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

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2002

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: 1-10285

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

California (State or other jurisdiction of incorporation or organization)		95-2647755 (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)

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding of the registrant's common stock, no par value, as of August 12, 2002 was 160,338,589 shares.

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

4-D NEUROIMAGING

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

		June 30, 2002			September 30, 2001
		(unaudited)
ASSETS
Cash and cash equivalents		$	572		$	178
Restricted cash			68			546
Accounts receivable, less allowance for doubtful accounts of $210			1,188			3,136
Inventories			4,080			7,311
Prepaid expenses and other			152			898

	Total current assets		6,060			12,069
Property and equipment, net			644			728
Goodwill, net			8,177			8,177
Deferred income taxes			670			588
Other assets			248			262

	Total assets	$	15,799		$	21,824

LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable		$	3,840		$	3,357
Accounts payable			1,712			2,357
Accrued liabilities			1,125			1,239
Accrued salaries and employee benefits			481			558
Customer deposits			336			6,459
Deferred revenues			340			204
Current portion of royalty obligation			312			312
Current portion of capital lease obligations			11			16

	Total current liabilities		8,157			14,502
Notes payable			524			481
Royalty obligation, net of current portion			1,108			1,122
Customer deposits			1,000			1,108
Deferred revenues			377			35
Capital lease obligations, net of current portion			—			17

	Total liabilities		11,166			17,265

COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock—no par value; 300,000,000 shares authorized; 159,107,820 and 145,018,629 shares issued and outstanding as of June 30, 2002 and September 30, 2001, respectively			114,533			112,700
Additional paid-in capital			3,007			3,007
Accumulated deficit			(112,700	)		(110,913	)
Accumulated other comprehensive loss			(207	)		(235	)

	Total shareholders' equity		4,633			4,559

	Total liabilities & shareholders' equity	$	15,799		$	21,824

See notes to consolidated financial statements

4-D NEUROIMAGING

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per-share amounts)

(unaudited)

		Three Months Ended June 30,						Nine Months Ended June 30,
		2002			2001			2002			2001
REVENUES
	Product sales	$	5,061		$	996		$	9,561		$	6,282
	Product services		195			169			763			482

			5,256			1,165			10,324			6,764

COST OF REVENUES
	Product		3,175			693			6,866			4,368
	Product services		302			152			806			446

			3,477			845			7,672			4,814

GROSS MARGIN			1,779			320			2,652			1,950

OPERATING EXPENSES
	Research and development		316			458			992			1,594
	Marketing and sales		489			449			1,475			1,381
	General and administrative		450			817			1,813			2,347
	Goodwill amortization		—			327			—			992

			1,255			2,051			4,280			6,314

OPERATING INCOME (LOSS)			524			(1,731	)		(1,628	)		(4,364	)
	Interest expense		(64	)		(190	)		(211	)		(844	)
	Interest income		4			(17	)		12			50
	Other income, net		(210	)		196			42			697

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES			254			(1,742	)		(1,785	)		(4,461	)
	Provision (benefit) for income taxes		—			17			1			(12	)

NET INCOME (LOSS)		$	254		$	(1,759	)	$	(1,786	)	$	(4,449	)

BASIC AND DILUTED NET INCOME (LOSS) PER SHARE		$	0.002		$	(0.01	)	$	(0.01	)	$	(0.04	)

Weighted average number of common shares outstanding			158,634			127,537			150,285			99,380

COMPREHENSIVE LOSS:
	Net income (loss)	$	254		$	(1,759	)	$	(1,786	)	$	(4,449	)
	Cumulative translation adjustment		84			(18	)		28			85

	Comprehensive income (loss)	$	338		$	(1,777	)	$	(1,758	)	$	(4,364	)

See notes to consolidated financial statements

4-D NEUROIMAGING

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

				Nine Months Ended June 30,
				2002			2001
OPERATING ACTIVITIES
	Net loss			$	(1,786	)	$	(4,449	)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
		Depreciation			254			302
		Amortization of goodwill			—			1,192
		Amortization of minimum royalty obligation			(122	)		(361	)
		Deferred income taxes			(81	)		18
	Changes in operating assets and liabilities:
		Restricted cash			478			155
		Accounts receivable			1,947			399
		Inventories			3,230			(483	)
		Prepaid expenses and other			746			(436	)
		Other assets			14			101
		Accounts payable			(644	)		(1,313	)
		Accrued liabilities			(72	)		(400	)
		Accrued salaries and employee benefits			(77	)		104
		Customer deposits			(6,123	)		2,735
		Deferred revenue			478			176
		Interest payable			(41	)		(247	)

			Net cash used in operating activities		(1,799	)		(2,507	)

INVESTING ACTIVITIES
	Purchases of property and equipment				(171	)		(864	)

			Net cash used in investing activities		(171	)		(864	)

FINANCING ACTIVITIES
	Proceeds from notes payable				525			—
	Proceeds from stock options exercised				3			—
	Repayments of notes payable				—			(123	)
	Proceeds from issuance of common stock				30			12,598
	Sale of common stock				1,800			—
	Payments on capital lease obligations				(22	)		(21	)
	Repayment of notes payable				—			(9,226	)

			Net cash provided by financing activities		2,336			3,228

			Effect of exchange rate changes		28			85
Net increase (decrease) in cash and cash equivalents					394			(58	)

Cash and cash equivalents at beginning of period					178			1,083

Cash and cash equivalents at end of period				$	572		$	1,025

See notes to consolidated financial statements

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,
	2002		2001
Royalty obligation incurred in acquisition of Neuromag Oy	$	—	$	2,382
Adjustment of acquisition liabilities to goodwill	$	—	$	200
Property and equipment transfer to inventories for customer sale	$	—	$	790
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$	—	$	76

See notes to consolidated financial statements

4-D NEUROIMAGING

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1. BUSINESS AND BASIS OF PRESENTATION

4-D Neuroimaging, formerly Biomagnetic Technologies, Inc., a California corporation, originally founded in 1970 to produce equipment for physics labs, currently develops, manufactures, 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 either Magnetic Source Imaging, or MSI, or when specific to the brain, Magnetoencephalography, or MEG. MEG/MSI systems locate and measure 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, the Company is focusing its efforts on MEG/MSI applications for the brain.

On December 22, 1999, 4-D Neuroimaging acquired all of the issued and outstanding capital stock ("Shares") of Neuromag Oy pursuant to the terms of a Share Purchase Agreement, by and between Marconi Medical Systems, Inc. ("Marconi") and 4-D (the "Share Purchase Agreement"). Similar to 4-D, Neuromag Oy is engaged in the research, development, manufacturing and sales of MSI systems. The acquisition of Neuromag Oy has been accounted for under the purchase method of accounting. The Company paid $10 million in cash and agreed to pay Marconi an interest-free minimum royalty obligation of $312,500 per year for eight years totaling $2.5 million and a maximum of $5 million in royalties and additional consideration dependent upon the occurrence of certain future events. The minimum royalty obligation was recorded at acquisition at a net present value of $1.7 million using an imputed interest rate of approximately 10 percent. The fair value of net assets acquired was approximately $900,000. The purchase price in excess of the fair value of net assets acquired was recorded as goodwill totaling approximately $10.8 million and was amortized through fiscal year ended September 30, 2001. Thereafter, as required by SFAS No. 142, goodwill and certain intangibles will no longer be amortized, but instead tested for impairment at least annually. The Company has early adopted SFAS No. 142 in fiscal 2002. The Company performed an impairment analysis in consultation with an independent valuation firm in March 2002. Based on the analysis, the Company formed the opinion that 4-D has no goodwill impairment as of October 1, 2001. The Company continues to review the impact of this statement and will make any necessary adjustments, as appropriate.

The unaudited consolidated condensed financial statements of 4-D Neuroimaging and its subsidiaries, Neuromag Oy, a wholly owned Finnish entity, and Biomagnetic Technologies, GmbH, an inactive wholly owned German entity, (together, the "Company", "we", "our", or "4-D") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. The Company suggests that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended September 30, 2001.

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, 2002 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.

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, 2002. Potentially dilutive securities, including stock options, are antidilutive and are excluded from the computation of diluted net loss per share.

NOTE 3. BUSINESS RISKS AND UNCERTAINTIES

The Company continues to experience serious liquidity issues and incurred net losses of $4,501,000, $8,127,000 and $7,464,000 in fiscal 2001, 2000 and 1999, respectively. The Company had negative cash flows from operations of $4,153,000, $5,217,000 and $8,602,000 in fiscal 2001, 2000 and 1999, respectively. For the quarter ended June 30, 2002 the Company recognized a net profit of $254,000 due to recognition of revenue on the sale of four units and had negative cash flow from operations of $1,799,000 for the nine months ended June 30, 2002. Sales and associated revenue recognition remains variable from quarter to quarter due to low unit sale and high unit prices. At June 30, 2002 the Company had an accumulated deficit of $112,700,000, shareholder equity of $4,633,000 and a working capital deficiency of $2,097,000. On June 30, 2002 the Company had restricted cash of $68,000, of which $51,000 relates to Neuromag Oy and $17,000 to the U.S operations.

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

Based on the Company's current expectation of anticipated cash receipts related to firm orders received and anticipated bookings of up to two additional MEG/MSI systems, the Company expects to have sufficient cash to continue operations through August 2002 without taking into account cash requirements for maturities of its notes payable. Historically, the Company has raised additional capital through its majority shareholders and related parties to fund continuing operations. The Company is working with these shareholders and related parties to renegotiate, reduce or repay its debt obligations and to provide additional funding for operations. There can be no assurance that these sources of

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

Realization of the Company's operating plans is dependent upon its ability to successfully close a number of MEG/MSI system sales in a highly competitive market for the limited number of systems being purchased worldwide. There can be no assurance that sufficient sales of MEG/MSI systems will be achieved in order to realize the current operating plans. Historically, there has been ongoing price competition from the Company's competitors for the currently limited number of whole head systems being purchased worldwide. This competition may affect potential future profitability of the MEG/MSI systems, the extent of which is not presently determinable. Competitors may develop new or different products using technology or imaging modalities that may provide or be perceived as providing greater value than the Company's products. Any such development could have a material adverse effect on its financial position, results of operations and cash flows.

The Company's long-term commercial success in the U.S. is dependent upon obtaining routine approval of reimbursement for clinical MEG/MSI procedures by third-party payors. The Centers for Medicare and Medicaid Services, or CMS, formerly known as the Health Care Financing Administration, or HCFA, which is responsible for the administration of Medicare, and the American Medical Association, or AMA, that administers the use of Current Procedural Terminology, or CPT, codes by most third-party payors, follow similar guidelines for determining whether a specific procedure or health care technology is "reasonable" and "necessary", and therefore reimbursable under Medicare or private insurance coverage. These guidelines generally include consideration of whether (i) the procedure or technology is more or less costly than an alternative already covered by insurance, (ii) the added benefit of the procedure or technology is significant enough to justify the expense, and (iii) the procedure or technology provides significant medical benefits not otherwise available from other procedures or technologies.

The Company has worked for several years with its customers and the American Academy of Neurology, or AAN, to obtain CPT codes for MEG. These efforts came to a successful fruition in February 2001 when the AMA announced that it would assign the first three CPT specific codes for the use of MEG. The codes for MEG were published in the Federal Register on November 1, 2001.

In the publication of the CPT codes on November 1, 2001, the reimbursement level to be paid for the use of the equipment, also known as the Technical Component fee, was designated to be carrier based. This means that each insurance carrier will independently assign a payment level. The Company will work with each of its customers and prospects to establish appropriate reimbursement levels with the carriers used by their patients. This has been the method of reimbursement that the Company's customers have been using for up to eight years and, with the Company's help, have been able to obtain satisfactory levels of reimbursement. The Company will continue to work with its customers, with the added advantage of having the CPT codes available.

The CPT codes became available for use starting in January 2002. They provide the basis for the first routine reimbursement for MEG. The first code is used primarily for the evaluation of candidates for epilepsy surgery, while the other two codes are used for pre-surgical functional mapping procedures. The Company's current sales strategies in the U.S. focus on the development of commercially viable

sales to clinical users. It is always difficult to predict the adoption rate of a new modality, but with the assignment of CPT codes the Company believes that it has a new and powerful sales tool.

In December 2001, the CMS published the Ambulatory Patient Cost, or APC, codes. APC codes are cost-based codes that set the technical fee that Medicare will pay for ambulatory patients being treated within the hospital. MEG was assigned to the "New Technology" section of the codes. Within this section are reimbursement levels from $0 to $6,000 per procedure. MEG was assigned to what the Company believes is an inappropriately low level of approximately $150 per procedure. MEG users and the AAN are in the process of appealing this assignment. In August of 2002 the CMS published a new proposed rule establishing what the Company believes are more reasonable levels of reimbursement for MEG studies. This proposed rule provides for reimbursement levels from $850 to $2,500 for the three different CPT codes that have been established for MEG. The rule will be open for comment for 60 days. Barring any changes, this rule will go into effect January 1, 2003.

As of July 31, 2002, outstanding debt owed to AIG Private Bank Ltd., or AIG, in the principal amount of $3,590,000 and accrued interest in the amount of approximately $39,000 was due and payable in full. The Company has failed to make this payment and is currently in negotiation with the bank for an extension of the debt, but there can be no assurance that the remaining debt can be restructured on terms acceptable to the Company, if at all. See Note 4 of this report for additional information regarding the debt owed to AIG.

The Corporation's officers are authorized on behalf of the Company to offer and issue up to 15,000,000 shares of the Company's common stock at a price not less than $0.13 per share. In the three month period ended June 30, 2002, 6,153,845 shares were issued to specified investors in a private placement in accordance with Section 4(2) of the Securities Act of 1933, as amended, in exchange for cash in the aggregate sum of $800,000. The participating investors include International Sequoia Investments Ltd., of which 4-D board member Martin Velasco Gomez is a major investor, an outside investor, and 4-D's board members Enrique Maso and Hans-Ueli Rihs.

The report of the Company's independent public accountants on the Company's financial statements included in its Form 10-K for the year ended September 30, 2001 contained a modification related to its ability to continue as a going concern.

NOTE 4. DEBT OBLIGATIONS

To acquire the shares of Neuromag Oy in 1999, the Company obtained a loan from AIG totaling $11 million that is secured by the entire share capital of Neuromag Oy and is guaranteed by an entity affiliated with Martin Egli, a member of the Company's board of directors. Mr. Egli also serves on AIG's board of directors. The $11 million loan was restructured in July 2000, which extended the original maturity date from June 30, 2000 to December 29, 2000 and the principal amount was increased to $11.4 million. On December 29, 2000, the Company did not make payment at maturity of the loan. Effective February 15, 2001, the Company and AIG reached an agreement in principle, extending the maturity date to July 20, 2001, increasing the loan principal to approximately $12 million (capitalizing accrued interest of approximately $550,000 into the loan principal) and obtaining additional guarantees of indebtedness from another bank.

On April 26, 2001 the Company reached an agreement with AIG in which $8.951 million of the principal and accrued interest of the loan was converted into shares of the Company's common stock as part of a private placement. The remainder, approximately $3 million of the loan, was restructured. As restructured, the loan in the principal amount of $3.357 million from AIG matured in July 2002. The interest rate was set at 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 loan balance to $3,590,000. As amended, the AIG loan is secured by a pledge and assignment by Scaloway Co. Ltd., or Scaloway, a guarantee in the amount of $2.2 million by Bank Julius Baer & Co. AG in Zurich, Switzerland, and all of the issued and outstanding shares of Neuromag Oy, 4-D's wholly-owned subsidiary located in Helsinki, Finland. Martin Velasco Gomez, a member of 4-D's board of directors, is the beneficial owner of Scaloway.

As of July 31, 2002 the AIG loan was due and payable in full. The Company has failed to make this payment and is currently in negotiation with AIG for an extension of the debt. If these negotiations are not successful and 4-D is held in default under the loan, then AIG has the right to exercise its security interest and take ownership of Neuromag Oy. As of August 14, 2002 AIG has not exercised its security interest and is continuing negotiations.

Prior to its acquisition by 4-D, Neuromag Oy borrowed a total of 528,000 in Euros, which equaled approximately 524,000 USD at June 30, 2002, from TEKES at the Finnish state base interest rate minus 1%, subject to a minimum rate of 3%. The future repayment date for principal and related accrued interest outstanding under this loan is dependent upon Neuromag Oy generating sufficient distributable equity based upon the statutory financial accounts prepared in accordance with Finnish generally accepted accounting principles, in the future.

In January 2002, 4-D obtained two unsecured loans from specified members of the Company's board of directors, each in the amount of $125,000, with an interest rate of 8% per annum. The principal and interest are due and payable in January 2003.

NOTE 5. INVENTORIES

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

	June 30, 2002		September 30, 2001
	(unaudited)
Raw materials	$	638	$	734
Work-in process		2,164		3,021
Finished goods		1,278		3,556

	$	4,080	$	7,311

NOTE 6. 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 revenues and long lived assets, excluding intangible, deferred tax and prepaid assets:

		Nine Months Ended June 30, (unaudited)
		2002		2001
Revenues:
	North America	$	4,065,586	$	3,294,000
	Europe		1,089,095		524,000
	Asia		5,169,301		2,946,000

		$	10,323,982	$	6,764,000

Long lived assets:
	North America	$	216,164	$	1,106,762
	Europe		623,274		724,612

		$	839,438	$	1,831,374

NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB completed SFAS No. 141, "Business Combinations," which requires all business combinations initiated after June 30, 2001 to be accounted for under the purchase method. SFAS No. 141 also sets forth guidelines for applying the purchase method of accounting in the determination of intangible assets, including goodwill acquired in a business combination, and expands financial disclosures concerning business combinations consummated after June 30, 2001. The application of SFAS No. 141 did not affect any of the Company's previously reported amounts included in goodwill and other intangible assets.

Effective June 1, 2001, the Company early adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which establishes new accounting and reporting requirements for goodwill and other intangible assets. SFAS No. 142 requires that goodwill and certain intangibles no longer be amortized, but instead tested for impairment at least annually (third quarter 2002 goodwill amortization otherwise would have been $327,000, and $981,000 for the three and nine months ended June 30, 2002). Goodwill was tested for impairment by comparing the fair value of 4-D to its carrying value (including goodwill). Fair value was determined using guidance from FASB Concept Statement No. 7.

Based on the Company's initial impairment test, done in consultation with an independent valuation firm, it determined that none of the goodwill recorded was impaired. Impairment adjustments recognized after adoption, if any, generally are required to be recognized as operating expenses.

In connection with adopting SFAS No. 142, the Company also reassessed the useful lives and the classification of its identifiable intangible assets and determined that they continue to be appropriate. The value of the Company's amortized intangible assets as of June 30, 2002 is $195,000.

In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement establishes the accounting model for long-lived assets to be disposed of by sale and applies to all long-lived assets, including discontinued operations. This new statement requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. The Company has adopted SFAS No. 144 for fiscal year ending September 30, 2002. The Company continues to assess the impact of this statement and will make any necessary adjustments, if appropriate.

NOTE 8. SUBSEQUENT EVENT

On July 10, 2002, the Company's officers were authorized to offer and issue up to an additional 15,000,000 shares of the Company's common stock at a price not less than $0.13 per share. During July 2002 an additional 1,230,769 shares were issued to an outside investor in a private placement transaction in accordance with Section 4(2) of the Securities Act of 1933, as amended, in exchange for cash in the aggregate sum of $160,000.

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, 2001. 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 "Factors that May Affect Future Results" and "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. This caution is made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

The Company is experiencing serious operating and liquidity issues. These issues are discussed in more detail under the footnotes to the Company's consolidated financial statements and "Results of Operations," "Liquidity and Capital Resources," "Factors that May Affect Future Results" and "Risks and Uncertainties" included elsewhere in this report.

Magnes® and Biomagnetic Technologies® with the logo are registered trademarks of the Company by registration with the State of California and by registration with the U.S. Patent and Trademark Office. Biomagnetic Technologies™ and Magnetic Source Imaging™ are registered trademarks in the State of California. Neuromag™ and Vectorview™ are registered trademarks of the Company by registration with the Finnish National Board of Patents and Registration. The Company has applied for trademark registration with the U.S. Patent and Trademark Office for 4-D Neuroimaging™, with and without the logo.

OVERVIEW

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

The measurement of the body's magnetic fields by MEG/MSI provides information about the normal and abnormal functioning of the brain, heart and other organs. 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 for tumors and other lesions. We continue to investigate the potential applications of our technology for problems of the heart, spine, and other organs, as well as for neuro-psychiatric disorders of the brain such as schizophrenia and closed-head trauma, and problems of the gastrointestinal system.

As of June 2002, 58 of the Company's MEG/MSI systems are installed in medical and research institutions worldwide, and more than 5,000 MEG/MSI examinations have been performed on patients and control subjects at our application development sites. Related findings by us, and our collaborators, have been published in more than 200 scientific and medical papers. Since the first reimbursement for MEG/MSI procedures was received in September 1993, more than 200 insurance companies have approved reimbursement on a case-by-case basis for certain MEG/MSI procedures performed with our MEG/MSI systems.

Our current Magnes product line consists of the Magnes 2500 WH, the Magnes 3600 WH, and the Magnes 1300 C. The Magnes 2500 WH allows for examination of the entire brain at once and is

designed for evaluating ambulatory or critically ill patients in seated or fully reclined positions. As of June 30, 2002, we had shipped 16 Magnes 2500 WH systems. In fiscal 2000, we completed the development of our next generation system, the Magnes 3600 WH that provides additional capabilities for the research market, and have delivered our first system to our customer. There are currently two Magnes 1300 C's in the field primarily being used to look at organs in the body other than the brain.

Our wholly owned subsidiary, Neuromag Oy, is engaged in the research, development and manufacturing of MEG/MSI systems in Helsinki, Finland. Neuromag Oy developed and sold its first MEG/MSI system, the Neuromag 122 in 1994. Neuromag then introduced its next generation product, the Vectorview, in 1997. Both are whole head systems, designed to evaluate brain function.

The current prices of our MEG/MSI systems generally range from approximately $1,000,000 to $2,500,000, depending upon system 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. These value fluctuations may result in either a negative or positive cumulative translation adjustment. There can be no assurances that currency fluctuations will not reduce the dollar return to the Company on such sales if made in the future. The foreign currency gain for the third quarter of fiscal 2002 was $84,000. At June 30, 2002 and 2001, 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.

Since concentrating on the development of our MEG/MSI systems, our corporate strategy and commitment of resources have focused on long-term product applications and continued product development.

We believe that to date the relatively small number of proven medical applications for MEG/MSI systems, the lack of routine reimbursement for MEG/MSI procedures and the uncertainty of product acceptance in the U.S. market have limited system sales. With the issuance of CPT codes for MEG, and with more appropriate reimbursement levels potentially becoming available in January of 2003 through the publication of new APC rules, we believe clinical acceptance of MEG/MSI systems may 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/MSI system may 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.

On February 19, 2002, 4-D Neuroimaging announced that it had concluded a distribution agreement with Elekta Instruments, Inc., a company engaged in the development, manufacture and sale of systems for radiosurgical therapy. Under the terms of this agreement, the marketing, sales and customer support resources of Elekta North and South America, a division of Elekta, will be applied to the sale and support of 4-D Neuroimaging products in the neurosurgical market.

CRITICAL ACCOUNTING POLICIES

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 that may be reported for any other interim period or for the entire fiscal year.

It is our policy to recognize system sales revenues upon the final acceptance of the equipment by the customer. Additionally, as a part of our policy, we defer a portion of our systems sales revenues related to future service activities and recognize them over the term of the service commitment, for at least a minimum period of one year.

We have recorded a goodwill asset that arose from the acquisition of Neuromag Oy in 1999. This asset is tested for possible impairment at least on an annual basis in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." See Note 7 for further discussion regarding SFAS No. 142.

RESULTS OF OPERATIONS

Total revenues for the third quarter and first nine months of fiscal 2002 were $5,256,000 and $10,324,000, including $195,000 and $763,000 of service revenues, compared to $1,165,000 and $6,764,000 of total revenues, including $169,000 and $482,000 of service revenues, for the third quarter and first nine months of fiscal 2001. This increase in total revenues was due to seven systems sold in fiscal 2002 as compared to five systems sold in 2001.

Cost of revenues for the third quarter and first nine months of fiscal 2002 were $3,477,000 and $7,672,000, compared to $845,000 and $4,814,000 for the third quarter and first nine months of fiscal 2001. The increase in cost of revenues in the three month and nine month periods was related to the increase in our systems sales volume in fiscal 2002 as compared to fiscal 2001.

Gross margins for the third quarter and first nine months of fiscal 2002 were $1,779,000 and $2,652,000 compared to $320,000 and $1,950,000 for the third quarter and first nine months of fiscal 2001. The gross margin percentage fluctuation was primarily due to the increased systems sales volume in fiscal 2002 as compared to fiscal year 2001 and the greater overhead absorption over a greater number of accepted systems.

Research and development expenses for the third quarter and first nine months of fiscal 2002 amounted to $316,000 and $992,000, compared to $458,000 and $1,594,000 for the third quarter and first nine months of fiscal 2001. The reduction in research and development expense in fiscal 2002 as compared to fiscal 2001 was due to a reduction in research and development personnel and expense associated with certain research programs due to both our increased focus on marketing and sales and our liquidity position. We believe our current hardware product lines fulfill current marketing and sales requirements and do not require additional research and development expenditures at this time.

Marketing and sales expenses amounted to $489,000 and $1,475,000 for the third quarter and first nine months of fiscal 2002, compared to $449,000 and $1,381,000 for the third quarter and first nine months of fiscal 2001. Marketing and sales expenses increased due to higher recruitment and consulting expenses

General and administrative expenses totaled $450,000 and $1,813,000 for the third quarter and first nine months of fiscal 2002, compared to $817,000 and $2,347,000 for the third quarter and first nine months of fiscal 2001. This decrease is primarily attributable to a reduction in professional services and insurance costs in fiscal 2002 and a reclassification of research and development costs at Neuromag Oy in fiscal 2001.

We have 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 or impairment recognized in the third quarter and first nine months of fiscal 2002, compared to $327,000 and $992,000 in the third quarter and first nine months for the same prior year periods. We performed an impairment analysis in consultation with an independent valuation firm in March 2002. Based on the analysis, it is our opinion that 4-D has no goodwill impairment as of October 1, 2001. The Company continues to review the impact of this statement and will make any necessary adjustments, as appropriate.

Interest expense totaled $64,000 and $211,000 for the third quarter and first nine months of fiscal 2002, compared to $190,000 and $844,000 during the third quarter and first nine months of fiscal 2001. The decrease in fiscal 2002 was the result of the cancellation of indebtedness in return for the issuance of common stock in the third quarter of fiscal 2001.

Other income totaled a loss of $210,000 in the third quarter and a gain of $42,000 in the first nine months of fiscal 2002, compared to a gain of $196,000 in the third quarter and $697,000 in the first nine months of fiscal 2001. The quarterly loss was primarily due to foreign currency loss. The decrease is primarily attributable to no income from our investment in Magnesensors during fiscal 2002 compared to $200,000 in income during fiscal 2001. During fiscal 2001, we notified Magnesensors that we would no longer continue to provide a $200,000 guarantee of indebtedness due to the termination of our contractual obligations to do so and our liquidity concerns. We had been providing the guarantee, and under the equity method of accounting for our investment in Magnesensors, had previously recorded our proportionate share of Magnesensors' losses to the extent of our debt guarantee.

Provision for income taxes totaled $0 and $1,000 in the third quarter and first nine months of fiscal 2002, compared to $17,000 in the third quarter and a tax benefit of $12,000 for the first nine months of fiscal 2001. The reduced tax provision in 2002 was due to the use of tax loss carryforwards at the Company's Neuromag Oy subsidiary in fiscal 2002 as compared to 2001.

Net income for the third quarter and a loss in the first nine months ended June 30, 2002 was $254,000 and $1,786,000 compared to a net loss of $1,759,000 and $4,449,000 for the comparable periods in the prior fiscal year. The profit in the third quarter and the reduction in net loss for the year, as compared to the prior year period, is primarily due to the increased sales volume in fiscal 2002, the reduction of research and development expenses and general and administrative expenses and the discontinuance of goodwill amortization as required under SFAS No. 142.

LIQUIDITY AND CAPITAL RESOURCES

We continue to experience serious liquidity issues and incurred net losses of $4,501,000, $8,127,000 and $7,464,000 in fiscal 2001, 2000 and 1999, respectively. We had negative cash flows from operations of $4,153,000, $5,217,000 and $8,602,000 in fiscal 2001, 2000 and 1999, respectively. For the quarter ended June 30, 2002, we recognized a net profit of $254,000 and had negative cash flows from operations of $1,799,000 for the nine month period ended June 30, 2002. At June 30, 2002, we had an accumulated deficit of $112,700,000, shareholders' equity of $4,633,000 and a working capital deficiency of $2,097,000. On June 30, 2002 we had restricted cash of $68,000, of which $51,000 relates to Neuromag Oy and $17,000 to the U.S. operations.

The report of our independent public accountants on our financial statements included in the Form 10-K for the year ended September 30, 2001 contained a modification related to our ability to continue as a going concern.

At June 30, 2002, we had a working capital deficit of $2,097,000 as compared to $2,433,000 at September 30, 2001. Our working capital deficiency decreased primarily from the reduction of customer deposits due to recognition of revenue on several systems.

Capital equipment expenditures totaled $4,000 for the third quarter of fiscal year 2002, compared to $815,000 for the third quarter of fiscal year 2001. Capital expenditures for fiscal year 2001 included a transfer from inventory to a customer, which has since been returned to demonstration inventory. Capital expenditures will continue to remain low due to our liquidity concerns.

In an effort to address our operational and liquidity issues, we continue to work with our lenders, are attempting to raise additional capital and are developing cost reduction measures on a worldwide basis to bring our cost structure more in line with expected revenues. If we are not successful in

initiating and executing these plans, we anticipate that capital, working capital and debt service requirements in fiscal 2002 will substantially exceed cash projected to be generated by MSI systems sales.

On February 22, 2002 we were authorized to offer and issue up to 15,000,000 shares of our common stock at a price not less than $0.13 per share through April 30, 2002. In the three month period ended March 31, 2002, 7,692,308 shares were issued to an outside investor in a private placement transaction in accordance with Section 4(2) of the Securities Act of 1933, as amended, in exchange for cash in the aggregate sum of $1,000,000.

During April 2002 an additional 6,153,845 shares were issued on the terms previously authorized in a private placement in accordance with Section 4(2) of the Securities Act of 1933, as amended, in exchange for cash in the aggregate sum of $800,000. The participating investors included International Sequoia Investments Ltd., of which 4-D board member Martin Velasco Gomez is a major investor, an outside investor, and 4-D's board members Enrique Maso and Hans-Ueli Rihs.

On July 10, 2002, we were authorized to offer and issue up to an additional 15,000,000 shares of our common stock at a price not less than $0.13 per share. During July 2002 an additional 1,230,769 shares were issued to an outside investor in a private placement transaction in accordance with Section 4(2) of the Securities Act of 1933, as amended, in exchange for cash in the aggregate sum of $160,000.

Based on our current expectation of anticipated cash receipts related to firm orders received and anticipated bookings of up to two additional MEG/MSI systems, we expect to have sufficient cash to continue operations through August 2002 without taking into account cash requirements for maturities of our notes payable. Historically, we have raised additional capital through our majority shareholders and related parties to fund continuing operations. We are working with these shareholders and related parties to renegotiate, reduce or repay our debt obligations and to provide additional funding for operations. There can be no assurance that these sources of capital and funds will be available or that the existing debt can be renegotiated on terms acceptable to the Company, if at all.

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 and additional consideration dependent upon the occurrence of specified future events. The acquisition was funded by a loan from AIG. 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.

As of July 31, 2002, the outstanding principal balance under the AIG loan in the amount of approximately $3,590,000 and accrued interest in the amount of approximately $39,000 was due and payable in full. We have failed to make this payment and are currently in negotiation with AIG for an extension of the debt. As of August 14, 2002, AIG has not exercised its security interest and is continuing negotiations. However, there can be no assurance that the loan will be restructured on terms acceptable to us, if at all.

distributable equity based upon the statutory financial accounts prepared in accordance with Finnish generally accepted accounting principles, in the future.

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

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

We require additional capital to fund working capital and debt service on an ongoing basis. We restructured our loans in April 2001 and have a principal balance due to AIG Private Bank, Ltd., Zurich Switzerland, as of July 2002 of $3,590,000 plus related interest. We will need to obtain additional financing to fund operations and repay the notes and interest. As of July 31, 2002 the AIG loan was due and payable in full. The Company has failed to make this payment and is currently in negotiation with AIG for an extension of the debt. As of August 14, 2002 AIG has not exercised its security interest and is continuing negotiations. We may not be able to arrange additional financing or restructure our debt on terms acceptable to us, if at all If the negotiations are not successful and we are held in default under the loan, then AIG has the right to exercise its security interest and take ownership of Neuromag Oy.

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/MSI market has not yet developed, resulting in only low volume sales to medical research institutions. Our net losses in the last three years have been as follows:

•: $4,501,000 of losses in fiscal 2001,
•: $8,127,000 of losses in fiscal 2000, and
•: $7,464,000 of losses in fiscal 1999

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

•: $4,153,000 in fiscal 2001,
•: $5,217,000 in fiscal 2000, and
•: $8,602,000 in fiscal 1999

At June 30, 2002, our accumulated deficit was $112,700,000, our shareholders' equity was $4,633,000 and we had negative working capital of $2,097,000. Our negative working capital at June 30, 2002 resulted primarily from continued losses incurred in the first two quarters of fiscal year 2002. In an effort to address our operational and liquidity issues, we continue to work with our lenders, are attempting to raise additional capital and are developing cost reduction measures on a worldwide basis to bring our cost structure more in line with expected revenues. If we are not successful in initiating and executing these plans, we anticipate that capital, working capital and debt service requirements in fiscal 2002 will substantially exceed cash projected to be generated by MEG/MSI systems sales.

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

Our commercial success is also highly dependent on reimbursement for procedures using the MEG/MSI systems. With the issuance of CPT codes by the AMA in January 2002, MEG/MSI has moved one step closer to having routine reimbursement. The level of reimbursement initially established, was not sufficient to provide for an economically viable MEG/MSI installation. In August of 2002 the CMS published a new proposed rule establishing what we believe are more reasonable levels of reimbursement for MEG studies. This proposed rule provides for reimbursement levels from $850 to $2,500 for the three different CPT codes that have been established for MEG. The rule will be open for comment for 60 days. Barring any changes, this rule will go into effect January 1, 2003. Without adequate reimbursement levels we will be more dependent on sales in the smaller research market.

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.

Integrating 4-D Neuroimaging and Neuromag Oy will be difficult.

Our acquisition of Neuromag Oy in December 1999 brought together two previous international competitors. Risks common to such mergers include:

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

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

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 and we might not be able to continue our operations.

If Elekta North and South America is ineffective in distribution our products in the U.S., sales may suffer.

Historically, we have undertaken the sales and support of our products in the U.S. directly with our own staff. We have now entered into a distribution agreement with Elekta North and South America. We believe the resources that can now be brought to bear on the sales of our products in the neurosurgery market will lead to increased sales. But it is possible that this new distributor will not prove effective in marketing our products.

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 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/MSI systems. We are currently dependent on sales of our MEG/MSI systems to basic research institutions that represent a market of limited size. Our current product line may not fully meet the needs of a commercial clinical market and we may 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/MSI products does not fully meet the commercial applications that emerge, or we are not able to develop or offer new products in a timely and cost effective manner.

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

Currently, there are only a few established diagnostic uses for MEG/MSI systems known by the medical industry. A commercial market may never develop for multiple uses of our products. A continued lack of clinical applications and commercial market for our MEG/MSI systems will have a material adverse impact on our financial position, results of operations and cash flows.

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

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

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

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

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

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

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

Significant portions of our sales to date have been in foreign markets. Revenues from international sales represented 78% of our revenues of MEG/MSI systems for the nine months ended June 30, 2002 compared to 48% in the same period of 2001. 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, 2002 and 2001 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. We believe that a hypothetical 10% change in foreign currency exchange rates would not materially change our current financial position and results of operations. However, these risks may become material as our sales increase or dramatic currency fluctuations occur from outside events.

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

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

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 the Company's 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 the Company's common stock. Fluctuations in financial performance from period to period, or acceleration of any of our debt by our lenders, also may have a significant impact on the market price of the common stock.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

On March 31, 2001, the Company had approximately $12,600,000 outstanding under London Interbank Offered Rate based variable rate indebtedness. Subsequent to March 31, 2001, we retired approximately $10,500,000 of our outstanding debt and restructured approximately $3,357,000 of our remaining debt owed to AIG Private Bank Ltd. in connection with a private placement transaction, which was consummated on or about April 26, 2001. Under the restructured loan terms, the maturity date has been extended to July 31, 2002 and the interest rate on the AIG loan was fixed at 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 loan balance to $3,590,000. As of July 31, 2002 the AIG loan was due and payable in full. The Company has failed to make this payment and is currently in negotiation with AIG for an extension of the debt. As of August 14, 2002, AIG has not exercised its security interest and is continuing negotiations, but there can be no assurance that the Company will be able to restructure its debt on acceptable terms, if at all. Because a major portion of the Company's current indebtedness is at a fixed rate, the Company does not expect changes in interest rates to have a material adverse effect on the Company during the 2002 fiscal year.

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

PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

We are authorized on behalf of the Company to offer and issue up to 15,000,000 shares of the Company's common stock at a price not less than $0.13 per share. In the three month period ended June 30, 2002, 6,153,845 shares were issued to specified investors in a private placement in accordance with Section 4(2) of the Securities Act of 1933, as amended, in exchange for cash in the aggregate sum of $800,000. The participating investors include International Sequoia Investments Ltd., of which 4-D board member Mr. Velasco Gomez is a major investor, an outside investor, and 4-D's board members Dr. Maso and Mr. Rihs. This private placement was consummated on April 8, 2002.

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

SIGNATURES

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

4-D NEUROIMAGING

August 14, 2002		/s/ D. SCOTT BUCHANAN
Date		D. Scott Buchanan President, Chief Executive Officer, Principal Financial Officer

August 14, 2002		/s/ EUGENE C. HIRSCHKOFF
Date		Eugene C. Hirschkoff Vice President Corporate Secretary

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PART I FINANCIAL INFORMATION
4-D NEUROIMAGING CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
4-D NEUROIMAGING CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per-share amounts) (unaudited)
4-D NEUROIMAGING CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
4-D NEUROIMAGING CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (in thousands) (unaudited)
4-D NEUROIMAGING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
PART II. OTHER INFORMATION
SIGNATURES

Exhibit No.

Description

Sixth 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-Q for the quarterly period ended March 31, 2002, filed with the SEC on May 15, 2002.

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.

Certification of Chief Executive Officer and Principal Financial Officer

Reports on Form 8K

4-D NEUROIMAGING 10-Q