** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-QSB**

 

| **ý**                                                                                                                                                                                                                                                                                                                |   | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**        |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                      |
| **For the quarterly period ended**      **June 30, 2003**                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                      |
| **o**                                                                                                                                                                                                                                                                                                                     |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                      |
| **For the transition period  from                       to                       ** |
|                                                                                                                                                                                                                                                                                                                      |
| **Commission File  Number:     0-19632**                                                                                                                                                                                                                                                         |

 

**4-D NEUROIMAGING**

(Exact name of smallbusiness issuer as specified in its charter)

 

| **California**                                                                      |   | **95-2647755**                        |
|-------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization)                     |   | (I.R.S. Employer  Identification No.) |
|                                                                                |   |                                  |
| **9727 Pacific Heights Boulevard, San  Diego, California**                          |   | **92121-3719**                        |
| (Address of principal  executive offices)                                           |   | (zip code)                            |
|                                                                                |
| **(858) 453-6300**                                                                  |
| (Registrant’s telephone number, including area code)                           |
|                                                                                |
|                                                                                |
| (Former name, former address and formal fiscal year,  if changed since last report) |

 

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

Number of shares of issuer’s Common Stock outstanding, no par value, asof July 15, 2003 was 220,859,748 shares.

 

Transitional SmallBusiness Disclosure Format.       o  Yes       ý  No

 

 

----

 

# **PART I**                                    FINANCIALINFORMATION

## ** **

## **ITEM 1.**     FINANCIAL STATEMENTS

** **

**4-D NEUROIMAGINGCONSOLIDATED BALANCE SHEETS**(in thousands, except share data)(unaudited)

 
|                                                                                                                                                                                   |   | **June 30,  2003** |   | **September  30,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|--------------------------|--------|
| **ASSETS**                                                                                                                                                                             |   |               |   |                     |   |
| Cash and cash  equivalents                                                                                                                                                             |   | $                  | 1,637  |                     | $      | 167 |   |
| Restricted cash                                                                                                                                                                        |   | —             |   | 17                       |   |
| Accounts  receivable, less allowance for doubtful accounts of $276 and $216 at June 30,  2003 and September 30, 2002, respectively                                                     |   | 253                |   | 366                      |   |
| Inventories                                                                                                                                                                            |   | 3,969              |   | 4,138                    |   |
| Prepaid expenses  and other current assets                                                                                                                                             |   | 298                |   | 200                      |   |
| Total current  assets                                                                                                                                                                  |   | 6,157              |   | 4,888                    |   |
|                                                                                                                                                                                   |   |               |   |                     |   |
| Property and  equipment, net                                                                                                                                                           |   | 174                |   | 607                      |   |
| Goodwill, net                                                                                                                                                                          |   | —             |   | 2,204                    |   |
| Deferred income  taxes                                                                                                                                                                 |   | —             |   | 588                      |   |
| Other assets                                                                                                                                                                           |   | 57                 |   | 227                      |   |
| Total assets                                                                                                                                                                           |   | $                  | 6,388  |                     | $      | 8,514 |   |
|                                                                                                                                                                                   |   |               |   |                     |   |
| **LIABILITIES AND SHAREHOLDERS’  DEFICIT**                                                                                                                                        |   |               |   |                     |   |
| Notes payable                                                                                                                                                                          |   | $                  | 1,000  |                     | $      | 4,040 |   |
| Accounts payable                                                                                                                                                                       |   | 1,618              |   | 1,903                    |   |
| Accrued  liabilities                                                                                                                                                                   |   | 400                |   | 1,111                    |   |
| Accrued salaries  and employee benefits                                                                                                                                                |   | 433                |   | 498                      |   |
| Customer  deposits                                                                                                                                                                     |   | 2,517              |   | 536                      |   |
| Deferred  revenues                                                                                                                                                                     |   | 156                |   | 342                      |   |
| Current portion  of royalty obligation                                                                                                                                                 |   | 312                |   | 312                      |   |
| Current portion  of capital lease obligations                                                                                                                                          |   | 10                 |   | 14                       |   |
| Total current  liabilities                                                                                                                                                             |   | 6,446              |   | 8,756                    |   |
|                                                                                                                                                                                   |   |               |   |                     |   |
| Notes payable                                                                                                                                                                          |   | —             |   | 521                      |   |
| Royalty  obligation, net of current portion                                                                                                                                            |   | 1,102              |   | 1,025                    |   |
| Customer  deposits                                                                                                                                                                     |   | 1,108              |   | 1,108                    |   |
| Deferred  revenues                                                                                                                                                                     |   | 275                |   | 377                      |   |
| Capital lease  obligations, net of current portion                                                                                                                                     |   | —             |   | 8                        |   |
| Total liabilities                                                                                                                                                                      |   | 8,931              |   | 11,795                   |   |
|                                                                                                                                                                                   |   |               |   |                     |   |
| **COMMITMENTS AND CONTINGENCIES**                                                                                                                                                      |   |               |   |                     |   |
|                                                                                                                                                                                   |   |               |   |                     |   |
| **SHAREHOLDERS’ DEFICIT**                                                                                                                                                         |   |               |   |                     |   |
| Common stock —  no par value; 500,000,000 shares authorized;  220,859,748 and 160,338,589 shares issued and outstanding as of June 30, 2003  and September 30, 2002, respectively |   | 117,728            |   | 114,693                  |   |
| Additional  paid-in capital                                                                                                                                                            |   | 3,007              |   | 3,007                    |   |
| Accumulated  deficit                                                                                                                                                                   |   | (123,278           | )      | (120,951                 | )      |
| Accumulated  other comprehensive loss                                                                                                                                                  |   | —             |   | (30                      | )      |
| Total  shareholders’ deficit                                                                                                                                                      |   | (2,543             | )      | (3,281                   | )      |
| Total  liabilities & shareholders’ deficit                                                                                                                                    |   | $                  | 6,388  |                     | $      | 8,514 |   |

 

See notes to consolidatedfinancial statements

 

2

----

 

**4-D NEUROIMAGINGCONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
|                                                                    |   | **Three  Months Ended  June 30,** |   | **Nine  Months Ended  June 30,** |   |
|-------------------------------------------------------------------------|--------|-----------------------------------|--------|----------------------------------|--------|
|                                                                    |   | **2003**                          |   | **2002**                         |   | **2003** |   | **2002** |   |
| **REVENUES**                                                            |   |                              |   |                             |   |   |   |   |   |
| Product sales                                                           |   | $                                 | 9      |                             | $      | 1,984 |   | $ | 506 |   | $ | 4,467 |   |
| Product services                                                        |   | 184                               |   | 176                              |   | 593 |   | 649 |   |
|                                                                    |   | 193                               |   | 2,160                            |   | 1,099 |   | 5,116 |   |
|                                                                    |   |                              |   |                             |   |   |   |   |   |
| **COST OF REVENUES**                                                    |   |                              |   |                             |   |   |   |   |   |
| Product                                                                 |   | 76                                |   | 1,292                            |   | 823 |   | 3,591 |   |
| Product services                                                        |   | 173                               |   | 246                              |   | 462 |   | 642 |   |
|                                                                    |   | 249                               |   | 1,538                            |   | 1,285 |   | 4,233 |   |
|                                                                    |   |                              |   |                             |   |   |   |   |   |
| **GROSS MARGIN (LOSS)**                                                 |   | (56                               | )      | 622                              |   | (186 | ) | 883 |   |
|                                                                    |   |                              |   |                             |   |   |   |   |   |
| **OPERATING EXPENSES**                                                  |   |                              |   |                             |   |   |   |   |   |
| Research and  development                                               |   | 246                               |   | 231                              |   | 692 |   | 764 |   |
| Marketing and  sales                                                    |   | 384                               |   | 408                              |   | 1,120 |   | 1,290 |   |
| General and  administrative                                             |   | 324                               |   | 455                              |   | 1,008 |   | 1,505 |   |
|                                                                    |   | 954                               |   | 1,094                            |   | 2,820 |   | 3,559 |   |
|                                                                    |   |                              |   |                             |   |   |   |   |   |
| **OPERATING LOSS**                                                      |   | (1,010                            | )      | (472                             | )      | (3,006 | ) | (2,676 | ) |
|                                                                    |   |                              |   |                             |   |   |   |   |   |
| Interest expense                                                        |   | (13                               | )      | (54                              | )      | (69 | ) | (187 | ) |
| Interest income                                                         |   | 1                                 |   | 2                                |   | 3 |   | 4 |   |
| Other income,  net                                                      |   | 79                                |   | (189                             | )      | 322 |   | 81 |   |
|                                                                    |   |                              |   |                             |   |   |   |   |   |
| **LOSS BEFORE PROVISION FOR INCOME  TAXES AND DISCONTINUED OPERATIONS** |   | (943                              | )      | (713                             | )      | (2,750 | ) | (2,778 | ) |
| Provision for  income taxes                                             |   | —                            |   | —                           |   | 1 |   | 1 |   |
|                                                                    |   |                              |   |                             |   |   |   |   |   |
| **NET LOSS FROM OPERATIONS**                                            |   | (943                              | )      | (713                             | )      | (2,751 | ) | (2,779 | ) |
|                                                                    |   |                              |   |                             |   |   |   |   |   |
| **DISCONTINUED  OPERATIONS**                                            |   |                              |   |                             |   |   |   |   |   |
| Income (loss)  from discontinued operations                             |   | (936                              | )      | 967                              |   | 455 |   | 993 |   |
|                                                                    |   |                              |   |                             |   |   |   |   |   |
| **NET INCOME (LOSS)**                                                   |   | $                                 | (1,879 | )                                | $      | 254 |   | $ | (2,296 | ) | $ | (1,786 | ) |
|                                                                    |   |                              |   |                             |   |   |   |   |   |
| **BASIC AND DILUTED NET INCOME (LOSS)  PER SHARE**                      |   |                              |   |                             |   |   |   |   |   |
| Loss from  operations                                                   |   | $                                 | (0.004 | )                                | $      | (0.004 | ) | $ | (0.014 | ) | $ | (0.018 | ) |
| Earnings (loss)  from discontinued operations                           |   | (0.004                            | )      | 0.006                            |   | 0.002 |   | 0.006 |   |
| Earnings (loss)  per share                                              |   | $                                 | (0.008 | )                                | $      | 0.002 |   | $ | (0.012 | ) | $ | (0.012 | ) |
| Weighted average  number of common shares outstanding                   |   | 220,856                           |   | 158,634                          |   | 201,513 |   | 150,285 |   |
|                                                                    |   |                              |   |                             |   |   |   |   |   |
| COMPREHENSIVE  INCOME (LOSS):                                           |   |                              |   |                             |   |   |   |   |   |
| Net income (loss)                                                       |   | $                                 | (1,879 | )                                | $      | 254 |   | $ | (2,296 | ) | $ | (1,786 | ) |
| Cumulative  translation adjustment                                      |   | —                            |   | 84                               |   | — |   | 28 |   |
| Comprehensive  income (loss)                                            |   | $                                 | (1,879 | )                                | $      | 338 |   | $ | (2,296 | ) | $ | (1,758 | ) |

** **

See notes to consolidated financial statements

 

3

----

 

**4-D NEUROIMAGINGCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)(unaudited)**

 
|                                                                                        |   | **Nine  Months Ended  June 30,** |   |
|---------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                        |   | **2003**                         |   | **2002** |   |
| **OPERATING ACTIVITIES**                                                                    |   |                             |   |   |   |
| Net loss                                                                                    |   | $                                | (2,296 | ) | $ | (1,786 | ) |
| Adjustments to  reconcile net loss to net  cash provided by (used in) operating activities: |   |                             |   |   |   |
| Depreciation                                                                                |   | 76                               |   | 254 |   |
| Amortization of  minimum royalty obligation                                                 |   | 77                               |   | (122 | ) |
| Gain on sale of  Neuromag Oy                                                                |   | (455                             | )      | — |   |
| Deferred income  taxes                                                                      |   | —                           |   | (81 | ) |
| Changes in  operating assets and liabilities excluding effects of acquisition:              |   |                             |   |   |   |
| Restricted cash                                                                             |   | 17                               |   | 478 |   |
| Accounts  receivable                                                                        |   | 113                              |   | 1,947 |   |
| Inventories                                                                                 |   | 169                              |   | 3,230 |   |
| Prepaid expenses  and other                                                                 |   | (98                              | )      | 746 |   |
| Other assets                                                                                |   | (5                               | )      | 14 |   |
| Accounts payable                                                                            |   | (974                             | )      | (644 | ) |
| Accrued  liabilities                                                                        |   | (546                             | )      | (72 | ) |
| Accrued salaries  and employee benefits                                                     |   | (65                              | )      | (77 | ) |
| Customer  deposits                                                                          |   | 1,981                            |   | (6,123 | ) |
| Deferred revenue                                                                            |   | (288                             | )      | 478 |   |
| Interest payable                                                                            |   | (165                             | )      | (41 | ) |
| Net cash used in  operating activities                                                      |   | (2,459                           | )      | (1,799 | ) |
|                                                                                        |   |                             |   |   |   |
| **INVESTING ACTIVITIES**                                                                    |   |                             |   |   |   |
| Purchases of  property and equipment                                                        |   | (20                              | )      | (171 | ) |
| Proceeds from  sale of Neuromag Oy                                                          |   | 4,000                            |   | — |   |
| Net cash  provided by (used in) investing activities                                        |   | 3,980                            |   | (171 | ) |
|                                                                                        |   |                             |   |   |   |
| **FINANCING ACTIVITIES**                                                                    |   |                             |   |   |   |
| Proceeds from  notes payable                                                                |   | 1,000                            |   | 525 |   |
| Proceeds from  employee stock purchase plan                                                 |   | 1                                |   | — |   |
| Proceeds from  stock options exercised                                                      |   | —                           |   | 3 |   |
| Proceeds from  stock exchange for cancellation of debt                                      |   | —                           |   | 30 |   |
| Proceeds from  sale of common stock                                                         |   | 3,000                            |   | 1,800 |   |
| Repayment of  notes payable                                                                 |   | (4,040                           | )      | — |   |
| Payments on  capital lease obligations                                                      |   | (12                              | )      | (22 | ) |
| Net cash  provided by (used in) financing activities                                        |   | (51                              | )      | 2,336 |   |
|                                                                                        |   |                             |   |   |   |
| Effect of  exchange rate changes                                                            |   | —                           |   | 28 |   |
|                                                                                        |   |                             |   |   |   |
| Net increase in  cash and cash equivalents                                                  |   | 1,470                            |   | 394 |   |
|                                                                                        |   |                             |   |   |   |
| Cash and cash  equivalents at beginning of period                                           |   | 167                              |   | 178 |   |
|                                                                                        |   |                             |   |   |   |
| Cash and cash  equivalents at end of period                                                 |   | $                                | 1,637  |   | $ | 572 |   |

 

See notes to consolidatedfinancial statements

 

4

----

 

**4-D NEUROIMAGINGCONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)**

**(in thousands)(unaudited)**

 

**SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES**

 
|                                      |   | **Nine  Months Ended  June 30,** |   |
|-------------------------------------------|--------|----------------------------------|--------|
|                                      |   | **2003**                         |   | **2002** |   |
|                                      |   |                             |   |   |   |
| Stock exchange  for professional services |   | $                                | 34     |   | $ | — |   |
|                                      |   |                             |   |   |   |
| SUPPLEMENTAL  DISCLOSURES:                |   |                             |   |   |   |
| Cash paid for  interest                   |   | $                                | 114    |   | $ | — |   |

** **

See notes to consolidated financial statements

 

5

----

 

**4-D NEUROIMAGINGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)**

 

### NOTE 1.   BUSINESS ANDBASIS OF PRESENTATION

 

4-D Neuroimaging, or 4-D, (formerly BiomagneticTechnologies, Inc.), a California corporation, originally founded in 1970 toproduce equipment for physics labs, currently develops, produces, markets andsells medical instrumentation that allows physicians to monitor how the body isfunctioning, and provides an important tool to neuroscientists, helping them tounravel how the brain functions.  Thebasic technology is referred to as Magnetoencephalography, or MEG (sometimesMagnetic Source Imaging or MSI).  MEGsystems measure and locate magnetic fields generated by the human body, andassist in the noninvasive diagnosis of a potentially broad range of medicaldisorders.  These measurements provideuseful information about the normal and abnormal functioning of the brain,heart, spine and other organs. Currently, we are focusing our efforts on MEG applications for thebrain.

 

The unaudited consolidated condensed financialstatements of 4-D Neuroimaging and its subsidiary, Biomagnetic Technologies,GmbH, an inactive wholly owned German entity (together, the “Company”, “we”,“our”, or “4-D”), have been prepared in accordance with the rules andregulations of the Securities and Exchange Commission.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States have beencondensed or omitted pursuant to such rules and regulations.  The Company suggests that these financialstatements are read in conjunction with the financial statements and notesthereto included in the Company’s annual report on Form 10-K for the fiscalyear ended September 30, 2002.

 

In the opinion of the Company, the accompanyingunaudited consolidated condensed financial statements contain all adjustments,consisting only of normal recurring entries, necessary to present fairly itsfinancial position at June 30, 2003 and the results of its operations and itscash flows for the periods presented.

 

The preparation of financial statements, in conformitywith accounting principles generally accepted in the United States, requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from these estimates.  Results for the interim periods presented inthis report are not necessarily indicative of results which may be reported forany other interim period or for the entire fiscal year.

 

In June 2002, the FASB issued SFAS No. 145,“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections.” This statement requires the classification of gains or losses from theextinguishments of debt to meet the criteria of Accounting Principles Board, orAPB, Opinion No. 30 “Reporting the Results of Operations – Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions” before they can be classifiedas extraordinary in the income statement. Those companies that use debt extinguishments as a part of their riskmanagement strategy are required to classify the gain or loss fromextinguishments of debt as a part of operating income in the incomestatement.  The Company adopted SFAS No.145 during the quarter ended December 31, 2002 with no material impact.

 

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

 

6

----

 

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

 

In December 2002, the FASB issued SFAS No. 148,“Accounting for Stock-Based Compensation – Transition and Disclosure.”  This statement amends FASB statement No. 123to provide accounting guidance related to stock based employee compensation.  SFAS No. 123, as amended, encourages,but does not require, companies to record compensation cost for stock-basedemployee compensation plans at fair value. The Company has chosen to continue to account for stock-basedcompensation using the intrinsic value method prescribed in APB Opinion No. 25,“Accounting for Stock Issued to Employees”, and related interpretations for allperiods presented.  Accordingly,compensation cost for stock options is measured as the excess, if any, of thefair value of the Company’s stock at the date of the grant over the amount anemployee must pay to acquire the stock.

 

The following table summarizes the impact on theCompany’s net loss had compensation cost been determined based upon the fairvalue at the grant date for awards under the stock option plans consistent withthe methodology prescribed under SFAS No. 123 (in thousands, except per sharedata):
|                                          |                                                                                                                                  | **Three  Months Ended  June 30,** |   | **Nine  Months Ended  June 30,** |   |
|-----------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------|--------|----------------------------------|--------|
|                                          |                                                                                                                                  | **2003**                          |   | **2002**                         |   | **2003** |   | **2002** |   |
|                                          |                                                                                                                                  |                              |   |                             |   |   |   |   |   |
| Net income  (loss), as reported               |                                                                                                                                  | $                                 | (1,879 | )                                | $      | 254 |   | $ | (2,296 | ) | $ | (1,786 | ) |
| Deduct:                                       | Total stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects |                              | 3      |                             | 4      |   | 8 |   | 16 |   |
|                                          |                                                                                                                                  |                              |   |                             |   |   |   |   |   |
| Pro forma net  income (loss)                  |                                                                                                                                  | $                                 | (1,882 | )                                | $      | 250 |   | $ | (2,304 | ) | $ | (1,802 | ) |
| Basic and diluted  earnings (loss) per share: |                                                                                                                                  |                              |   |                             |   |   |   |   |   |
| As reported                                   |                                                                                                                                  | $                                 | (0.008 | )                                | $      | 0.002 |   | $ | (0.012 | ) | $ | (0.012 | ) |
| Pro forma                                     |                                                                                                                                  | $                                 | (0.008 | )                                | $      | 0.002 |   | $ | (0.012 | ) | $ | (0.012 | ) |
|                                               |                                                                                                                                       |                                   |        |                                  |        |  |  |  |  |  |  |  |  |  |

 

The Company accounts for stock options granted tonon-employees using the fair value method. Compensation expense for options granted to non-employees has beendetermined in accordance with Emerging Issues Task Force, or EITF, No. 96-18,“Accounting for Equity Instruments that are Issued to Other than Employees forAcquiring, or in Conjunction with Selling, Goods or Services”, as the fairvalue of the consideration received or the fair value of the equity instrumentsissued, whichever is more reliably measurable. Compensation expense for options granted to non-employees isperiodically remeasured as the underlying options vest and is recorded asexpense and deferred compensation in the financial statements.

 

Holders of common stock are entitled to one vote pershare.  Basic earnings per share arecomputed by dividing net income or loss by the weighted average of commonshares outstanding during the period. Diluted earnings per share reflects the potential dilution that couldoccur if securities or other contracts to issue common stock (warrants topurchase common stock and common stock options using the treasury stock method)were exercised or converted into common stock. Potential common shares in the diluted earnings per share computationare excluded when their effect would be antidilutive.

 

In January 2003, the FASB issued FASB InterpretationNo. 46. “Consolidation of Variable Interest Entities.”  This interpretation clarifies theapplication of Accounting Research Bulletin No. 51, “Consolidated FinancialStatement”, to certain entities in which equity investors do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties.  It further clarifies whether an entity shall be subject toconsolidation according to the provisions of this interpretation, if by design,certain conditions exist.  Managementhas assessed the impact of this interpretation and believes it has no materialimpact.

 

7

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*RecentAuthoritative Pronouncements*

 

In May 2003, the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristic of both Liabilities andEquities.”  This statement establishesstandards for how an issuer classifies and measures in its statement offinancial position certain financial instruments with characteristics of bothliabilities and equity.  It requiresthat an issuer classify a financial instrument that is within its scope as aliability (or an asset in some circumstances) because that financial instrumentembodies an obligation of the issuer. Management has assessed the impact of this statement and believes it hasno material impact.

 

### NOTE 2.   BASIC ANDDILUTED NET LOSS PER SHARE

 

Shares used in computing basic and diluted net lossper share include the weighted average number of common shares outstanding asof June 30, 2003.  Potentially dilutivesecurities, including stock options, are antidilutive and are excluded from thecomputation of diluted net loss per share.

###  

### NOTE 3.   SALE OF FINNISHSUBSIDIARY NEUROMAG OY

 

In December 1999, theCompany acquired Neuromag Oy, located in Helsinki Finland for $10 million incash and an interest-free minimum royalty obligation of $312,500 per year foreight years (totaling $2.5 million) to Marconi Medical Systems, Inc.,Cleveland, Ohio. The funds for the purchase were provided by a loan from AIGPrivate Bank Ltd. (“AIG”) totaling $11 million secured by 100% of theoutstanding and issued capital stock of Neuromag Oy and guaranteed by an entityunaffiliated with the Company.

 

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

 

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

 

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

 

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

 

In December 2002, the Company recorded a gain on thesale of our Finnish subsidiary of $1,391,000 by eliminating goodwill of$2,204,000 and intercompany payables and other related accounts for$405,000.  The Company retainsresponsibility for the royalty obligations to Marconi after the sale ofNeuromag Oy.  In addition, the reductionin deferred income taxes of $588,000 consists of deferred foreign taxes ofNeuromag Oy.

 

The Company had adopted SFAS No. 144 in fiscal2002, which requires that adjustments to amounts previously reported indiscontinued operations that are directly related to the disposal of componentof an entity in a prior period be classified separately in the current periodin discontinued operations. Pursuant to the sale of Neuromag Oy in October2002, the resolution of liability obligations directly related to the saleresulted in the Company recognizing a loss from discontinued operations ofapproximately $936,000 for the quarter ended June 30, 2003, resulting in a netrecorded gain of $455,000 on the sale of the Company’s Finnish subsidiary forthe nine month period ended June 30, 2003.

 

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

 

In October 2002, the Company sold 100% of theCompany’s shares in 4-D Neuroimaging Oy, (“Asset”), to VHBV.  As part of an effort by the Company’s boardof directors to raise additional financial resources, one of the board membersconveyed to the Company for consideration an offer from VHBV to purchase theAsset for $4,000,000.

 

The pro forma financialspresented below are the unaudited consolidated statements of operations basedon the assumption that the Company had not acquired the subsidiary in December1999.

 

8

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**CONDENSEDPRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS**

**THREE MONTHS ENDED June 30, 2002**

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

**(unaudited)**

 
|                     |   | **Consolidated** |       | **Neuromag** |       | **Pro forma  Adjustments** |       | **Pro forma  w/o  Neuromag** |       |
|--------------------------|--------|------------------|------------|--------------|------------|----------------------------|------------|------------------------------|------------|
|                     |   |             | ** ** |         | ** ** |                       | ** ** |                         | ** ** |
| Revenue                  |   | $                | 5,256      |         | $          | 3,096                      |       |                         |       | $ | 2,160 |   |
| Cost of Revenues         |   | 3,477            |       | 1,939        |       |                       |       | 1,538                        |       |
|                     |   |             |       |         |       |                       |       |                         |       |
| Gross Margin             |   | 1,779            |       | 1,157        |       |                       |       | 622                          |       |
|                     |   |             |       |         |       |                       |       |                         |       |
| Operating  Expenses      |   | 1,255            |       | 161          | a)         | $                          | (70        | )                            | 1,024      |   |
|                     |   |             |       |         |       |                       |       |                         |       |
| Operating Income  (Loss) |   | 524              |       | 996          |       |                       |       | (402                         | )          |
|                     |   |             |       |         |       |                       |       |                         |       |
| Other                    |   | (270             | )          | (29          | )b)        | $                          | 49         |                         | (192       | ) |
|                     |   |             |       |         |       |                       |       |                         |       |
| Net Income  (Loss)       |   | $                | 254        |         | $          | 967                        |       |                         |       | $ | (594 | ) |

 

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

b)  Interest expense for AIG loan andintercompany loans

 

**CONDENSEDPRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS**

**NINE MONTHS ENDED June 30, 2002**

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

**(unaudited)**

** **
|                     |   | **Consolidated** |   | **Neuromag** |   | **Pro forma  Adjustments** |   | **Pro forma  w/o  Neuromag** |   |
|--------------------------|--------|------------------|--------|--------------|--------|----------------------------|--------|------------------------------|--------|
|                     |   |             |   |         |   |                       |   |                         |   |
| Revenue                  |   | $                | 10,324 |         | $      | 5,208                      |   |                         |   | $ | 5,116 |   |
| Cost of Revenues         |   | 7,672            |   | 3,439        |   |                       |   | 4,233                        |   |
|                     |   |             |   |         |   |                       |   |                         |   |
| Gross Margin             |   | 2,652            |   | 1,769        |   |                       |   | 883                          |   |
|                     |   |             |   |         |   |                       |   |                         |   |
| Operating  Expenses      |   | 4,280            |   | 720          | a)     | $                          | (242   | )                            | 3,318  |   |
|                     |   |             |   |         |   |                       |   |                         |   |
| Operating Income  (Loss) |   | (1,628           | )      | 1,049        |   |                       |   | (2,435                       | )      |
|                     |   |             |   |         |   |                       |   |                         |   |
| Other                    |   | (158             | )      | (56          | )b)    | $                          | 174    |                         | 72     |   |
|                     |   |             |   |         |   |                       |   |                         |   |
| Net Income  (Loss)       |   | $                | (1,786 | )            | $      | 993                        |   |                         |   | $ | (2,363 | ) |

 

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

b)  Interest expense for AIG loan andintercompany loans

###  

9

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### NOTE 5.   DEBT OBLIGATIONS

 

In January 2002, 4-D obtained two $125,000 unsecured loans, one fromEnrique Maso and one from Swisspartners Investment Network Ltd., orSwisspartners, with an interest rate of 8% per annum.  In August 2002, 4-D obtained two $100,000 unsecured loans, onefrom MATRUST, S.L. and one from International Sequoia Investment Ltd., with aninterest rate of 8% per annum.  Theprincipal amounts of the loans were repaid in November 2002, accrued interestfor Enrique Maso was recorded as a gain on extinguishment of debt and isreflected in other income on the statement of operations.  The accrued interest for Swisspartners wasdue and payable in March 2003 and paid in April 2003.

 

In November 2002, theCompany entered into another line of credit with AIG Bank for $1,000,000.  The interest on the line of credit is 4.17%and initially the line of credit was due and payable November 5, 2003.  In January 2003 the maturity of the line ofcredit was extended until May 31, 2004. Proceeds were used to pay off the two $125,000 unsecured loans fromEnrique Maso and Swisspartners, the two $100,000 unsecured loans from MATRUST,S.L. and International Sequoia Investment Ltd. and to pay certain accounts payablein the amount of $120,000 to Dr. Galleon Graetz, a member of the board ofdirectors and a consultant for the Company. All of these amounts, totaling $570,000, were then pledged by therespective parties as collateral against the loan.  The remaining amount was used for general corporate purposes.

 

As additional collateralagainst the loan, Mr. Martin Egli, a member of the Company’s board ofdirectors, provided a personal guarantee of $500,000 and the Company pledgedits patent portfolio and a Magnes 2500 WH system, currently installed at theUniversity of Alabama, to which the Company retains title.

 

NOTE 6.   ADDITIONAL FINANCING

 

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

 

### NOTE 7.   INVENTORIES

 

The composition of inventories is as follows (inthousands):

 
|            |   | **June 30, 2003** |   | **September 30, 2002** |   |
|-----------------|--------|-------------------|--------|------------------------|--------|
|            |   | **(unaudited)**   |   |                   |   |
|            |   |              |   |                   |   |
| Raw materials   |   | $                 | 229    |                   | $      | 532 |   |
| Work-in process |   | 2,622             |   | 2,328                  |   |
| Finished goods  |   | 1,118             |   | 1,278                  |   |
|            |   | $                 | 3,969  |                   | $      | 4,138 |   |

###  

**NOTE8.**   SEGMENT AND GEOGRAPHICINFORMATION

 

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

 

In October 2002, the Company sold its Finnish subsidiary, Neuromag Oy,and these operations have been accounted for as discontinued operations for allof the periods presented and are not included in the segment data.

 

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|               |   | **Nine Months Ended  June 30,** |      |
|--------------------|--------|---------------------------------|-----------|
|               |   | **(unaudited) **           |      |
|               |   | **2003**                        |      | **2002** |   |
| Revenues:          |   |                            |      |   |   |
| North America      |   | $                               | 672,737   |   | $ | 4,065,586 |   |
| Europe             |   | 324,313                         |      | 925,141 |   |
| Asia               |   | 102,610                         |      | 125,614 |   |
|               |   | $                               | 1,099,660 |   | $ | 5,116,341 |   |
|               |   |                            |      |   |   |
| Long lived assets: |   |                            |      |   |   |
| North America      |   | $                               | 134,244   |   | $ | 216,164 |   |
| Europe             |   | 39,346                          |      | 34,781 |   |
|               |   | $                               | 173,590   |   | $ | 250,945 |   |

 
| **ITEM 2.** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.** |
|-------------|--------------------------------------------------------------------------------------------------|

 

The following information should be read inconjunction with the condensed consolidated financial statements and theaccompanying notes included in Item 1 of this quarterly report, and the auditedfinancial statements, accompanying notes and Management’s Discussion andAnalysis of Financial Condition and Results of Operations contained in ourannual report on Form 10-K for the fiscal year ended September 30, 2002.  This report may contain predictions,estimates and other forward-looking statements that involve a number of risksand uncertainties including, but not limited to, those discussed in “Risks andUncertainties.”  See “Risks and Uncertainties”for a discussion of some of the factors known to us that could cause reportedfinancial information not to be necessarily indicative of future results.  We are not obligated to publicly release theresults of any revisions to forward-looking statements to reflect events andcircumstances arising after the date this report is filed.

 

OVERVIEW

 

4-D Neuroimaging is engaged primarily in the business of developing,manufacturing and selling innovative medical imaging systems to medicalinstitutions.  The MEG systems developedby the Company measure magnetic fields created by the human body for thenoninvasive diagnosis of certain medical disorders, primarily in thebrain.  We are focusing on the use ofour technology for potential commercial market applications such as thediagnosis and planning for surgical treatment of epilepsy, and the functionalmapping of areas of the brain at risk during surgery. We continue toinvestigate the potential applications of our technology for neuro-psychiatricdisorders of the brain such as schizophrenia, as well as for problems of theheart, spine and other organs.

 

As of June 2003, thirty three (33) of our MEG systemsare installed in medical and research institutions worldwide. Related findingsby us, and our collaborators, have been published in more than 200 scientificand medical papers.  More than 200insurance companies have approved reimbursement on a case-by-case basis.

 

Our current Magnes product lineconsists of the Magnes 2500 WH, the Magnes 3600 WH, and the Magnes 1300 C,pricing for which ranges from approximately $1.0 to $2.5 million, depending onthe configuration. Major portions of our sales have been in foreignmarkets.  We have previously pricedcertain of our European sales in the currency of the country in which theproduct was sold and the prices of such products in dollars varied as the valueof the dollar fluctuated against the quoted foreign currency price.  There can be no assurances that currencyfluctuations will not reduce the dollar return to us on such sales if made inthe future. Although at June 30, 2003 and 2002, we did not have any openforward exchange contracts, we may in the future enter into forward exchangecontracts to partially hedge such foreign currency exposure, if appropriate.

 

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In October 2002, we sold 100% of our shares inNeuromag Oy to Vaandramolen Holding BV, or VHBV, for $4,000,000, as discussedin more detail in Note 3 of the consolidated financial statements.  We used $3,694,000 of the proceeds from thesale to fully pay the remaining debt outstanding under a loan from AIG, whichhad been used to fund our acquisition of Neuromag in December 1999.  At that time we had acquired all of theissued and outstanding capital stock, or Shares, of Neuromag Oy pursuant to theterms of a share purchase agreement by and between us and Marconi MedicalSystems, Inc., or Marconi.  Under theterms of the share purchase agreement, we paid a total of $10 million in cashto Marconi for the purchase of the Shares. We also agreed to pay an interest-free minimum royalty obligation of$312,500 per year (totaling $2,500,000) to Marconi under an ancillary royaltyagreement over the next 8 years. 4-D retains responsibility for the royaltyagreement after the sale of Neuromag.

 

We believe that to date the relatively small number of proven medicalapplications for MEG systems, the lack of routine reimbursement for MEGprocedures, and the uncertainty of product acceptance in the U.S. market havelimited system sales through fiscal 2003. With the issuance of CPT codes for MEG, the clinical acceptance of MEGsystem may begin to increase.  It is notpossible to reliably predict the timing and extent of future product sales dueto the long sales cycles and the uncertainties in the rate of impact the CPTcodes will have on the market.  We donot anticipate multiple sales to the same end-user at current sales volumes,and the sale of one MEG system may still have a significant impact on ourfinancial position and results of operations during any reporting period.  As a result, quarterly and annual operatingperformance will continue to fluctuate significantly.

 

CRITICAL ACCOUNTING POLICIES

 

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

 

RESULTS OFOPERATIONS

 

Total revenues for the third quarter and first ninemonths of fiscal 2003 were $193,000 and $1,099,000, including $184,000 and$593,000 of service revenues, compared to $2,160,000 and $5,116,000 of totalrevenues, including $176,000 and $649,000 of service revenues, for the thirdquarter and first nine months of fiscal 2002. This decrease in total revenues was due primarily to the recognition ofno revenue for MSI system sales the first nine months of fiscal 2003 ascompared to two new and one refurbished system sales in the first nine monthsof fiscal 2002.  Revenue for one newsystem was recognized in the third quarter of fiscal 2002.  The revenues for the third quarter of fiscal2003 were due primarily to the recognition of revenue associated with thecompletion of a previous contract.  Therevenues for the first nine months of fiscal 2003 were due primarily to therecognition of one magnetically shielded room.

 

Cost of revenues for the third quarter and first ninemonths of fiscal 2003 were $249,000 and $1,285,000, compared to $1,538,000 and$4,233,000 for the third quarter and first nine months of fiscal 2002.  This decrease in total cost of revenues wasdue primarily to the recognition of no revenue for MSI system sales the firstnine months of fiscal 2003 as compared to two new and one refurbished systemsales in the first nine months of fiscal 2002. Revenue for one new system was recognized in the third quarter of fiscal2002.  The cost of revenues for thethird quarter and first nine months of fiscal 2003, were due primarily to costsassociated with the completion of a previous contract, and related unabsorbedoverhead.

 

Research and development expenses for the thirdquarter and first nine months of fiscal 2003 amounted to $246,000 and $692,000,compared to $231,000 and $764,000 for the third quarter and first nine monthsof fiscal 2002. The reduction of research and development expenses for thefirst nine months of fiscal 2003 as compared to the first nine months of fiscal2002 was due to continued, incremental cost reductions in the overheadstructure of the company and is consistent with our increased focus onmarketing and sales.

 

Marketing and sales expenses amounted to $384,000 and$1,120,000 for the third quarter and first nine months of fiscal 2003, comparedto $408,000 and $1,290,000 for the third quarter and first nine months offiscal 2002. The decrease in marketing and sales expenses in the third quarterand first nine months of fiscal 2003, compared to the third quarter and firstnine months of fiscal 2002, was due to the reduction of trade shows and otherrelated expenses and cost reductions in the overhead structure of the company.

 

12

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General and administrative expenses totaled $324,000and $1,008,000 for the third quarter and first nine months of fiscal 2003,compared to $455,000 and $1,505,000 for the third quarter and first nine monthsof fiscal 2002.  The decrease in generaland administrative expenses in the third quarter and first nine months offiscal 2003 as compared to the same prior year period was due to the reducedconsulting, professional and insurance expenses and cost reductions in theoverhead structure of the company.

 

Interest expense totaled $13,000 and $69,000 for thethird quarter and first nine months of fiscal 2003, compared to $54,000 and$187,000 during the third quarter and first nine months of fiscal 2002. Thereduction in interest expense in the third quarter and first nine months offiscal 2003, as compared to the third quarter and first nine months of fiscal2002 was due primarily to the reduction of debt following the sale of ourFinnish subsidiary in October 2002.

 

Other income totaled $79,000 in the third quarter and$322,000 in the first nine months of fiscal 2003, compared to a loss of $189,000in the third quarter and a gain of $81,000 in the first nine months of fiscal2002.  The increase in other income wasdue primarily to the foreign currency exchange effects.

 

Net loss for the third quarter and first nine monthsended June 30, 2003 amounted to $1,879,000 and $2,296,000 compared to a netincome for third quarter of $254,000 and a net loss in the first nine months of$1,786,000 for the comparable periods in the prior fiscal year.  The increase in net loss for the thirdquarter in fiscal 2003 was primarily due to no system revenue recognized ascompared to one MSI system sale recognized in the third quarter of fiscal 2002and the resolution of liability obligations directly related to the sale ofNeuromag Oy in October 2002.  Theincrease in net loss for the first nine months of fiscal 2003 was primarily dueto no system revenue recognized as compared to two new and one refurbished MSIsystem sales recognized in the first nine months of fiscal 2002.

 

*DiscontinuedOperations*

 

In October 2002, we sold our Finnish subsidiary,Neuromag Oy, to Vaandramolen Holding BV for a total of $4,000,000 in cash asdiscussed in more detail in Note 3 of the consolidated financial statements.

 

The results of operations of our Finnish subsidiaryfor the third quarter and first nine months ended June 30, 2002 have beenincluded in discontinued operations.  Werecorded a gain of $1,391,000 from discontinued operations in the first quarterof fiscal 2003.  The resolution ofliability obligations directly related to the sale of Neuromag Oy in October2002 resulted in the recording of a loss of $936,000 for discontinuedoperations in the third quarter of fiscal 2003 resulting in a net recorded gainof $455,000 on the sale of our Finnish subsidiary for the nine month periodended June 30, 2003.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We continued to experience substantial losses of $10,038,000 and$2,296,000 in fiscal 2002 and the first nine months of fiscal 2003,respectively.  We had negative cashflows from operations of $2,757,000 and $2,459,00 in fiscal 2002 and the firstnine months of fiscal 2003, respectively.

 

In December 1999, we acquired all of the issued and outstanding capitalstock, or Shares, of Neuromag Oy pursuant to the terms of a share purchaseagreement with Marconi.  Under the termsof the share purchase agreement, we paid Marconi a total of $10,000,000 in cashfor the purchase of the Shares and agreed to pay Marconi between a minimum of$2,500,000 and a maximum of $5,000,000 in royalties under an ancillary royaltyagreement over an eight-year period.  Asof June 30, 2003, we have paid a total of $625,000 under the royaltyagreement.  The acquisition was fundedby a loan from AIG in the principal amount of $11,000,000.  Mr. Egli, a member of our board of directors,is also a member of the board of directors of AIG.

 

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

 

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

 

13

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

 

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

 

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

 

Capital equipment expenditures totaled $20,000 in thefirst nine months of fiscal 2003 compared to $171,000 for the first nine monthsof fiscal 2002, of which $141,000 is related to discontinued operations.  The decrease in the first nine months offiscal 2003 can be attributed principally to a decrease in purchases during theyear.  Capital expenditures willcontinue to remain low due to our focus on the marketing of our current productline to the emerging clinical market.

 

In February 2003, the Company signed a new five-yearlease agreement with the owners of the property, which will expire in February2008.  The leased space has been reducedto approximately 46,000 square feet and subleases approximately 450 square feetof the facility to one company, for the net monthly rent of approximately $425,on a month-to-month basis.  The averagemonthly lease payment for the first year and over the term of the lease will beapproximately $35,000 to $52,000 respectively.

 

In March 2003,Elekta AB, the parent company of Elekta Instruments Inc. and Elekta KK, ourdistribution partners in the United States and Japan respectively, announcedtheir acquisition of 4-D Neuroimaging Oy, (also known as Neuromag Oy) theCompany’s former subsidiary which had been sold to Vaandramolen Holding BV inOctober 2002.  This acquisition may havean adverse impact on the distribution of our products in theseterritories.  We are currently in dispute regarding our distribution agreementswith Elekta Instruments and Elekta KK and arbitration proceedings werecommenced on or about April 30, 2003 and June 16, 2003 before the AmericanArbitration Association and International Chamber of Commerce,respectively.  Elekta Instruments isseeking termination of our distribution agreement as well as unspecifiedmonetary damages and costs.  We areseeking unspecified monetary damages and certain other equitable remedies inour claims and counterclaims against Elekta KK and Elekta Instruments.  These disputes may result in, among other things,a change in our distributors or the termination or a change in the structure ofour distribution agreements.  We intendto vigorously pursue our rights under the distribution agreements and we expectto incur significant additional fees for professional services as a result ofthese disputes.  We are unable topredict the outcome of these proceedings.

 

FACTORS THAT MAY AFFECT FUTURE RESULTS

 

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

 

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we file from time to time with the Securities and ExchangeCommission.  This caution is made underthe safe harbor provisions of the Private Securities Litigation Reform Act of1995.

 

RISKS AND UNCERTAINTIES

 

We face the following risks associatedwith our business operations:

 

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

 

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

 

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

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

 

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

 

•                                                                       $2,757,000in fiscal 2002 and

•                                                                       $4,153,000in fiscal 2001

 

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

 

Historically, we have raised additional capital through our majorityshareholders and related parties to fund continuing operations.  There can be no assurance that these sourcesof capital will continue to be available on terms acceptable to us, if at all.

 

*If we are unable to satisfy customer performance and servicerequirements, we may be unable to compete effectively.*

 

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

 

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

 

Our present directors, executive officers and principalshareholders and their affiliates beneficially own a majority of ouroutstanding common stock.  As a result,if all or some of these shareholders were to act together, they would be ableto exercise significant influence over all matters requiring shareholderapproval, including the election of directors and approval of significantcorporate transactions.  Suchconcentration of ownership may also have the effect of delaying or preventing achange in our control that may be favored by other shareholders.

 

*Ourvendors may not continue providing favorable credit terms.*

 

Due to our liquidity issues, we have extended vendor paymentsbeyond normal credit terms.  If ourmajor vendors were to decline further credit or require cash on deliverypayments, our financial position, results of operations and cash flows would beadversely impacted.

 

*Ourcurrent arrangements for distribution of our products in the U.S. and Japan areuncertain and may adversely impact our rate of sales.*

 

In March 2003,Elekta AB, the parent company of Elekta Instruments Inc. and Elekta KK, ourdistribution partners

 

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in the UnitedStates and Japan respectively, announced their acquisition of 4-D NeuroimagingOy, (also known as Neuromag Oy) the Company’s former subsidiary which had beensold to Vaandramolen Holding BV in October 2002.  This acquisition may have an adverse impact on the distributionof our products in these territories.  We are currently in disputeregarding our distribution agreements with Elekta Instruments and Elekta KK andarbitration proceedings were commenced on or about April 30, 2003 and June 16,2003 before the American Arbitration Association and International Chamber ofCommerce, respectively.  ElektaInstruments is seeking termination of our distribution agreement as well asunspecified monetary damages and costs. We are seeking unspecified monetary damages and certain other equitableremedies in our claims and counterclaims against Elekta KK and ElektaInstruments.  These disputes may resultin, among other things, a change in our distributors or the termination or achange in the structure of our distribution agreements.  We intend to vigorously pursue our rightsunder the distribution agreements and we expect to incur significant additionalfees for professional services as a result of these disputes.  We are unable to predict the outcome ofthese proceedings.

 

*Ifwe are unable to identify additional clinical applications for our MEG systems,there will be limited commercially viable markets for our products.*

 

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

 

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

 

Significant portions of our sales todate have been in foreign markets. Revenues from international sales represented 60% of our revenues of MEGsystems for the fiscal year ended September 30, 2002.  In fiscal 2003, through June 30, 2003, 39% of our revenues arefrom international sales.  We expectthat revenues from international sales will continue to represent a significantportion of our annual revenues.  Becausewe sell in foreign markets, we are exposed to potential risks of increases anddecreases in foreign currency exchange rates. Although at June 30, 2003 and 2002 we did not have any open forwardexchange contracts, upon occasion, we may enter into forward exchange contractsto partially hedge (or protect) against such foreign currency exchangerisks.  Fluctuations may reduce thereturn in U.S. dollars that we actually receive on our sales.

 

*Ifwe fail to compete successfully, our revenues and operating results will beadversely affected.*

 

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

 

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

 

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

 

*Ifnew government legislation is enacted or unfavorable medical industry trendsarise, we may be unable to sell our products and our revenues will suffer.*

 

We cannot predict what adverse effect, if any, futurelegislation or FDA regulations may have on the MEG market and our financialresults.  Medical industry costcontainment trends may impose restrictions on sizeable third-party reimbursementsfor diagnostic procedures, limiting the market opportunity. Further, if federalgovernment agencies or any state legislature enacts legislation or guidelinesrelating to our business or the health care industry that create

 

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additional business hurdles, including legislation relatingto third party reimbursement, our financial position and results of operationscould be negatively affected.

 

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

 

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

 

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

 

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

 

Our industry is characterized by rapidtechnological change, which may also impact our commercial success.  Competitors may develop products using othertechnologies or may improve existing products. This competition may reduce the size of the potential market for ourproducts or make them obsolete or non-competitive.  Competitors may also develop new or different products usingtechnology 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 adverselyaffected if such competitive developments occur.

 

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

 

The market prices for securities of companies withnewly emerging markets have historically been highly volatile, and their stockprice from time to time has experienced significant price and volumefluctuations that are unrelated to the operating performance of such companies.Moreover, our relatively low trading volume increases the likelihood andseverity of volume fluctuations, which likely will result in a correspondingincrease in the volatility of our common stock price.  Factors such as announcements of complex technologicalinnovations or new sales, governmental regulations, developments in patent orother proprietary rights, developments in our relationships with collaborativepartners, general market conditions and the timing of decisions by our existingshareholders to sell large positions of our common stock may have a significanteffect on the market price of our common stock.  Fluctuations in financial performance from period to period, oracceleration of any of our debt by our lenders, also may have a significantimpact on the market price of our common stock.

 

**ITEM3.  CONTROLS AND PROCEDURES**

 

*Evaluationof Disclosure Controls and Procedures*

 

Our chief executive and principal financial officerhas evaluated the effectiveness of our disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of theperiod covered by this report (the “Evaluation Date”).  Based on such evaluation, he has concludedthat, as of the Evaluation Date, our disclosure controls and procedures areeffective in alerting him on a timely basis to material information relating toour company (including our consolidated subsidiary) required to be included inour reports filed or submitted under the Exchange Act.

 

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**PART II.**                                                OTHERINFORMATION

 

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

 
| (a) Exhibit No. |   | Description                                                                                                                                                                                                                                                                                                                                                                                                                     |
|-----------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1             |   | Seventh Amended and Restated Articles of  Incorporation  This exhibit was previously filed as a part of, and is hereby incorporated by  reference to, the same numbered exhibit in the Quarterly Report on Form  10-QSB for quarter ended March 31, 2003, filed with the SEC on May 15,  2003.                                                                                                                             |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2             |   | Restated By-Laws  This exhibit was previously filed as a part of, and is hereby incorporated by  reference to, the same numbered exhibit in the Registration Statement filed  pursuant to the Securities Act of 1933 on Form S-1 Registration Statement No.  33-29095, filed June 7, 1989, as amended by Amendment No. 1, filed June 13,  1989, Amendment No. 2, filed July 21, 1989 and Amendment No. 3, filed July  28, 1989. |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31              |   | Certification of Chief Executive Officer and Principal  Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                     |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32              |   | Certification of Chief Executive Officer and  Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                            |

 

(b) Reports on Form 8-K

 

None

 

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SIGNATURES

 

In accordance with the requirements of the ExchangeAct of 1934, the registrant caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.

 

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

 

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