4-D Neuroimaging (FDNUV) 10QSB 2003 Q3 Quarterly report (small business)

UNITED STATES
SECURITIES 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 small business issuer as specified in its charter)

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Transitional Small Business Disclosure Format.       o  Yes       ý  No

PART IFINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

4-D NEUROIMAGING
CONSOLIDATED 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 consolidated financial statements

2

4-D NEUROIMAGING
CONSOLIDATED 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

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4-D NEUROIMAGING
CONSOLIDATED 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 consolidated financial statements

4

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

(in thousands)
(unaudited)

SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

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

See notes to consolidated financial statements

5

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

NOTE 1.BUSINESS AND BASIS OF PRESENTATION

4-D Neuroimaging, or 4-D, (formerly Biomagnetic Technologies, Inc.), a California corporation, originally founded in 1970 to produce equipment for physics labs, currently develops, produces, markets and sells medical instrumentation that allows physicians to monitor how the body is functioning, and provides an important tool to neuroscientists, helping them to unravel how the brain functions.  The basic technology is referred to as Magnetoencephalography, or MEG (sometimes Magnetic Source Imaging or MSI).  MEG systems measure and locate magnetic fields generated by the human body, and assist in the noninvasive diagnosis of a potentially broad range of medical disorders.  These measurements provide useful 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 the brain.

The unaudited consolidated condensed financial statements 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 and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.  The Company suggests that these financial statements are read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2002.

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

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

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

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

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In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”  This interpretation addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees.  This interpretation also clarifies the requirements related to the recognition of a liability by a guarantor at the inception of a guarantee for the obligations that the guarantor has undertaken in issuing that guarantee.  Management has assessed the impact of this interpretation and believes 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. 123 to 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-based employee compensation plans at fair value.  The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations for all periods presented.  Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock.

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

		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 to non-employees using the fair value method.  Compensation expense for options granted to non-employees has been determined in accordance with Emerging Issues Task Force, or EITF, No. 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.  Compensation expense for options granted to non-employees is periodically remeasured as the underlying options vest and is recorded as expense and deferred compensation in the financial statements.

Holders of common stock are entitled to one vote per share.  Basic earnings per share are computed by dividing net income or loss by the weighted average of common shares outstanding during the period.  Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock (warrants to purchase 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 computation are excluded when their effect would be antidilutive.

In January 2003, the FASB issued FASB Interpretation No. 46. “Consolidation of Variable Interest Entities.”  This interpretation clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statement”, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.  It further clarifies whether an entity shall be subject to consolidation according to the provisions of this interpretation, if by design, certain conditions exist.  Management has assessed the impact of this interpretation and believes it has no material impact.

7

Recent Authoritative Pronouncements

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristic of both Liabilities and Equities.”  This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity.  It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer.  Management has assessed the impact of this statement and believes it has no material impact.

NOTE 2.BASIC AND DILUTED NET LOSS PER SHARE

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

NOTE 3.SALE OF FINNISH SUBSIDIARY NEUROMAG OY

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

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

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

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

The Company had early adopted SFAS No. 142 in fiscal 2002 which requires that goodwill and certain intangibles no longer be amortized, but instead 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 the sale of the Company’s Finnish subsidiary in October 2002.

In December 2002, the Company recorded a gain on the sale 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 retains responsibility for the royalty obligations to Marconi after the sale of Neuromag Oy.  In addition, the reduction in deferred income taxes of $588,000 consists of deferred foreign taxes of Neuromag Oy.

The Company had adopted SFAS No. 144 in fiscal 2002, which requires that adjustments to amounts previously reported in discontinued operations that are directly related to the disposal of component of an entity in a prior period be classified separately in the current period in discontinued operations. Pursuant to the sale of Neuromag Oy in October 2002, the resolution of liability obligations directly related to the sale resulted in the Company recognizing a loss from discontinued operations of approximately $936,000 for the quarter ended June 30, 2003, resulting in a net recorded gain of $455,000 on the sale of the Company’s Finnish subsidiary for the nine month period ended June 30, 2003.

NOTE 4.PRO FORMA FINANCIAL INFORMATION ASSUMING NEUROMAG WAS NOT ACQUIRED

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

The pro forma financials presented below are the unaudited consolidated statements of operations based on the assumption that the Company had not acquired the subsidiary in December 1999.

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CONDENSED PRO 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	)

a)  Administrative costs associated with additional personnel that would not have been needed.

b)  Interest expense for AIG loan and intercompany loans

CONDENSED PRO 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	)

a)  Administrative costs associated with additional personnel that would not have been needed.

b)  Interest expense for AIG loan and intercompany loans

9

NOTE 5.DEBT OBLIGATIONS

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

In November 2002, the Company 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 of credit was extended until May 31, 2004.  Proceeds were used to pay off the two $125,000 unsecured loans from Enrique Maso and Swisspartners, the two $100,000 unsecured loans from MATRUST, S.L. and International Sequoia Investment Ltd. and to pay certain accounts payable in the amount of $120,000 to Dr. Galleon Graetz, a member of the board of directors and a consultant for the Company.  All of these amounts, totaling $570,000, were then pledged by the respective parties as collateral against the loan.  The remaining amount was used for general corporate purposes.

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

NOTE 6.ADDITIONAL FINANCING

In December 2002, the Company issued 60,000,000 shares of its common stock representing approximately 29% of its outstanding voting securities in a private placement transaction with Swisspartners Investment Network AG in accordance with Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended.  The common stock was 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 (in thousands):

	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

NOTE 8.SEGMENT AND GEOGRAPHIC INFORMATION

The Company operates in one segment that includes developing, manufacturing and selling MSI products.  The Company’s operations can be divided into three markets: the basic research market, the clinical applications development market, and the commercial clinical market.  Substantially all of its revenues have been derived from, and substantially all its assets have been devoted to, the basic research market.  The following table summarizes the 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 all of the periods presented and are not included in the segment data.

10

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

OVERVIEW

4-D Neuroimaging is engaged primarily in the business of developing, manufacturing and selling innovative medical imaging systems to medical institutions.  The MEG systems developed by the Company measure magnetic fields created by the human body for the noninvasive diagnosis of certain medical disorders, primarily in the brain.  We are focusing on the use of our technology for potential commercial market applications such as the diagnosis and planning for surgical treatment of epilepsy, and the functional mapping of areas of the brain at risk during surgery. We continue to investigate the potential applications of our technology for neuro-psychiatric disorders of the brain such as schizophrenia, as well as for problems of the heart, spine and other organs.

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

Our current Magnes product line consists 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 on the configuration. Major portions of our sales have been in foreign markets.  We have previously priced certain of our European sales in the currency of the country in which the product was sold and the prices of such products in dollars varied as the value of the dollar fluctuated against the quoted foreign currency price.  There can be no assurances that currency fluctuations will not reduce the dollar return to us on such sales if made in the future. Although at June 30, 2003 and 2002, we did not have any open forward exchange contracts, we may in the future enter into forward exchange contracts to partially hedge such foreign currency exposure, if appropriate.

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In October 2002, we sold 100% of our shares in Neuromag Oy to Vaandramolen Holding BV, or VHBV, for $4,000,000, as discussed in more detail in Note 3 of the consolidated financial statements.  We used $3,694,000 of the proceeds from the sale to fully pay the remaining debt outstanding under a loan from AIG, which had been used to fund our acquisition of Neuromag in December 1999.  At that time we had acquired all of the issued and outstanding capital stock, or Shares, of Neuromag Oy pursuant to the terms of a share purchase agreement by and between us and Marconi Medical Systems, Inc., or Marconi.  Under the terms of the share purchase agreement, we paid a total of $10 million in cash to 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 royalty agreement over the next 8 years. 4-D retains responsibility for the royalty agreement after the sale of Neuromag.

We believe that to date the relatively small number of proven medical applications for MEG systems, the lack of routine reimbursement for MEG procedures, and the uncertainty of product acceptance in the U.S. market have limited system sales through fiscal 2003.  With the issuance of CPT codes for MEG, the clinical acceptance of MEG system may begin to increase.  It is not possible to reliably predict the timing and extent of future product sales due to the long sales cycles and the uncertainties in the rate of impact the CPT codes will have on the market.  We do not 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 our financial position and results of operations during any reporting period.  As a result, quarterly and annual operating performance will continue to fluctuate significantly.

CRITICAL ACCOUNTING POLICIES

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

RESULTS OF OPERATIONS

Total revenues for the third quarter and first nine months 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 total revenues, including $176,000 and $649,000 of service revenues, for the third quarter and first nine months of fiscal 2002.  This decrease in total revenues was due primarily to the recognition of no revenue for MSI system sales the first nine months of fiscal 2003 as compared to two new and one refurbished system sales in the first nine months of fiscal 2002.  Revenue for one new system was recognized in the third quarter of fiscal 2002.  The revenues for the third quarter of fiscal 2003 were due primarily to the recognition of revenue associated with the completion of a previous contract.  The revenues for the first nine months of fiscal 2003 were due primarily to the recognition of one magnetically shielded room.

Cost of revenues for the third quarter and first nine months 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 was due primarily to the recognition of no revenue for MSI system sales the first nine months of fiscal 2003 as compared to two new and one refurbished system sales in the first nine months of fiscal 2002.  Revenue for one new system was recognized in the third quarter of fiscal 2002.  The cost of revenues for the third quarter and first nine months of fiscal 2003, were due primarily to costs associated with the completion of a previous contract, and related unabsorbed overhead.

Research and development expenses for the third quarter 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 months of fiscal 2002. The reduction of research and development expenses for the first nine months of fiscal 2003 as compared to the first nine months of fiscal 2002 was due to continued, incremental cost reductions in the overhead structure of the company and is consistent with our increased focus on marketing 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, compared to $408,000 and $1,290,000 for the third quarter and first nine months of fiscal 2002. The decrease in marketing and sales expenses in the third quarter and first nine months of fiscal 2003, compared to the third quarter and first nine months of fiscal 2002, was due to the reduction of trade shows and other related expenses and cost reductions in the overhead structure of the company.

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General and administrative expenses totaled $324,000 and $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 months of fiscal 2002.  The decrease in general and administrative expenses in the third quarter and first nine months of fiscal 2003 as compared to the same prior year period was due to the reduced consulting, professional and insurance expenses and cost reductions in the overhead structure of the company.

Interest expense totaled $13,000 and $69,000 for the third 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. The reduction in interest expense in the third quarter and first nine months of fiscal 2003, as compared to the third quarter and first nine months of fiscal 2002 was due primarily to the reduction of debt following the sale of our Finnish 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 $189,000 in the third quarter and a gain of $81,000 in the first nine months of fiscal 2002.  The increase in other income was due primarily to the foreign currency exchange effects.

Net loss for the third quarter and first nine months ended June 30, 2003 amounted to $1,879,000 and $2,296,000 compared to a net income 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 third quarter in fiscal 2003 was primarily due to no system revenue recognized as compared to one MSI system sale recognized in the third quarter of fiscal 2002 and the resolution of liability obligations directly related to the sale of Neuromag Oy in October 2002.  The increase in net loss for the first nine months of fiscal 2003 was primarily due to no system revenue recognized as compared to two new and one refurbished MSI system sales recognized in the first nine months of fiscal 2002.

Discontinued Operations

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

The results of operations of our Finnish subsidiary for the third quarter and first nine months ended June 30, 2002 have been included in discontinued operations.  We recorded a gain of $1,391,000 from discontinued operations in the first quarter of fiscal 2003.  The resolution of liability obligations directly related to the sale of Neuromag Oy in October 2002 resulted in the recording of a loss of $936,000 for discontinued operations in the third quarter of fiscal 2003 resulting in a net recorded gain of $455,000 on the sale of our Finnish subsidiary for the nine month period ended 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 cash flows from operations of $2,757,000 and $2,459,00 in fiscal 2002 and the first nine months of fiscal 2003, respectively.

In December 1999, we acquired all of the issued and outstanding capital stock, or Shares, of Neuromag Oy pursuant to the terms of a share purchase agreement with Marconi.  Under the terms of the share purchase agreement, we paid Marconi a total of $10,000,000 in cash for 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 royalty agreement over an eight-year period.  As of June 30, 2003, we have paid a total of $625,000 under the royalty agreement.  The acquisition was funded by 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 until April 26, 2002, at which time the interest rate was reduced to 4.4% per annum for the remainder of the loan term.  On May 15, 2002 the accrued interest in the amount of $232,000 was capitalized increasing the principal loan balance to $3,590,000.  The AIG loan matured in July 2002. We continued in negotiations with AIG through the end of fiscal year 2002.

In October 2002, we sold our Finnish subsidiary, Neuromag, to Vaandramolen Holdings, BV, a Dutch company, for $4,000,000 in cash.  $3,694,000 of these funds we used to pay back the $3,590,000 of principle and $94,000 of interest due on our loan from AIG and to pay the  $10,000 bank service fee.  See Note 3 of the consolidated financial statements for additional information with regard to our sale of Neuromag.

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In November 2002, we 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 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 Sequoia Investment Ltd.  Each loan had an interest rate of 8% per annum.  Accrued interest for Enrique Maso was recorded as a gain on extinguishment of debt and is reflected in other income on the statement of operations.  The accrued interest for Swisspartners was due and payable in March 2003 and paid in April 2003.  Proceeds were also used to pay certain accounts payable in the amount of $120,000 to Dr. Galleon Graetz, a member of the board of directors and a consultant for the Company. The respective parties then pledged all of these amounts, totaling $570,000 as collateral against the loan.  The remaining amount was used for general corporate purposes.

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

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

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

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

In March 2003, Elekta AB, the parent company of Elekta Instruments Inc. and Elekta KK, our distribution partners in the United States and Japan respectively, announced their acquisition of 4-D Neuroimaging Oy, (also known as Neuromag Oy) the Company’s former subsidiary which had been sold to Vaandramolen Holding BV in October 2002.  This acquisition may have an adverse impact on the distribution of our products in these territories.  We are currently in dispute regarding our distribution agreements with Elekta Instruments and Elekta KK and arbitration proceedings were commenced on or about April 30, 2003 and June 16, 2003 before the American Arbitration Association and International Chamber of Commerce, respectively.  Elekta Instruments is seeking termination of our distribution agreement as well as unspecified monetary damages and costs.  We are seeking unspecified monetary damages and certain other equitable remedies in our 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 of our distribution agreements.  We intend to vigorously pursue our rights under the distribution agreements and we expect to incur significant additional fees for professional services as a result of these disputes.  We are unable to predict the outcome of these proceedings.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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we file from time to time with the Securities and Exchange Commission.  This caution is made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

RISKS AND UNCERTAINTIES

We face the following risks associated with our business operations:

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

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

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

•$4,501,000 of losses in fiscal 2001

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

•$2,757,000 in fiscal 2002 and

•$4,153,000 in 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 majority shareholders and related parties to fund continuing operations.  There can be no assurance that these sources of capital will continue to be available on terms acceptable to us, if at all.

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

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

Our management and controlling shareholders, which together control a majority of our common stock, may control our operations and make decisions that you do not consider in your best interest.

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

Our vendors may not continue providing favorable credit terms.

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

Our current arrangements for distribution of our products in the U.S. and Japan are uncertain and may adversely impact our rate of sales.

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

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in the United States and Japan respectively, announced their acquisition of 4-D Neuroimaging Oy, (also known as Neuromag Oy) the Company’s former subsidiary which had been sold to Vaandramolen Holding BV in October 2002.  This acquisition may have an adverse impact on the distribution of our products in these territories.  We are currently in dispute regarding our distribution agreements with Elekta Instruments and Elekta KK and arbitration proceedings were commenced on or about April 30, 2003 and June 16, 2003 before the American Arbitration Association and International Chamber of Commerce, respectively.  Elekta Instruments is seeking termination of our distribution agreement as well as unspecified monetary damages and costs.  We are seeking unspecified monetary damages and certain other equitable remedies in our 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 of our distribution agreements.  We intend to vigorously pursue our rights under the distribution agreements and we expect to incur significant additional fees for professional services as a result of these disputes.  We are unable to predict the outcome of these proceedings.

If we 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 MEG systems known by the medical industry.  A commercial market may never develop for multiple uses of our products.  A lack of additional clinical applications may limit the commercial market for our MEG systems and will have a material adverse impact on our financial position, results of operations and cash flows.

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

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

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

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

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

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

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

We cannot predict what adverse effect, if any, future legislation or FDA regulations may have on the MEG market and our financial results.  Medical industry cost containment trends may impose restrictions on sizeable third-party reimbursements for diagnostic procedures, limiting the market opportunity. Further, if federal government agencies or any state legislature enacts legislation or guidelines relating to our business or the health care industry that create

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additional business hurdles, including legislation relating to third party reimbursement, our financial position and results of operations could be negatively affected.

Our success is dependent upon our ability to attract and retain qualified scientific and management personnel.

The loss of services of any one of our executive management or key scientific personnel would delay our ability to execute our business plans and reduce our ability to successfully develop and commercialize products, maintain good customer relationships and compete in the marketplace. There can be no assurance that we will be able to hire, train or retain such qualified personnel.

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

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

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

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

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

ITEM 3.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

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PART II.OTHER INFORMATION

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 Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the 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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