, in foreign markets. Although the distributor agreements that the Company has entered into in the Far East have required sales to be priced in U.S. dollars, the
Company has previously priced certain of its European sales in the currency of the country in which the product was sold and the prices of such products in U.S. dollars varied as the value of the U.S.
dollar fluctuated against the quoted foreign currency price. Additionally, substantially all of the receivables and payables of the Company's foreign subsidiaries are denominated in currencies other
than U.S. dollars. Consequently, the Company's reported results are subject to various risks, including without limitation, foreign currency risks. Although at June 30, 2001 the Company did not
have any open forward exchange contracts, the Company may in the future enter into forward exchange contracts to partially hedge, or protect against, such foreign currency exposure, if appropriate. As
part of a comprehensive approach to risk management, the Company is presently evaluating alternatives to address this risk. See our discussion under "Risks and UncertaintiesIf foreign
currency rates fluctuate our return on sales in U.S. dollars may suffer" and Item 3 "Quantitative and Qualitative Disclosures About Market Risk", for more detailed discussions of the quantitative and
qualitative disclosures about market risk.

The
Company believes that the relatively small number of proven medical applications for its MSI systems, the lack of routine reimbursement for MSI procedures, and the uncertainty of
product acceptance in the U.S. market have limited system sales. In February 2001, the American Medical Association approved the issuance of billing codes, commonly referred to as Current
Procedural Terminology ("CPT") codes, for the use of MEG or MSI, in the planning for the surgical treatment of epilepsy and for pre-surgical functional mapping of the brain prior to
neurosurgery. 4-D regards the issuance of CPT codes to be a significant step in establishing routine reimbursement for MEG in the United States. However, it is not possible to reliably
predict the timing and extent of future product sales due to the uncertainties of the acceptance of medical applications, reimbursement and product acceptance. The Company does not anticipate multiple
sales to the same end-user at current sales volumes, and the sale of one MSI system may have a significant impact on the Company's financial position and results of operations during any
reporting period. As a result, quarterly and annual operating performance will continue to fluctuate significantly.

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RESULTS OF OPERATIONS

Total revenues for the third quarter and first nine months of fiscal 2001 were $1,165,000 and $6,764,000, including $169,000 and $482,000 of service revenues,
compared to $5,244,000 and $5,853,000 of total revenues, including $171,000 and $427,000 of service revenues, for the third quarter and first nine months of fiscal 2000. The decrease in revenues in
the third quarter fiscal year 2001 as compared
to fiscal 2000 was due to large system shipments in the third quarter of fiscal year 2000. The year to date increase in revenue for fiscal 2001 over fiscal year 2000 resulted from Neuromag Oy's
revenues being included for only six months in fiscal year 2000 due to the December 22, 1999 acquisition date of Neuromag Oy.

Cost
of revenues for the third quarter and first nine months of fiscal 2001 were $846,000 and $4,814,000 compared to $2,913,000 and $4,268,000 for the third quarter and first nine
months of fiscal 2000. The cost of revenues as a percentage of revenues remains high primarily due to overall low sales volume and higher resulting overheads.

The
Company's results of operations for the quarter ended June 30, 2001 reported a reduction of gross margin, and higher operating loss and net loss as compared to the quarter
ended June 30, 2000 due to reduced sales volume in the third quarter of 2001. The first nine months of fiscal 2001 recorded a positive gross margin of $1,950,000 as compared to 1,585,000 the
prior year. These improved results are primarily due to increased sales volume and related improved gross margin.

Research
and development expenses for the third quarter and first nine months of fiscal 2001 amounted to $458,000 and $1,594,000 compared to $653,000 and $2,183,000 for the third
quarter and first nine months of fiscal 2000. The reduction in research and development expenses primarily results from continuing cost control measures implemented by the Company during the Company's
liquidity difficulties. Reductions also result from reduced spending on new product development due to the fact that current hardware product lines fulfill current marketing and sales requirements.

Marketing
and sales expenses for the third quarter and first nine months of fiscal 2001 amounted to $449,000 and $1,381,000, compared to $357,000 and $1,492,000 for the third quarter
and first nine months of fiscal 2000. The 2001 quarter increase was primarily due to higher travel and consulting expenses, while the year to date decrease in marketing and sales expenses primarily
results from continuing cost control measures implemented by the Company during the Company's liquidity difficulties.

General
and Administrative expenses for the third quarter and first nine months of fiscal 2001 were $817,000 and $2,347,000 compared to $869,000 and $1,987,000 for the same prior year
periods. The decrease for the third quarter of fiscal 2001, as compared to fiscal 2000, was primarily due to continuing cost control measures implemented by the Company. The increase for the
nine-month fiscal period ended June 30, 2001, as compared to fiscal 2000, was primarily the result of Neuromag Oy being included for only three months in fiscal 2000 due to the
December 22, 1999 acquisition date.

Goodwill
amortization for the third quarter and first nine months of fiscal 2001 were $327,000 and $992,000 compared to $351,000 and $702,000 for fiscal year 2000. The increase for
the nine month period ended June 2001 as compared to fiscal 2000 was primarily the result of Neuromag Oy being included for only six months in fiscal 2000 due to the December 22, 1999
acquisition date.

Interest
expense totaled $190,000 for the third quarter of fiscal 2001, compared to $258,000 during the third quarter of fiscal 2000. The decrease in the third quarter of fiscal 2001
was primarily the result of reduced borrowings due to the common stock in exchange for cancellation of indebtedness in April 2001. The nine month fiscal period ending June 30, 2001
totaled $844,000 as compared to $529,000 for the same period in 2000. The increase in 2001 was primarily the result of Neuromag Oy being included for only six months in fiscal 2000 due to the
December 22, 1999 acquisition date.

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Other income (expense) totaled $196,000 in the third quarter of fiscal 2001 and $697,000 in the first nine months of fiscal 2001, compared to ($4,000) in the third quarter of fiscal
2000 and ($86,000) in the first nine months of fiscal 2000. The increase in other income is primarily attributable to $200,000 in income from investment in Magnesensors and the reversal of $125,000
previously reserved against a collaboration agreement which was never completed. During the first quarter of fiscal 2001, 4-D notified Magnesensors that it would no longer continue to
provide a $200,000 guarantee of indebtedness due to the termination of its contractual obligations to do so and 4-D's liquidity concerns. 4-D had been providing the guarantee,
and under the equity method of accounting for its investment in Magnesensors, had previously recorded its proportionate share of Magnesenors' losses to the extent of 4-D's debt guarantee.
The remainder of the increase in the nine month period of fiscal 2001 compared to fiscal 2000 was due primarily to rental income from a sublease of the property and foreign currency translations.

The
provision for income taxes totaled $17,000 in the third quarter of fiscal 2001 compared to the provision in the third quarter of fiscal 2000 of $0. The tax benefit for the year
2001 pertains to Finnish taxes for the Company's Neuromag Oy subsidiary.

Net
loss for the third quarter and first nine months of fiscal 2001 amounted to $1,759,000 and $4,449,000 compared to a net loss of $182,000 and $5,493,000 for the comparable periods
in the prior fiscal year. The increase in net loss for the third quarter of fiscal 2001 as compared to the prior year period is primarily due to the reduced sales volume in the quarter. The reduction
of net loss in the nine-month period was due primarily to increased sales volumes as well as the continuing cost control measures implemented by the Company.

LIQUIDITY AND CAPITAL RESOURCES

The Company has experienced serious liquidity issues over the last few years and has incurred net losses of $8,127,000, $7,464,000, and $4,968,000 in fiscal
2000, 1999 and 1998, respectively. The Company had negative cash flows from operations of $5,217,000, $8,602,000, and $5,520,000 in fiscal 2000, 1999 and 1998, respectively. For the quarter ended
June 30, 2001, the Company incurred a net
loss of $1,759,000. At June 30, 2001, the Company had an accumulated deficit of $110,863,000, a net capital equity of $4,515,000 and a positive working capital of $330,000. The increase in net
equity and working capital as compared to prior periods was due primarily to the issuance of common stock in exchange for cancellation of indebtedness (see Note 4), the restructured AIG loan
and the reclassification of long term customer deposits.

4-D
issued 59,549,081 shares of its common stock representing approximately 41% of its outstanding voting securities in a private placement transaction with specified
investors in accordance with Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended, which was consummated on or about April 26, 2001. The
common stock was issued at a per-share price of $0.21, in exchange for cancellations of indebtedness in the aggregate amount of $10,505,307 and cash in the aggregate sum of $2,000,000.

The
$10,505,307 in cancellations of indebtedness consisted of a partial cancellation of indebtedness in the amount of USD $8,951,000 by AIG according to a letter agreement dated on or
about April 25, 2001 between AIG and 4-D, full cancellations of indebtedness in the amounts of USD $872,867 and $224,875 by Swisspartners Investment Network Ltd., or Swisspartners,
a full cancellation of indebtedness in the amount of USD $224,875 by MATRUST, S.L., a full cancellation of indebtedness by International Sequoia Investments Limited, or Sequoia, in the amount of USD
$224,875, and a full cancellation of indebtedness in the amount of $6,815 from Amaldos, S.A. The full cancellations of indebtedness entered into between 4-D and each of Amaldos, S.A.,
MATRUST, S.L., Sequoia and Swisspartners represent the portion of the debt assigned to each such entity by BDN upon its reduction of capital. Martin Egli, a member of 4-D's board of
directors is also a member of the board of

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directors of AIG and is a managing partner of Swisspartners. Dr. Maso, a member of 4-D's board of directors, is a majority shareholder in MATRUST, S.L. Mr. Velasco, a member
of 4-D's board of directors, is a major investor in Sequoia. See Note 4 and Part II, Item 2 of this report for additional information with regard to the loans 4-D
obtained from AIG, Swisspartners and BDN and the reassignment of portions of the BDN loans to Amaldos, S.A., MATRUST, S.L., Sequoia and Swisspartners upon BDN's reduction of capital.

The
remainder of the AIG loan was restructured. As restructured, the loan in the principal amount of $3.357 million from AIG matures in July 2002 and the interest rate
is currently set at 6.8% per annum until April 26, 2002, at which time the interest accrued on the loan through such date will be due and payable and the interest rate will be readjusted for
the remainder of the loan term. As amended, the AIG loan is secured by a pledge and assignment by Scaloway Co. Ltd., or Scaloway, a guarantee in the amount of USD $2,200,000 by Bank Julius
Baer & Co. AG and all of the issued and outstanding shares of Neuromag Oy, 4-D's wholly-owned subsidiary. If 4-D defaults under the AIG loan, then AIG has the right to
exercise its security interest and take ownership of Neuromag Oy. In connection with the private placement transaction, Scaloway agreed to convert certain assets pledged and assigned by Scaloway into
an indirect ownership of all 42,623,810 shares of 4-D's common stock issued to AIG. Scaloway has sole voting and dispositive power over these shares. Martin Velasco, a member of 4-D's
board of director, is the beneficial owner of Scaloway. See Note 4 and Part II, Item 2 of this report for additional information with regard to the AIG loan and the private placement
transaction..

Swisspartners,
one of 4-D's principal shareholders, invested $2 million in cash into the Company through its purchase of additional common stock. In connection with
the purchase by Swisspartners, 4-D's board of directors approved an increase in the current size of its board of directors from eight to nine to appoint Mr. Hans-Ueli
Rihs to serve as a member of the board of directors effective May 2001. Mr. Hans-Ueli Rihs is also a member of the board of directors of Swisspartners. 4-D
currently intends to use the cash proceeds for general corporate purposes, marketing, and continued product research and development, as it deems necessary.

Immediately
following the private placement transaction, the Company had 145,018,629 shares issued and outstanding. The distribution of the 59,549,081 shares of common stock issued in
the private placement transaction and the resulting beneficial ownership of the purchasers in the private placement transaction is discussed in more detail in Note 4.

Prior
to its acquisition by 4-D, Neuromag Oy borrowed a total of 3,140,000 in Finnish Markka, or FIM, which equaled approximately $449,000 USD at June 30, 2001,
from TEKES at the Finnish state base interest rate minus 1%, 2001, subject to a minimum rate of 3%. The future repayment date for principal and related accrued interest outstanding under this loan is
dependent upon Neuromag Oy generating sufficient distributable equity based upon the statutory final accounts prepared in accordance with Finnish generally accepted accounting principles, in the
future.

Based
on the Company's current expectation of anticipated cash receipts related to firm orders received and anticipated bookings of additional MSI systems, the Company expects to have
sufficient cash to continue operations through at least September 2001. Historically, the Company has raised additional capital through its majority shareholders and related parties to fund
continuing operations. There can be no assurance that these sources of capital will continue to be available, or that existing debt can be renegotiated on terms acceptable to the Company, if at all.

The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed above and as shown in the accompanying
consolidated financial statements, the Company has operating and liquidity concerns that raise doubt about the Company's ability to continue as a going concern. There can be no assurance that the
Company will be able to successfully improve its operating results and further restructure its

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indebtedness or that its liquidity and capital resources will be sufficient to maintain its normal operations. The financial statements do not include any adjustments relating to the recoverability
and
classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

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

At
June 30, 2001, the Company had a positive working capital of $330,000 as compared to a negative working capital of $14,186,000 at June 30, 2000. The Company's
increased working capital primarily resulted from the issuance of common stock in exchange for cancellation of indebtedness, the restructured AIG loan and the reclassification of long term customer
deposits.

Capital
equipment expenditures totaled $815,000 for the third quarter of fiscal 2001, compared to $15,000 for the third quarter of fiscal 2000. Capital expenditures include a transfer
from inventory to a customer lease of $790,000 in the third quarter of 2001. For the nine months ended June 30, 2001 expenditures were $864,000 as compared to the prior year 2000 for $169,000
which included a transfer from inventory to a customer lease of $790,000 in the third quarter of 2001.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

RISKS AND UNCERTAINTIES

We face the following risks associated with our business operations:

We are uncertain with respect to additional funding and may not be able to meet our capital needs. As a result, there is substantial doubt about the Company's ability to
continue as a going concern.

We
require additional capital to fund the Company's capital, working capital and debt service requirements on an ongoing basis. We will need to obtain additional financing to fund
operations and repay our existing debt. We may not be able to arrange additional financing or restructure our debt on terms acceptable to us, if at all.

If we continue to incur operating losses and negative cash flows from operations, we may be unable to continue our operations.

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



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



At
June 30, 2001 our accumulated deficit was $110,863,000, our shareholders' equity was $4,515,000 and the Company had a positive working capital of $330,000.

If we are unable to satisfy customer performance and service requirements, we may be unable to compete effectively.

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

If we are unable to identify additional clinical applications for our MSI systems, there will be no commercially viable markets for our products.

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

If we are unable to develop additional products, our ability to commercialize our products will be adversely impacted.

Our
success may be limited by our dependence on our current line of MSI systems. We are currently dependent on sales of our MSI systems to basic research institutions that represent a
market of limited size. Our current product line may not fully meet the needs of a commercial clinical market and we may need to develop additional products directly suited to an emerging set of needs
from this market. Our financial results may be materially adversely affected if our current line of MSI products does not fully meet the needs of commercial applications that emerge, or we are not
able to offer new products in a timely and cost effective manner that meet these emerging needs.

If we fail to obtain an adequate level of reimbursement for MSI procedures by third party payors, sales will suffer.

Our
commercial success is also highly dependent on reimbursement for procedures using the MSI system. Currently, Medicare, insurance companies and other healthcare providers approve
payment for MSI procedures on a case-by-case basis. As of June 30, 2001, these third party payors have only approved limited reimbursements in the United States.
Although third party payors have increasingly approved reimbursements, we cannot assure you that third party reimbursements will become widely available. In February, the American Medical Association
approved the issuance of billing codes, commonly referred to as Current Procedural Terminology ("CPT") codes, for the use of MEG in the planning for the surgical treatment of epilepsy and for
pre-surgical functional mapping of the brain prior to neurosurgery. This is the first step is establishing routine reimbursement for MEG in the United States. The United States government
does not currently reimburse for MSI procedures. If reimbursement does not become more widely available, our financial position and results of operations will be materially adversely affected.
Further, if the Federal government or any state legislature enacts

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legislation relating to our business or the health care industry, including legislation relating to third party reimbursement, our financial position and results of operations could be negatively
affected. In addition, there is currently no reimbursement for MSI procedures outside of the United States.

Our vendors may not continue providing favorable credit terms.

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

If discoveries or developments of new technologies occur, our products and technology may become obsolete.

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

If we fail to compete successfully, our revenues and operating results will be adversely affected.

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

If new government legislation is enacted or unfavorable medical industry trends arise, we may be unable to sell our products and our revenues will
suffer.

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

If foreign currency exchange rates fluctuate, our return on sales in U.S. dollars may suffer.

A
significant portion of our sales to date have been in foreign markets. Revenues from international sales represented 99% of our revenues of MSI systems for the fiscal year ended
September 30, 2000. In fiscal 2001, through June 30, 2001, 55% of our revenues are from international sales. We expect that revenues from international sales will continue to represent a
significant portion of our annual revenues. Because we sell in foreign markets, we are exposed to potential risks of increases and decreases in foreign currency exchange rates. Although at
June 30, 2001 we did not have any open forward exchange contracts, on occasion, we may enter into forward exchange contracts to partially hedge (or protect) against such foreign currency
exchange risks. Fluctuations may reduce the return in U.S. dollars that we actually receive on our sales and could impact operating results through translation of the Company's subsidiaries' financial
statements. These risks may become material as our sales increase or dramatic currency fluctuations occur from outside events.

The Company's success is dependent upon its ability to attract and retain qualified scientific and management personnel.

The
loss of services of any one of our executive management or key scientific personnel would delay our ability to execute our business plans and reduce our ability to successfully
develop and

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commercialize products, maintain good customer relationships and compete in the marketplace. We also face increasing difficulties in recruiting qualified personnel in the software and hardware design
areas because of intense competition for such personnel in today's job market. There can be no assurance that the Company will be able to hire, train or retain such qualified personnel.

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

Our stock price is highly volatile and subject to swings based on sales and other market conditions.

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

If our products produce unreliable diagnostic information, it may result in a liability, which would adversely impact our financial condition.

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

Integrating 4-D Neuroimaging and Neuromag Oy has been difficult.

Our
acquisition of Neuromag Oy brought together two previous international competitors. Ongoing factors and risks which may arise as a result of our merger may include:



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

Our board of directors, executive officers and controlling shareholders, which together control a large portion of our common stock, may control our operations and may make
decisions which you do not consider in your best interest.

Our
present directors, executive officers and principal shareholders and their affiliates beneficially own a significant portion of our outstanding common stock. As a result, if all
or some of these shareholders were to act together, they would be able to exercise significant influence over all matters requiring shareholder approval, including the election of directors and
approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying or preventing a change in our control that may be favored by other shareholders.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

On March 31, 2001, the Company had approximately $12.6 million outstanding under London Interbank Offered Rate based variable rate indebtedness.
Subsequent to March 31, 2001, the Company retired approximately $10.5 million of its outstanding debt and restructured approximately $3.357 million of its remaining debt owed to
AIG Private Bank Ltd. in connection with a private placement transaction which was consummated on or about April 26, 2001. Under the restructured loan terms, the maturity date has been
extended to July 31, 2002 and the interest rate on the AIG loan has currently been fixed at 6.8% per annum until April 26, 2002, at which time the interest accrued on the loan through
such date will be due and payable and the interest rate will be readjusted for the remainder of the loan term. Because a major portion of the Company's current indebtedness is at a fixed rate, the
Company does not expect changes in interest rates to have a material adverse effect on the Company during the 2001 fiscal year. See Note 4 and Part II, Item 2 of this report for additional
detail with regard to the restructuring of the AIG loan and the private placement transaction.

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

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PART II. OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

4-D issued 59,549,081 shares of its common stock representing approximately 41% of its outstanding voting securities in a private placement
transaction with specified investors in accordance with Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended, which was consummated on or about
April 26, 2001.  The common stock was issued at a per-share price of $0.21, in exchange for cancellations of indebtedness in the aggregate amount of $10,505,307 and
cash in the aggregate sum of $2,000,000. 4-D currently intends to use the cash proceeds for general corporate purposes, marketing and continued product research and development, as it
deems necessary. The 59,549,081 shares of common stock were distributed as set forth in the table below. Except as otherwise noted in the table below, each purchase by cancellation of indebtedness was
made in United States Dollars, or USD, according to a Full Cancellation of Indebtedness dated as of April 26, 2001 between 4-D and the respective purchaser. The percentage ownership
is calculated based on 145,018,629 shares issued and outstanding immediately following the private placement transaction.

|Purchasers                                              |  | Number of
Shares
Acquired in
Transaction |  | Source and Amount of Consideration                                                                                                                                                            |  | Total
Number of
Shares
Owned
following
Transaction |  | Percentage
Ownership of
Outstanding
Voting Securities
following
Transaction (%)
|------------------------------------------------------- |  | ---------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------- |  | -------------------------------------------------------------------------------
|AIG Private Bank Ltd. ("AIG")                           |  | 42,623,810                               |  | Partial Cancellation of Indebtedness in the amount of USD $8,951,000 pursuant to that certain letter agreement dated on or about April 25, 2001 between AIG and 4-D (the "Letter Agreement"). |  | 42,623,810                                         |  | 29.4                                                                           
|Swisspartners Investment Network Ltd. ("Swisspartners") |  | 14,751,153                               |  | USD $2,000,000 cash and Full Cancellations of Indebtedness in the amounts of USD $872,867 and USD $224,875.                                                                                   |  | 36,468,755                                         |  | 25.1                                                                           
|MATRUST, S.L.                                           |  | 1,070,833                                |  | Full Cancellation of Indebtedness in the amount of USD $224,875.                                                                                                                              |  | 1,070,833                                          |  | 0.7                                                                            
|International Sequoia Investments Ltd.                  |  | 1,070,833                                |  | Full Cancellation of Indebtedness in the amount of USD $224,875.                                                                                                                              |  | 1,070,833                                          |  | 0.7                                                                            
|Amaldos, S.A.                                           |  | 32,452                                   |  | Full Cancellation of Indebtedness in the amount of USD $6,815.                                                                                                                                |  | 32,452                                             |  | Less than 0.1                                                                  
|TOTAL:                                                  |  | 59,549,081                               |  |                                                                                                                                                                                               |  | 81,266,683                                         |  | 56.0                                                                           

The
Letter Agreement acknowledges AIG's receipt of 42,623,810 shares of 4-D's common stock as partial payment in the amount of USD $8,951,000 against a loan
4-D obtained on or about December 21, 1999, as subsequently amended August 10, 2000, February 15, 2001 and April 26, 2001, from AIG in the principal amount of
$11,951,000. In connection with the private placement transaction,

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the AIG loan was amended effective as of April 26, 2001 to, among other things, extend its maturity date to July 31, 2002 and re-establish the interest rate based on AIG's
refinancing costs in line with the current market conditions plus a fixed margin of 2.5% per annum. The interest rate is currently set at 6.8% per annum until April 26, 2002, at which time the
interest accrued on the loan through such date will be due and payable and the interest rate will be re-adjusted for the remainder of the loan term. As amended, the AIG loan is secured by a pledge and
assignment by Scaloway, a guarantee in the amount of US $2,220,000 by Bank Julius Baer & Co. AG in Zurich, Switzerland, and all of the issued and outstanding shares of Neuromag Oy, 4-D's
wholly-owned subsidiary located in Helsinki, Finland. If 4-D defaults under the AIG loan, then AIG has the right to exercise its security interest and take ownership of Neuromag Oy. In connection with
the private placement transaction, Scaloway agreed to convert certain assets pledged and assigned by Scaloway into an indirect ownership of all 42,623,810 shares of 4-D's common stock issued to AIG.
Scaloway has sole voting and dispositive power over these shares. Martin Velasco, a member of 4-D's board of directors, is the beneficial owner of Scaloway.

The
Full Cancellation of Indebtedness entered into between 4-D and Amaldos, S.A. in the amount of $6,815 represents the portion of the debt assigned to it by BDN upon its
reduction of capital. The Full Cancellations of Indebtedness entered into between 4-D and each of MATRUST, S.L., Sequoia and Swisspartners each in the amount of USD $224,875 represent the
portion of the debt assigned to each such purchaser by BDN upon its reduction of capital. In June 2000, 4-D obtained unsecured loans in principal amounts totaling $834,595 from BDN, a Spanish company
owned by three members of 4-D's board of directors, Martin Egli, Enrique Maso and Martin Velasco. 4-D repaid approximately $200,000 of the BDN loans. BDN subsequently executed a reduction of capital
and redistributed its rights under the BDN loans to Amaldos, S.A., MATRUST, S.L., Sequoia and Swisspartners. Dr. Maso is a majority shareholder in MATRUST, S.L., Mr. Velasco is a major investor in
Sequoia, and Mr. Egli is a managing partner of Swisspartners. Of the 36,468,755 shares reported as beneficially owned by Swisspartners in the table above, 18,717,602 shares are owned by Dassesta
International S.A., or Dassesta. Swisspartners owns 100% of the capital stock of Dassesta. Dr. Maso, a majority owner of MATRUST, S.L., also owns 25,000,000 shares of 4-D's common stock.

In
connection with the purchase by Swisspartners, 4-D's board of directors approved an increase in the current size of its board of directors from eight to nine to appoint Mr.
Hans-Ueli Rihs to serve as a member of the board of directors effective May 2001. Mr. Hans-Ueli Rihs is also a member of the board of directors of Swisspartners.

The
description of the private placement transaction set forth above is qualified in its entirety by reference to the Company's current report on Form 8-K filed
with the SEC on or about May 11, 2001, as
amended by the current report on Form 8-K/A filed on or about June 20, 2001 and the form of Common Stock Purchase Agreement, the Letter Agreement, the April 26, 2001 amendment to the AIG
loan and the Full Cancellations of Indebtedness, copies of which are filed as exhibits to such reports.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE SECURITY HOLDERS.

The Company held its annual meeting of shareholders on March 23, 2001 and proxies for such meeting were solicited pursuant to Regulation 14.
There was no solicitation in opposition to the Company's nominees for directors as listed in the proxy statement and all such nominees were elected. In addition, the following matters were adopted by
the shareholders at the annual meeting.

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Nominees

Votes For

Votes Withheld

Votes Abstained

UnvotedD. Scott Buchanan

58,154,186

119,705



Martin P. Egli

58,155,186

118,705



Enrique Maso

58,155,186

118,705



Galleon Graetz

58,155,186

118,705



Antti Ahonen

58,155,186

118,705



Felipe Fernandez Atela

58,155,186

118,705



Martin Velasco

58,155,186

118,705








Votes For

Votes Against

Votes Abstain

Unvoted58,206,791

59,650

7,450




As
reported by the Company on a current report on Form 8-K filed with the Securities and Exchange Commission on March 29, 2001, as subsequently amended, the
Company's current auditors are Swensen Advisors, LLP.

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ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

|a) Exhibit No. |     | Description                                                                                                                                                                                                                                                                                  
|-------------- | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            | (1) | Fifth Amended and Restated Articles of Incorporation                                                                                                                                                                                                                                         
|3.2            | (2) | Restated By-Laws                                                                                                                                                                                                                                                                             
|10.1           |     | Letter Agreement dated on or about April 25, 2001 between 4-D and AIG Private Bank, Ltd., which is incorporated herein by reference to Exhibit 99.2 to our current report on Form 8-K filed with the SEC on or about May 11, 2001, as
subsequently amended.                                  
|10.2           |     | Amendment to Loan Agreement dated on or about April 26, 2001 between 4-D and AIG Private Bank, Ltd., which is incorporated herein by reference to Exhibit 99.3 to our current report on Form 8-K filed with the SEC on or about May 11,
 2001, as subsequently amended.                      
|10.3           |     | Full Cancellation of Indebtedness effective as of April 26, 2001 between 4-D and Swisspartners Investment Network Ltd., which is incorporated herein by reference to Exhibit 99.4 to our current report on Form 8-K filed with the SEC
on or about May 11, 2001, as subsequently amended.    
|10.4           |     | Full Cancellation of Indebtedness effective as of April 26, 2001 between 4-D and Swisspartners Investment Network Ltd., which is incorporated herein by reference to Exhibit 99.5 to our current report on Form 8-K filed with the SEC
on or about May 11, 2001, as subsequently amended.    
|10.5           |     | Full Cancellation of Indebtedness effective as of April 26, 2001 between 4-D and MATRUST, S.L., which is incorporated herein by reference to Exhibit 99.6 to our current report on Form 8-K filed with the SEC on or about May 11, 2001, as
subsequently amended.                            
|10.6           |     | Full Cancellation of Indebtedness effective as of April 26, 2001 between 4-D and International Sequoia Investments Limited, which is incorporated herein by reference to Exhibit 99.7 to our current report on Form 8-K filed with the SEC
on or about May 11, 2001, as subsequently amended.
|10.7           |     | Full Cancellation of Indebtedness effective as of April 26, 2001 between 4-D and Amaldos, S.A., which is incorporated herein by reference to Exhibit 99.8 to our current report on Form 8-K/A filed with the SEC on or about June 20,
2001.                                                  
|10.8           |     | Form of Common Stock Purchase Agreement, which is incorporated herein by reference to Exhibit 99.1 to our current report on Form 8-K filed with the SEC on or about May 11, 2001, as subsequently amended.                                                                                   

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The
Company filed a current report on Form 8-K/A with the SEC on April 5, 2001 in connection with the change in its certifying accountant. The Company also filed a current
report on Form 8-K with the SEC on May 11, 2001, as subsequently amended by the Company's current report on Form 8-K/A filed with the SEC on
June 20, 2001 with regard to the Company's sale and issuance of its common stock in a private placement transaction.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|4-D NEUROIMAGING    |  |                                                                                                      
|------------------- |  | -----------------------------------------------------------------------------------------------------
|August 20, 2001Date |  | /s/D. SCOTT BUCHANAND. Scott Buchanan President, Chief Executive Officer,
Principal Financial Officer
|August 20, 2001Date |  | /s/EUGENE C. HIRSCHKOFFEugene C. Hirschkoff Vice President
Corporate Secretary                       

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