MAGNA LAB INC, 10KSB, 1997-10-24

MAGNA LAB INC
10KSB, 1997-10-24
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-KSB

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 28, 1997.

( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period From __________ To __________

Commission file number 0-21320

MAGNA-LAB INC.
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(Name of small business issuer in its charter)

NEW YORK 11-3074326
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)

P.O. BOX 1313, BRENTWOOD, NY (FORMERLY 250Z EXECUTIVE DRIVE, NY) 11717-0689
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(Address of principal executive offices) (Zip Code)

Issuer's telephone number -- (516) 595-2111

Securities registered under Section 12(b) of the Exchange Act:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None None

Securities registered under Section 12(g) of the Exchange Act:

CLASS A COMMON STOCK, $.001 PAR VALUE PER SHARE
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(Title of Class)

REDEEMABLE CLASS A WARRANTS
---------------------------
(Title of Class)

REDEEMABLE CLASS B WARRANTS
---------------------------
(Title of Class)

REDEEMABLE CLASS E WARRANTS
---------------------------
(Title of Class)

UNITS, EACH CONSISTING OF ONE SHARE OF CLASS A COMMON STOCK,
$.001 PAR VALUE PER SHARE, ONE REDEEMABLE CLASS A WARRANT
AND ONE REDEEMABLE CLASS B WARRANT
------------------------------------------------------------
(Title of Class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 NO X
--- ---

Check if no disclosure of delinquent files in response to Item 405 of Regulation
S-B is contained in this form, and no disclosure will be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB (X)

The issuer's revenues for its most recent fiscal year ended February 28, 1997:
$1,131,000

The aggregate market value on October 15, 1997 of the publicly trading voting
stock held by non-affiliates (consisting of Class A Common Stock, $.001 par
value) computed on the average bid and asked prices of such stock on that date
was approximately $600,000 . As of October 15, 1997, 3,825,142 shares of Class A
Common Stock, $.001 par value and 1,764,858 shares of Class B Common Stock,
$.001 par value, were outstanding.

Transitional small business disclosure format (check one)

YES NO X
--- ---

DOCUMENTS INCORPORATED BY REFERENCE -- NONE

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

(A) BUSINESS DEVELOPMENT (INCLUDING CURTAILMENT OF OPERATIONS IN 1997)

Magna-Lab Inc. (the "Company") was incorporated as a New York corporation
on February 22, 1991 and commenced operations on February 10, 1992. Prior to
February 10, 1992, the activities of Minkoff Research Labs, Inc. (the
"Predecessor") can be considered a predecessor to the Company. Minkoff Research
Labs, Inc. was formed in October 1989 by Dr. Lawrence A. Minkoff, the Company's
President, Chief Executive Officer and Chairman of the Board, to, among other
things, conduct research and development of magnet technologies. In February
1992, the Company was initially funded.

In October 1992, the Board of Directors approved the split (effective in
December 1992) of the Company's shares approximately 21,532 for one. In December
1992, the Company effected a recapitalization pursuant to which all then
outstanding shares of Common Stock were reclassified as Class B Common Stock,
having 5 votes per share. In April and May of 1993, the Company completed the
initial public offering of 1,150,000 units of its equity securities (see "Item 5
- -- Market for Common Equity and Related Stockholder Matters" and Note 7 to
Financial Statements) yielding net proceeds of approximately $5.4 million. In
July and August 1995, $1,250,000 principal amount of Bridge Notes together with
warrants to purchase 625,000 shares of Class A Common Stock and an additional
$166,667 in cash were converted into 625,000 shares of Class A Common Stock. In
January 1996, the Company completed the public offering of 1,850,000 shares of
Class A Common Stock and Class E Warrants to purchase 925,000 shares of Class A
Common Stock yielding net proceeds of approximately $4.6 million. In February
1997 the Company issued a Note payable in March 1997 to a shareholder for
$75,000 bearing interest at prime plus 2% until March 1997 and a penalty rate
thereafter. In February 1997, the Company sold 300,000 shares of its Class A
Common Stock in a private placement with accredited investors for $100,000.

In May 1997 the Company vacated its principal executive office and its
address is now P.O. Box 1313, Brentwood, New York 11767 and its telephone number
is (516) 595-2111. In April 1996, the Company's principal executive office was
relocated to 250Z Executive Drive, Edgewood, N.Y. 11767 and its telephone number
was changed to 516-595-2111. Prior thereto the Company's principal executive
office was located at 950 South Oyster Bay Road, Hicksville, New York 11801 and
its telephone number was 516 575-2111.

The Company has been unable to generate adequate cash flow from sales and
production of its first product and has been unable to complete sufficient
financing to continue its planned operations. The Company's current liquidity is
not adequate to meet its obligations as they come due.

In February 1997, the Board of Directors agreed to retain a consultant
(subject to certain matters to be resolved) and approved a plan of restructuring
of the Company's operations conceived with the assistance of the consultant (the
"Plan"). The Plan has, as its objective, restructuring of the Company's existing
business by elimination of production, marketing and certain system engineering
by strengthening the existing relationship with Elscint Cryomagnetics, Ltd., a
subsidiary of Elscint, Ltd. ("Elscint" -- see "Business of the Issuer --
General" and "Business of the Issuer -- Marketing and Distribution") for a
discussion of the relationship with Elscint), and repositioning the Company into
a royalty and development company in the near term. The repositioning would
involve a significant new development initiative in Cardiac MRI through a joint
collaboration with the Mount Sinai School of Medicine (the "Cardiac MRI
Initiative"). The Company has received a proposal from Elscint (the "Elscint
Proposal") for certain work which is integral to the Plan but the Company has
been unable to finalize the proposal because of lack of funds. The Company has
concluded an agreement with the Mount Sinai School of Medicine for the Cardiac
MRI Initiative but has been unable to fund its obligations under the agreement.
The Plan involves termination of the majority of the Company's workforce
including the entire sales and marketing staff, the production department and
portions of the engineering staff. Further, the Plan includes elimination of the
Company's production, development and executive facility, reductions in the need
for other assets including leased assets with remaining non-cancelable terms,
and other measures. The Plan also includes raising new financing in order to
support the Cardiac MRI Initiative and the financial resources needed

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to proceed with the Elscint Proposal. The Company recorded a restructuring
charge of approximately $1.5 million in February, 1997 for write downs of fixed
assets, inventory (see next paragraph) and deposits made with strategic vendors
which are non-refundable, as well as accruals for lease termination and other
costs. The ultimate amount may differ from this estimate.

Pursuant to the Plan and after its further attempts to raise additional
working capital were unsuccessful, on March 5, 1997, the Company informed 10 of
its 20 employees that they were being indefinitely laid off and between March 5
and March 15, 1997, another 4 employees were laid off due to insufficient funds
for their payroll. The remaining employees were offered the opportunity to
continue with the Company in exchange for deferred compensation pending
successful completion of continuing efforts to complete a financing (which has
not been completed). At October 1, 1997, unpaid payroll to terminated and
continuing employees totaled approximately $300,000. Of the remainder, only
Lawrence A. Minkoff, Ph. D., the Company's Chairman, president and Chief
Executive Officer, is in the full time employ of the Company as of October 15,
1997. The remaining employees have terminated their full time relationship with
the Company and approximately four of them serve or have indicated that they may
serve as part time employees or consultants to the Company. When the Company
vacated its principal production, development and executive facility it agreed
to a judgment against it by the landlord for unpaid rent in amounts exceeding
$50,000 and for additional rent totaling approximately $70,000 in settlement of
the unexpired term of the lease. The Company then placed certain inventory and
equipment in storage and several key individuals continued the search for new
capital. The Company's operations have, therefore, all but ceased. Additionally,
various creditors have threatened or initiated legal action to recover amounts
due them which the Company has no ability to pay (See -- Litigation).

The Company continues to search for new capital in order to continue its
operations pursuant to the Plan. The Company has been in negotiation with an
investor group to provide certain limited funding to the Company predicated on
the Company's ability to significantly reduce its recorded liabilities (through
creditor concessions). The funding, if completed, would result in the issuance
of a number of shares of common stock in excess of the currently outstanding
shares. No assurance can be made that the Company will be able to complete such
financing.

(B) BUSINESS OF ISSUER

GENERAL

The Company has developed and had intended to manufacture and market the
MAGNA-SL(R), the first of a planned series of anatomy-specific MRI products
which are smaller and cost less to own, install and operate than present "whole
body" MRI systems. Further, because the Company's scanners are open on three
sides and require only the part of the body being scanned to be placed inside
the scanner, they should not elicit the claustrophobic responses many patients
have to most whole body scanners. Unlike new "open" whole body systems, which
use "low-field" magnets, the MAGNA-SL uses a "mid-field" permanent magnet and
therefore produces image quality comparable to that of "mid-field" whole body
scanners (which the Company believes represent the majority of the MRI market).

The Company received US marketing clearance for the MAGNA-SL in September
1994 from the Food and Drug Administration ("FDA") through submission of a
510(k) premarket notification. The Company has sold and delivered four MAGNA-SL
scanners. Three such sales were made to a related party with which the Company
has entered into a sales, marketing and distribution agreement. The third
scanner delivered to this related party has not been paid for by such related
party and the Company has provided for this receivable. See Item 12 -- "Certain
Relationships and Related Transactions" and Notes 7 and 9 to Financial
Statements.

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year renewal period. Thereafter, the agreement is renewable by Elscint in two
year sales periods at higher minimum quantities which will be set by the parties
in good faith. Elscint has the right to cure shortfalls by, among other things,
making payment of approximately 87% of the minimum royalties. Upon execution of
the agreement, a nonrefundable deposit of $250,000 was paid to the Company to be
applied to first year royalties. Additionally, Elscint and the Company have
agreed to cooperate in making certain capital expenditures and other areas of
manufacturing in order to reduce production costs and increase operating
margins. The parties have also agreed to collaborate in developing new features
and improvements to the MAGNA-SL and the Company has agreed to provide certain
ongoing research and development support. Elscint has a right of first
negotiation on certain new products.

The parties agreed to certain development tasks and enhancements, which, if
not completed by the Company in November 1996, could, if not cured, result in
termination of the agreement by Elscint. Elscint has informed the Company that
it is not satisfied with the completion of certain of the tasks agreed to by the
parties. The parties then negotiated a new completion date for the tasks with
Elscint reserving all of its rights including the right to complete the tasks
itself at the Company's expense or to terminate the agreement. Elscint informed
the Company that it was not satisfied with the Company's completion of the tasks
after the new completion date. Subsequently, Elscint presented to the Company
its proposal (the "Elscint Proposal") to take over the uncompleted tasks and
resulting in a major alteration and improvement of certain systems comprising
the MAGNA-SL. The Elscint Proposal requires a development payment of $500,000
plus certain support activities from the Company. The Company has agreed to go
forward with Elscint Proposal but has been unable to make any of the required
payments to initiate or complete the Elscint Proposal. In May 1997, the Company
received notification from Elscint that it would reserve the right to terminate
its agreement with the Company and seek damages from the Company as a result of
the Company's failure to cure the deficiencies identified by Elscint or
alternatively to move forward with the Elscint Proposal. Elscint has
subsequently indicated to the Company that it still wished to proceed with the
Elscint Proposal.

A third party had indicated to the Company that it believes the agreement
with Elscint comes within the terms of a Company engagement with that third
party and that a fee is due them with respect thereto. The Company disputed
this. The agreement with the third party contained provisions for compensation
of 6% of certain amounts received and refers to a minimum fee of $250,000 for
covered transactions. The Company had discussions with this party concerning
this matter and, in light of those discussions to a point in time and after
discussions with counsel, had accrued (but still disputed) an amount of fee
based on a percentage of the royalties received to date. In December 1996, this
third party presented the Company with a demand for immediate payment of the
$250,000 minimum fee it asserts is due under its agreement. During October 1997,
the parties agreed to settle this matter for the issuance of 125,000 shares of
Class A Common Stock.

In August 1996, Elscint placed purchase orders for certain components of
the MAGNA-SL from the Company in order to accommodate the stage of its
manufacturing and marketing efforts. In the third quarter ended November 30,
1996, the Company shipped approximately $99,000 of components to Elscint.

In May 1997, the Company entered into an agreement with Mount Sinai School
of Medicine and Dr. Valentin Fuster (as principal investigator) for a
collaborative research arrangement devoted to utilizing MRI in cardiac arterial
imaging and requiring payments totaling approximately $1.5 million over three
years. The initial required payment of $150,000 has not yet been made by the
Company due to the lack of any available funds for such effort.

INDUSTRY BACKGROUND

MRI, also known as nuclear magnetic resonance imaging, is a medical
diagnostic imaging procedure which produces images of slices of the body
allowing physicians to view the internal human anatomy. MRI has certain
advantages over other imaging procedures such as computerized axial tomography
(CAT), Positron Emission Tomography (PET) and X-ray. MRI does not use X-rays, or
any other ionizing radiation as in other nuclear medicine techniques and can
produce soft tissue contrast differences many times greater than other
procedures. MRI can acquire data in any planar orientation, is not limited to
cross sectional slices and provides greater flexibility in imaging a wide
variety of pathologies. MRI systems create images by analyzing the behavior of
hydrogen atom nuclei in the body. The

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living body contains a number of hydrogen atoms, mostly in the form of water.
MRI systems typically consist of a large magnet, radio signal generators, radio
signal receivers and computer hardware and software. By affecting the alignment
and behavior of nuclei using an external magnet and radio waves, MRI systems
obtain information and process the information by a computer to create an image
of the internal human anatomy which is displayed on a video monitor.

MRI systems in use are often categorized into low-field, mid-field and
high-field systems. Such designations refer to the strength of the magnetic
field utilized in the system. Generally, higher field strength equates to
greater resolution and/or speed of production of the images. Published industry
data suggest that mid-field systems are the most prevalent systems. There are
estimated to be over four thousand MRI scanners in operation in the United
States. Substantially all of them require the human body to be placed in a long
tube in which the magnetic field is generated. Whole body MRI machines generally
cost in excess of $1,000,000 and typically require substantial space to install.
Recently, so called "open" machines have entered the marketplace. Such systems
primarily rely on low-field magnets in a more open architecture to accommodate
those persons who cannot tolerate the mid-field and high-field whole body MRI
systems because of the person's size or feelings of claustrophobia. An industry
source has estimated that during 1991 approximately six million four hundred
thousand MRI procedures were performed in the United States. The number of
procedures were estimated, by that industry source, to increase to eleven
million MRI procedures by 1995. Of the 1991 historical estimate and 1995
projected estimate, approximately 31% and 35%, respectively, were estimated to
be head scans, 42% and 39%, respectively, were estimated to be spine scans, 19%
and 19%, respectively, were estimated to be extremities (knees, elbows, wrists,
feet and hands) scans and 8% and 7%, respectively, were estimated to be other
(breasts, cardiac, jaw, abdomen, shoulder and hip) scans.

THE COMPANY'S MRI SYSTEM AND PROPOSED SYSTEMS

The MAGNA-SL

The Company has developed and, in September 1994, received regulatory
clearance from the FDA to begin marketing, its first MRI scanner, the MAGNA-SL.
The MAGNA-SL is not currently available for sale due to the Company's
curtailment of operations as well as difficulties with vendors and the absence
of a technical workforce to build, install and service such systems. When it was
available the MAGNA-SL was to have sold for less than $500,000 and have low
installation and operating costs compared to whole body MRI scanners. Four
MAGNA-SL scanners have been delivered to and accepted by customers, including
three scanners which were shipped to a related party, the third of which remains
unpaid. If the Plan is successful, the Company may attempt to enter into
relationships with others (besides Elscint) covering the production, sale and
distribution of the MAGNA-SL.

The MAGNA-SL is approximately two and one-half feet high, three and
one-half feet deep and two feet wide. The magnet structure is open at the top,
bottom and front providing access from three sides thereby permitting
non-claustrophobic scanning. A bed/chair is placed next to the magnet for
various scans and would recline into the magnet for head scans (if such scans
become practical in the future). Sitting or reclining in the moveable bed/chair,
patients may position their leg, knee, arm, elbow, wrist, hand or (possibly)
head in the magnet opening without having to put their entire body into the
scanner. The magnet will rotate 90 degrees into a horizontal position for arm,
elbow, wrist and hand scanning as well as certain positions for knee and leg
scanning. In addition, images of legs or feet may be obtained from either a
weight-bearing position (standing up) or from a sitting or lying down position.
This approach adds to the inherent patient friendliness by having the patient
sitting for many scans where typically they are in a prone position. Separate
from the magnet is the digital and analog MRI electronics and computer terminal
which controls the operation of the magnet and produces the image. The entire
system may be installed in approximately 150 square feet of office space making
it suitable for use in radiology suites, hospital emergency rooms, or offices of
private medical practices. Management believes that, because the MAGNA-SL is
specifically designed for extremities, it may be a more effective MRI scanner
for these areas particularly because of its capability for bent limb and weight
bearing images. Substantially all conventional whole-body MRI systems use
magnets which are larger than the magnet used for the Company's product and
proposed products, which surround patients on all sides, leaving access only
from the front and back. Certain manufacturers have begun to introduce "open"
whole body systems and one manufacturer has introduced a dedicated extremity
system, which systems are less claustrophobic than traditional whole body
systems. These

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systems, however, use "low-field" magnets. The MAGNA-SL uses a "mid-field"
permanent magnet and therefore produces image quality comparable to that of
"mid-field" whole body scanners (which the Company believes represent the
majority of the MRI market).

The MAGNA-SL is expected initially to have applications in radiology,
orthopedics, pediatrics, chiropractic and podiatry and, if and when possible,
for applications in neurology, vascular and certain areas of dentistry.

Other Proposed Products

The Company has intended to build on the technology of the MAGNA-SL magnet
and system to design and develop other anatomy specific MRI scanners (including
potentially a scanner dedicated to MRI mammography and a back and spine scanner,
among other ideas) but has no resources with which to pursue such intentions. To
date, the Company has been engaged in computer simulation of the design of
magnets which it believes could be used in such MRI scanners and has not to date
commenced constructing any prototypes.

PRODUCTION AND ASSEMBLY

The MAGNA-SL system is comprised of three major subsystems; a magnet
subsystem (assembled by the Company), an MRI computer subsystem (purchased from
a third party with which the Company is now in dispute as a result of the
Company's failure to purchase commercially viable quantities, among other
matters) and a rack of power and electronic components (purchased from third
parties). The Plan and the Elscint Proposal involve replacing the MRI computer
subsystem, among other items, with Elscint manufactured components.

The production plan was to utilize a "Systems Integration Approach," under
which the magnet subsystem is assembled by the Company and then shipped to the
customer's site for integration with the other subsystems shipped directly to
the customer site by qualified suppliers. Early production models were
integrated first at the Company's facility to ensure quality and repeatability.
The customer was to be responsible for certain site preparations, such as the
installation of radio frequency shielding to shield the MRI system from
interference and certain electrical work. The costs of radio frequency shielding
and certain other installation costs, are lower for the MAGNA-SL than for whole
body systems. The magnet subsystem was to be assembled from purchased materials,
tested by Company employees, and then shipped to the customer for integration.

In order to assemble the magnet, the Company has purchased generally
available magnet material, steel and other mechanical components from others.
Using specially manufactured tools and equipment designed by the Company, the
Company has assembled the magnet for each scanner individually.

The MRI computer subsystem was purchased from a supplier in Europe. In
August 1993, the Company established a multi-system purchase relationship with
this vendor by making a $480,000 non-refundable deposit payment. Such agreement,
as amended in July 1994, provided for purchases of MRI computer subsystems and
the license of certain technology underlying the subsystems. The Company had
agreed to purchase initial subsystems which, as amended, would result in an
additional payment of $240,000 beyond the $480,000 paid as a deposit. Of that
additional $240,000, substantially all has been paid at February 28, 1997,
leaving an unamortized deposit of approximately $320,000 at February 28, 1997.
Such remaining deposits have been written off at February 28, 1997 as a result
of the (a) the Company's inability to go forward with purchase commitments, and
(b) the Company's intention to move forward with the Elscint Proposal which
would eliminate this component. The Company believes that its prior relationship
with this vendor may no longer be available. Further, it is possible that this
vendor may assert damages against the Company for the Company's failure to move
forward with plans which affect pricing of units delivered (volume discounts for
volumes not realized) or for other costs or investments made by this vendor as a
result of its relationship with the Company.

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The power and electronics components necessary for the MAGNA-SL system are
generally available from a variety of vendors. The Company had established
sources of supply for such components but as a result of non-payment of these
vendors, believes that such sources of supply may no longer be available to it.

The Company's liquidity over the past year has caused severe problems in
vendor relations including pending and threatened litigation as well as certain
judgments against the Company.

The Company is also required to conform to FDA Good Manufacturing Practice
("GMP") regulations and various other statutory and regulatory requirements
applicable to the manufacture of medical devices. The Company's production and
assembly operations are subject to FDA inspections at all times. The Company
would not meet the standards of such practices at this time. See "Governmental
Regulation."

MARKETING AND DISTRIBUTION

Prior to cessation of operations in March 1997 the Company was selling and
marketing the MAGNA-SL in the United States through a combination of its own
sales force and contractual arrangements with others. The principal markets for
the MAGNA-SL include private practitioners and institutions initially for
applications in radiology, orthopedics, pediatrics, chiropractic and podiatry
and, if and when possible, for applications in neurology, vascular and certain
areas of dentistry. The Company's sales force, which consisted of three persons
(including the Vice President of Sales and Marketing, and all of whom were
terminated pursuant to the Plan), concentrated primarily on the United States
radiology market.

Prior to cessation of operations, the Company had entered into several
separate distribution and sales representation agreements. Each agreement
granted certain defined exclusive rights, generally provided (except for an
agreement granting exclusive distribution rights in the orthopedic market in 20
U.S. states) that a minimum number of scanners are purchased within a specified
time frame. One of these agreements is with Beta Numerics, Inc. ("Beta"), a
private company founded by two directors and beneficial shareholders, and one
former director and continuing shareholder, of the Company. Beta has not met the
minimum number of scanners to be purchased under the agreement and has not paid
for one scanner delivered to it in December 1996. The Company has sold and
delivered four MAGNA-SL scanners including three to Beta, one of which remains
unpaid. For a more detailed description of the relationship with Beta, see Item
12. "Certain Relationships and Related Transactions."

In June 1996, the Company and Elscint signed a definitive agreement
covering a strategic business arrangement in which Elscint would manufacture the
MAGNA-SL for marketing and sale by Elscint in certain non-United States
territories including Europe, the Peoples Republic of China, parts of the Middle
East and Latin America, Australia and other territories. The Company would be
paid royalties on each system manufactured and sold by Elscint. To maintain its
rights under the agreement, Elscint is required to sell a minimum number of
systems in the first two year period (commencing after an agreed upon period of
start-up) and a higher number of systems in the first permitted two year renewal
period. Thereafter, the agreement is renewable by Elscint in two year sales
periods at higher minimum quantities which will be set by the parties in good
faith. Elscint has the right to cure shortfalls by, among other things, making
payment of approximately 87% of the minimum royalties. Upon execution of the
agreement, a nonrefundable deposit of $250,000 was paid to the Company to be
applied to first year royalties. Additionally, Elscint and the Company have
agreed to cooperate in making certain capital expenditures and other areas of
manufacturing in order to reduce production costs and increase operating
margins. The parties have also agreed to collaborate in developing new features
and improvements to the MAGNA-SL and the Company has agreed to provide certain
ongoing research and development support. Elscint has a right of first
negotiation on certain new products.

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satisfied with the completion of the tasks after the revised completion date.
Subsequently, Elscint presented to the Company its proposal (the "Elscint
Proposal") to take over the uncompleted tasks resulting in a major alteration
and improvement of certain systems comprising the MAGNA-SL and requiring a
development payment of $500,000 and certain support efforts from the Company.
The Company has agreed to go forward with Elscint Proposal but has been unable
to make any of the required payments to initiate or complete the Elscint
Proposal. In May 1997, the Company received notification from Elscint that it
would reserve the right to terminate its agreement with the Company and seek
damages from the Company as a result of the Company's failure to cure the
deficiencies identified by Elscint or alternatively move forward with the
Elscint Proposal. Elscint has subsequently indicated to the Company that it
still wished to proceed with the Elscint Proposal.

Should the Company be able to complete a financing necessary to continue
operations, the Company plans to attempt to go forward with the Elscint Proposal
and to license Elscint or others to the territories not presently covered by the
June 1996 agreement with Elscint (which agreement is not presently operative).
The Company has engaged in discussions with other companies in the medical
imaging industry to attempt to negotiate sales, distribution, marketing and or
manufacturing agreement without any success.

WARRANTY AND SERVICE

It is customary in the medical equipment industry to warrant that each
scanner will be free from defects in material and workmanship for a period of
one year after acceptance of the scanner and provide routine servicing free of
charge for the first year. After the first year, servicing is customarily
offered to customers on a contract basis or by charges for service calls.

The Company has been unable, due to lack of financial resources, to honor
its obligations for warranty and service since approximately March 1997.

In the medical device market, the ability to provide comprehensive and
timely service can be a key competitive advantage and is important for
establishing customer confidence. The Company's inability to service, for an
extended period of time since March 1997, the four scanners placed in service
creates a serious obstacle to the Company's desire to reenter this market even
upon completion of a financing (which in any case is uncertain).

UNDERWRITERS LABORATORIES INC. OR EQUIVALENT LISTING

The Company's scanners are required to be listed by Underwriters
Laboratories Inc. ("UL")., which is a not-for-profit independent organization,
or by ETL Testing Laboratories, Inc. ("ETL"). The Company's scanners are not
presently listed by such organizations.

Both UL and ETL are entities which test numerous consumer and commercial
products for compliance with nationally recognized safety standards. Listing of
a product indicates that samples of that product have been tested to such safety
standards and found to be reasonably free from foreseeable risk of fire,
electric shock and related hazards. Under the laws of certain states, the
Company will not be permitted to operate and install its products without
obtaining and maintaining such a listing. Even in those states where the Company
is not required by law or otherwise to obtain a listing, if it is unable to
obtain and maintain a listing on an ongoing basis its ability to market and sell
its scanners may be adversely affected. Underwriters Laboratories Inc. or
equivalent testing and review generally can be completed in a two to three month
period, although the process may be extended under certain circumstances. The
cost of obtaining and maintaining such a listing is estimated to be in excess of
$60,000. The Company may be subject to similar requirements in the non-US
countries in which the MAGNA-SL may be sold.

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PROPRIETARY RIGHTS

Dr. Lawrence A. Minkoff, Chief Executive Officer, President and a Director
of the Company, has received one patent relating to the permanent magnet
structure of the MAGNA-SL. In December 1992, Dr. Minkoff assigned his rights to
these magnet technologies to the Company. Additionally, the Company has filed
applications for patent protection internationally, including an application
under the Patent Cooperation Treaty ("PCT"), relating to the permanent magnet
structure, but has permitted its rights under that PCT application to lapse. The
Company has been informed that the PCT application was published, making it
unlikely that additional foreign patent protection with respect to the permanent
magnet structure can now be obtained. The Company does not believe that failure
to obtain such additional patent protection will have a material adverse effect
on the Company's business. In March 1995, the Company was issued a U.S. patent
concerning a certain proprietary imaging sensing coil assembly. The Company has
filed an application for patent protection internationally, including under the
PCT, relating to the imaging sensing coil assembly.

The Company's policy has been to obtain patents to protect technology,
inventions and improvements that are important to the development of its
business. The Company also relies upon trade secrets, know-how, continuing
technological innovation and licensing opportunities to develop and maintain its
competitive position.

The patent position of any medical device manufacturer, including the
Company, is uncertain and may involve complex legal and factual issues.
Consequently, the Company does not know whether its application will result in
the issuance of any patents, or, for any patents issued, whether they will
provide significant proprietary protection or will be circumvented or
invalidated. Since patent applications are maintained in the U.S. in secrecy
until patents issue, and since publications of discoveries in the scientific or
patent literature tend to lag behind actual discoveries by several months, the
Company cannot be certain that it was the first creator of inventions covered by
its pending patent application or that it was the first to file a patent
application for such inventions. There can be no assurance that any of the
Company's patent applications will result in any patents being issued or that,
if issued, patents will offer protection against competitors with similar
technology; nor can there be any assurance that others will not obtain patents
that the Company would need to license or circumvent. Moreover, the Company may
have to participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine the priority of inventions, which could result in
substantial cost to the Company.

The Company may utilize technologies, patents or other rights which may be
held by third parties. Certain technologies utilized by the Company are covered
by patents owned or administered by the British Technologies Group, PLC. The
Company has had discussions with British Technologies Group, PLC. concerning
licencing such technology, and although the Company believes that such licence
would be available to it on terms that are generally available to MRI
manufacturers, the Company has been unable to make the required payment to
secure such technologies which are integral to the MAGNA-SL.

The Company has also relied upon unpatented trade secrets, and no assurance
can be given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets or disclose such technology, or that the Company can meaningfully
protect its right to unpatented technology.

The Company has, in the past, required its employees, consultants and
advisors to execute confidentiality agreements upon the commencement of an
employment or a consulting relationship with the Company. Since the Company has
been unable to pay accrued compensation to its employees for some period of
their service, the continuing enforceability of such agreements may be
questionable. Each agreement provided that all confidential information
developed or made known to the individual during the course of the relationship
will be kept confidential and not disclosed to third parties except in specified
circumstances. In the case of employees, the agreements provided that all
inventions conceived by an individual shall be the exclusive property of the
Company, other than inventions unrelated to the Company's business and developed
entirely on the employee's own time. There can be no assurance, however, that
these agreements will provide meaningful protection or adequate remedies for the
Company's trade secrets in the event of unauthorized use or disclosure of such
information. To the extent that consultants, key employees or other third

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parties apply technological information independently developed by them or by
others to Company projects, disputes may arise as to the proprietary rights to
such information which may not be resolved in favor of the Company.

Dr. Minkoff, two of the Company's former executive officers and several of
its scientists and other personnel were formerly employed, at various times
prior to November 1989, by a company engaged in the development, manufacture and
sale of MRI devices. Each of these present and former executive officers and
senior scientists has informed the Company that he was not subject to any
agreement with such company containing a restrictive covenant limiting
competitive activities at the termination of employment with that company.
However, since the prior employer is a potential competitor of the Company, it
may threaten or commence legal action to deter the development of the Company's
technology alleging, among other things, that it may have rights to technology
developed by the Company through the efforts of such persons. The prior employer
also holds patents relating to MRI devices and has instituted litigation against
certain manufacturers of MRI devices including Hitachi Ltd., General Electric
Company and others alleging, among other things, that the manufacture of MRI
devices by such companies constitutes patent infringement, violations of the
Lanham Act and unfair competition. It has been reported that the prior employer
and Hitachi Ltd. have settled their action out of court and that a jury has
rendered a verdict in favor of the former employer against General Electric in
an amount which has been reported to be reduced by a judge and exceeds $60
million. General Electric is reported to be appealing this decision. There can
be no assurance that this potential competitor will not name the Company in its
current litigation, or commence a new action against the Company. The costs of
defending such an action, if brought, could require substantial financial
resources. Although no assurance can be given that such claims will not be
instituted against the Company, the Company believes, based upon the advice of
its patent counsel, that the use of its magnet technologies, at its stage of
development in December 1995, in its scanners, will not infringe the patents of
such competitor granted through December 1, 1995.

GOVERNMENTAL REGULATION

The operations of the Company, which have essentially been at least
temporarily suspended, are subject to extensive federal and state regulation.
MRI devices generally, and any scanners the Company has developed or may
develop, in particular, are subject to regulation by the FDA, certain state and
federal agencies that regulate the provision of health care, particularly the
Health Care Financing Administration ("HCFA"), and the Environmental Protection
Agency ("EPA"). In the Company's current state, it could not comply with some of
the regulations to which it is subject.

A. FDA REGULATION

The FDA categorizes devices into three regulatory classifications subject
to varying degrees of regulatory control. Class I devices are those devices
whose safety and efficacy can reasonably be ensured through the general control
provisions. These provisions include requirements that a device not be
adulterated or misbranded, that the device is manufactured in conformity with
GMP regulations and that appropriate FDA premarket notification requirements be
met. Class II devices are those devices whose safety and efficacy can reasonably
be ensured through the use of special controls, such as performance standards,
post-market surveillance, patient registries and FDA guidelines. All other
devices are placed in Class III. Class III devices, which are typically invasive
or life sustaining products, require clinical testing to assure safety and
effectiveness and FDA approval prior to marketing and distribution. The FDA also
has the authority to require clinical testing of Class I and Class II devices.

The MAGNA-SL(TM) is a Class II medical device subject to clearance by the
FDA prior to commercialization in the United States. Such FDA clearance was
received in September 1994 through submission of a 510(k) notification
(discussed below). The cessation of the Company's operations in March 1997 calls
into question the Company's previously received FDA clearance.

Pursuant to the Food Drug and Cosmetic ("FDC") Act and regulations
promulgated thereunder, the FDA regulates the manufacture, distribution and
promotion of medical devices in and the exportation from the United States.
Various states and foreign countries in which the Company's products may be sold
in the future may impose additional regulatory requirements.

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If a manufacturer or distributor of medical devices can establish that a
device is "substantially equivalent" to a legally marketed Class I or Class II
medical device or to a Class III medical device for which the FDA has not
required premarket approval, the manufacturer or distributor may seek FDA
marketing clearance for the device by filing a 510(k) notification. The 510(k)
notification and the claim of substantial equivalence will almost certainly have
to be supported by various types of data indicating that the device is as safe
and effective for its intended use as a legally marketed predicate device. Until
the FDA issues an order finding that a device is substantially equivalent, the
manufacturer or distributor may not place the device into commercial
distribution. The order may be sent within 90 days of the submission and may
declare the FDA's determination that the device is "substantially equivalent" to
another legally marketed device, and allow the device to be marketed in the
United States. The FDA may, however, determine that the proposed device is not
substantially equivalent, or may require further information, such as additional
test data, before the FDA is able to make a determination regarding substantial
equivalence. Such determination or request for additional information could
delay the Company's market introduction of its products and could have a
materially adverse effect on the Company's continued operations.

If a manufacturer or distributor cannot establish to the FDA's satisfaction
that a new device is substantially equivalent, the device will be considered a
Class III device and the manufacturer or distributor will have to seek premarket
approval ("PMA") or reclassification of the new device. A PMA would have to be
submitted and be supported by extensive data, including preclinical and clinical
trial data, to demonstrate the safety and efficacy of the device. Upon receipt,
the FDA will conduct a preliminary review of the PMA to determine whether the
submission is sufficiently complete to permit a substantive review. If
sufficiently complete, the submission is declared fileable by the FDA. By
statute and regulation, the FDA has 180 days to review a PMA once determined to
be fileable. During that time an advisory committee may also evaluate the
application and provide recommendations to the FDA. While the FDA has responded
to PMA's within the allotted time period, PMA reviews more often occur over a
significantly protracted time period, and generally take approximately two or
more years to complete from the date of filing. A number of devices have never
been cleared for marketing. An application and petition to reclassify a device
can also be extensive in time and cost.

If human clinical trials of a device are required, and the device presents
"significant risk," the manufacturer or distributor of the device will have to
file an investigational device exemption ("IDE") application with the FDA prior
to commencing human clinical trials. The IDE application must be supported by
data, typically including the results of animal and mechanical testing. If the
IDE application is approved, human clinical trials may begin at the specific
number of investigational sites and could include the number of patients
approved by FDA. Sponsors of clinical trials are permitted to sell those devices
distributed in the course of the study, provided such compensation does not
exceed recovery of the costs of manufacturer, research, development and
handling.

In 1988, the FDA reclassified MRI devices and all substantially equivalent
devices of this generic type from Class III to Class II. This encompassed MRI
systems from 13 petitioners. Accordingly, if the Company can demonstrate to the
FDA that its proposed products or any other scanner developed by the Company are
substantially equivalent either to the reclassified MRI devices or to other
currently marketed mammography or back and spine scanning devices, its proposed
products could be considered Class II medical devices which can be cleared for
commercial distribution via 510(k) notification. There can be no assurance that
the FDA will find such products to be substantially equivalent to reclassified
MRI devices or any other legally marketed devices. The FDA may require the
Company or its competitors to file PMAs for new products or technologies if the
devices are sufficiently different from the reclassified MRI devices. Such a
determination by the FDA would delay the Company's market introduction of
products it may in the future (subject to obtaining funding) consider
developing, and could have a material adverse effect on the Company's
operations, should the Company resume operations and pursue development of such
products. FDA recently announced its intent to impose higher safety standards on
premarket clearance of devices that might pose potential risks if they fail.
Such a change in policy could have a material adverse effect on the Company,
should the Company resume operations and pursue development of such products.

The costs associated with the filing of applications with the FDA and of
conducting clinical trials can be significant. While the MAGNA-SL has received
clearance from the FDA, there is no assurance that any of the

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Company's product enhancements, if any, or the Company's proposed products,
should the Company resume operations and pursue development of such products
will ever obtain the necessary FDA clearance for commercialization.

If determined to be Class II medical devices under the Safe Medical Devices
Act of 1990, the Company's proposed products are potentially subject to
performance standards and other special controls that the FDA has the authority
to establish. Currently, no such performance standards or special controls
applicable to the Company's products have been established. If any such
performance standards or other special controls are established, obtaining
initial marketing clearance for its products or maintaining continued clearance
will be dependent upon the Company's ability to satisfactorily comply with such
standards or controls.

The MAGNA-SL and any future products distributed by the Company pursuant to
the above described clearances will be subject to pervasive and continuous
regulation by the FDA. Moreover, the FDC Act will also require the Company,
should it ever resume manufacturing products, to manufacture its products in
registered establishments and in accordance with Good Manufacturing Practice
(GMP) regulations. Once registered, the Company's facility, if any, will be
subject to periodic inspections by the FDA. The Company does not presently have
a facility. Labeling and promotional activities are subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. In addition, the
Company's products, if any, are expected to be subject to technical standards
established by the Federal Communications Commission regarding radio frequency
emission limits. The export of medical devices is also subject to regulations in
certain instances and in certain circumstances to FDA approval as well as to
approval by certain countries to which these devices might be exported. In
addition, the use of the Company's products may be regulated by various state
agencies. There can be no assurance that the Company's products will be able to
comply successfully with any such requirements or regulations. In fact, the
Company's MAGNA-SL does not presently comply with the regulatory standards of
several countries. Moreover, future changes in regulations or enforcement
policies could impose more stringent requirements on the Company, compliance
with which could adversely affect the Company's potential business. Failure to
comply with applicable regulatory requirements could result in enforcement
action, including withdrawal of marketing authorization, injunction, seizure or
recall of products, operating restrictions, refusal of government to approve
product applications or allow a company to enter into supply contracts and
liability for civil and/or criminal penalties.

B. THIRD PARTY COVERAGE, REIMBURSEMENT AND RELATED HEALTH CARE REGULATIONS.

The market for MRI scanners, including the Company's products and proposed
products, is affected significantly by the amount which Medicare, Medicaid or
other third party payors, including private insurance companies, will reimburse
hospitals and other providers for diagnostic procedures using MRI systems. The
health care industry has changed dramatically during the 1980's and the 1990's
in reaction to changes in third party reimbursement systems designed to contain
health care costs. In the MRI market, third party reimbursement issues will
focus principally on whether MRI diagnostic procedures using the Company's
products and proposed products will be covered procedures and, if so, the level
of reimbursement that will be available for the MRI procedure.

HCFA, the agency responsible for administering the Medicare program, sets
requirements for coverage and reimbursement under the program, pursuant to the
Medicare law. In addition, each state Medicaid program has individual
requirements that affect coverage and reimbursement decisions under state
Medicaid programs for certain health care providers and recipients. Private
insurance companies also set their own coverage and reimbursement policies.
Private insurance companies and state Medicaid programs are influenced, however,
by the HCFA requirements.

As of November 22, 1985, under a national policy, Medicare covers certain
diagnostic procedures using MRI technology (as described by Medicare) for
certain clinical indications. There can be no assurance that the Company's
products or proposed products, once available, will be included within the then
current Medicare coverage determination. In the absence of a national Medicare
coverage determination, local contractors that administer the Medicare program,
within certain guidelines, can make their own coverage decisions. Favorable
coverage determinations are made in those situations where a service is of a
type that falls within allowable Medicare benefits and a review concludes that
the service is safe, effective and not experimental. Under HCFA coverage
requirements,

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<PAGE>

FDA approval for the marketing of a medical device, including the Company's
proposed MRI mammography scanning systems and any other MRI technology devices,
will not necessarily lead to a favorable coverage decision. A determination will
still need to be made as to whether the device is reasonable and necessary for
the purpose used. In addition, HCFA has proposed adopting regulations that would
add cost-effectiveness as a criterion in determining Medicare coverage. Although
the Company believes that its products and proposed products provide a cost
effective alternative to "whole body" scanners, no assurance can be given that
the scans utilizing the Company's products will be covered under Medicare,
especially if HCFA changes its coverage policy to include a cost-effectiveness
criterion. Changes in HCFA's coverage policy, including adoption of a
cost-effective criterion could have a material adverse effect on the Company's
prospects, if any, in the MRI market.

Currently, MRI diagnostic services provided on an outpatient basis are
reimbursable under Part B of the Medicare program. The professional and
technical components of radiological procedures which are performed in a
physician's office or freestanding diagnostic imaging center, and the
professional component of radiological procedures performed in a hospital
setting, are currently reimbursed on the basis of a relative value scale which
phased in, beginning January 1, 1992. There can be no assurance that the
implementation of this system, or other governmental actions, will not limit or
decrease reimbursement levels for services using any products developed by the
Company. Any reduction in the willingness of physicians to perform procedures
using the Company's proposed products could have a material adverse effect on
the Company's prospects, if any, in the MRI market.

Medicare reimbursement for the technical component (the operating costs)
for MRI diagnostic services furnished in the hospital outpatient setting
generally is currently calculated on a formula that is the lesser of the
hospital's reasonable costs and a 42/58 blended amount respectively of hospital
reasonable costs and the blended amount of reimbursement for the technical
component of the service if furnished in a physician's office in the same
locality.

The market for the Company's products and proposed products could also be
adversely affected by the amount of reimbursement provided by third party payors
to hospitals or private practitioners for procedures performed using such
products. Reimbursement rates from private insurance companies vary depending
upon the procedure performed, the third-party payor, the insurance plan, and
other factors. Medicare generally reimburses hospitals that are expected to
purchase the Company's products and proposed products for their operating costs
for in-patients on a prospectively-determined fixed amount for the costs
associated with an inpatient hospital stay based on the patient's discharge
diagnosis, regardless of the actual costs incurred by the hospital in furnishing
care. The willingness of these hospitals ("PPS hospitals") or private
practitioners to purchase the Company's products and proposed products, if any,
could be adversely affected if they determined that the prospective payment
amount to be received for the procedures for which the Company's products or
proposed products are used would be inadequate to cover the costs associated
with performing the procedures using the Company's proposed products, or to be
less profitable than using an alternative procedure for the same condition.

Until October 1991, hospitals were generally able to pass their capital
costs on to Medicare which reimbursed such costs on a reasonable basis subject
to percentage limitations. However, under regulations which became effective
October 1, 1991, reimbursement for capital-related costs began to be included in
the prospective payment system. In general, under the new system, which has a 10
year phase-in period, hospitals will be reimbursed for capital costs related to
services provided to inpatients through an add-on payment made to the hospital
based upon the Diagnostic Related Group (DRG) for each such inpatient. While it
is unclear what effects the prospective payment systems will have, it may cause
hospitals to more closely scrutinize new capital expenditures and it could have
an adverse effect on recovery of capital costs for equipment such as the
MAGNA-SL and proposed products. Capital costs for hospital outpatient
departments are currently reimbursed by Medicare in an amount equal to 90% of
their reasonable capital costs.

A number of states, through Certificate of Need ("CON") laws, limit the
establishment of new facility or service or the purchase of major medical
equipment to situations where it has been determined that the need for such
facility, service or equipment exists. The market for the MAGNA-SL and the
Company's proposed products may be adversely affected by CON regulation to the
extent that institutional health care facility purchasers and lessors of the
products are subject to CON regulation. While many states exempt
non-institutional providers from CON coverage, a number of

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states have extended CON coverage to physicians' offices or medical groups by
restricting the purchase of major medical equipment wherever located.

C. EPA REGULATION

The Company, and any research facility which it operates, would also be
required to comply with any applicable federal and state environmental
regulations and other regulations related to hazardous materials used,
generated, and/or disposed of in the course of its operations. The Company
presently does not have a facility.

COMPETITION

The health care industry in general, and the market for diagnostic imaging
equipment in particular, is highly competitive and virtually all of the other
entities known to management of the Company to be engaged in the manufacture of
MRI scanners possess substantially greater resources than the Company. At the
present time, manufacturers of whole body scanners include the General Electric
Company; Toshiba; Bruker Medical Imaging Inc.; Elscint, Ltd.; Siemens
Corporation; Philips Medical Systems, a division of Philips Industries, N.V.;
Picker International Corporation; Shimadzu; and Hitachi. The Company believes
that the principal elements of competition which will affect successful
marketing of MRI systems, including any Elscint marketing efforts pursuant to
the Proposal, will include price, product performance, service and support
capability, financing terms and brand name recognition. The Company is aware of
one company, Esaote Biomedica SpA. ("Esaote") engaged in marketing an MRI device
for extremity imaging. Their product, the ARTOSCAN, received FDA marketing
clearance in October 1993, approximately 11 months prior to the Company's
receipt of clearance. The Company believes that the MAGNA-SL had substantial
performance advantages over the ARTOSCAN product including: mid-field rather
than low-field magnet, greater imaging volume, ability to do weight bearing and
fully bent limb scans, greater patient positioning opportunities and superior
image quality. However, Esaote has marketed hundreds of its extremity imaging
devices. The list price of the ARTOSCAN product is believed to be approximately
25% lower than the Company's list price was for the MAGNA-SL. The Company had
planned to compete with the ARTOSCAN product on the basis of image quality, a
wider range of imaging opportunities and greater patient comfort, including any
Elscint marketing efforts pursuant to the Proposal.

The Company also has experienced competition from the use of x-ray
machines. The Company believes that the use of x-ray machines is widely
established and clinically accepted. Although the Company believes that an MRI
scanner will represent a safer and more effective diagnostic imaging device,
there can be no assurance that any products developed by the Company will be
commercially accepted, especially in light of the cost-savings involved in
purchasing x-ray machines and the familiarity of current practitioners in
operating such devices. While the Company believes that the price of the
MAGNA-SL as well as its low operating costs would permit health care providers
to conduct MRI imaging and diagnostic readings for less cost than is currently
possible, there can be no assurance that the cost of the MAGNA-SL or any other
products developed will be able to successfully compete with conventional x-ray
machines. In addition, although the Company believes that the cost of whole body
MRI scanners will render their use in screening mammography or diagnostic
purposes undesirable, there can be no assurance that this technology or other
technologies will not successfully compete with any MRI scanner designed to
image specific parts of the body. In addition, there can be no assurance that
other technologies will not be developed that will render the Company's proposed
MRI scanners obsolete or uneconomical. To some extent, competition will also
come from the manufacturers of other types of diagnostic imaging systems, such
as ultrasound or thermography.

PRODUCT LIABILITY

Product liability claims relating to the Company's products may be asserted
against the Company. If such claims are asserted against the Company, there can
be no assurance that the Company will have sufficient resources to defend
against any such claim or satisfy any such successful claim. The Company had
product liability insurance which was terminated during 1997 for non-payment of
insurance premiums.

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Further, Beta has notified the Company that it is unsatisfied with the
performance of the MAGNA-SL at one or more of its owned sites and has threatened
product lability exposure to the Company. The Company presently has no remedy
for such assertion because its lack of financial resources, unsatisfactory
vendor relationships and lack of continuing technical personnel, among other
factors, prevent it from addressing such concerns. In the event of an uninsured
or inadequately insured product liability claim, the Company's business and
financial condition, which is presently in severe distress, could further be
materially adversely affected.

The Company's agreement with Elscint (which agreement is not presently
operative) requires Elscint to carry product liability insurance, and the
Company may attempt to require any other joint venturers or licensees to carry
product liability insurance. However, there can be no assurance that such joint
venturers or licensees will agree, or will be able, to obtain or maintain
insurance at an acceptable cost or that, if such insurance is obtained, it will
be adequate to cover the Company's potential liability.

HUMAN RESOURCES

On March 5, 1997, the Company informed 10 of its 20 employees that they
were being indefinitely laid off and between March 5 and March 15, 1997, another
4 employees were laid off due to insufficient funds for their payroll. The
remaining employees were offered the opportunity to continue with the Company in
exchange for deferred compensation pending successful completion of continuing
efforts to complete a financing (which was not completed). At March 15, 1997,
unpaid payroll to terminated and continuing employees totaled approximately
$150,000. Of the remainder, only Lawrence A. Minkoff, Ph. D., the Company's
Chairman, president and Chief Executive Officer, is in the full time employ of
the Company as of October 15, 1997. The remaining employees have terminated
their full time relationship with the Company and approximately four of them
serve or have indicated that they may serve as part time employees or
consultants to the Company. At October 1, 1997 the Company owes over $300,000 in
unpaid payroll to such employees. There is no assurance that any of such
employees will not institute actions against the Company to recover their unpaid
payroll.

ITEM 2: DESCRIPTION OF PROPERTY

The Company presently has no facilities with which to conduct its
operations. Certain inventory and equipment have been secured in storage
facilities (for which unpaid storage charges encumber the Company's ability to
recover such property) and certain corporate and other records have been secured
in the personal residences of key individuals or directors. From April 26, 1996
until May 1997 the Company leased approximately 16,000 square feet of office,
manufacturing and research and development space in Edgewood, New York. The
existing lease was due to expire in May 2003 but was terminated pursuant to a
stipulation and judgment entered in the District Court of the County of Suffolk
(New York), Fifth District Central Islip Part, on April 3, 1997. Prior to April
26, 1996, the Company leased approximately 10,000 square feet of office,
manufacturing and research and development space in Hicksville, New York under a
lease which was to expire in September 1997. Under a "Surrender of Lease
Agreement", the Company and the landlord agreed to the early termination of the
lease and the forgiveness of certain amounts payable under the lease which were
overdue. The Company believes that its current need is for a very small office
facility.

ITEM 3: LEGAL PROCEEDINGS

As a result of a period of deferral of payment of obligations due to the
lack of cash, the Company is the subject of numerous threatened, and certain
actual, litigation actions for nonpayment of obligations or for breach of
agreements (including threatened litigation with respect to the Elscint
agreement, the agreement with a European supplier of MRI components, and
others). One vendor, Devcom, has initiated litigation in the United States
District Court for the Eastern District of New York over certain contested
balances due and certain alleged commitments for services in the future and, on
October 7, 1997, the vendor received a judgment against the Company in the
amount of $300,000 because of the Company's lack of financial resources to
defend itself in this action. The Company has entered into a

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stipulation of judgment with its former landlord (Heartland Rental Properties
Partnership) calling for payment of approximately $120,000 (see "Item 2 --
"Description of Property"). Other judgments, for lesser amounts have been
entered against the Company. Many other vendors and some employees have
threatened the Company with litigation to recover amounts due them and a
significant number of these parties have retained counsel who have contacted the
Company regarding their claims. In many, if not most of these situations, the
Company has no defense because it has received and accepted the goods or
services but has been unable to pay. The significant likelihood exists that the
Company could be forced to seek protection from the bankruptcy court in order to
satisfy its creditors if it is unable to complete a new financing (which
financing the Company believes would be largely conditioned upon the creditors
forgiveness of very significant portions of the amounts due).

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

No matters were submitted to a vote of security holders during the quarter
ended February 28, 1997.

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PART II

ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(A) MARKET INFORMATION

The following sets forth the high and low bid prices for the Company's
Class A Common Stock, Class A Warrants, Class B Warrants, Class E Warrants, and
IPO Units (each consisting of one share of Common Stock, one Class A Warrant and
one Class B Warrant) for each quarter during the last two fiscal years and
through August 31, 1997. The source for the high and low bid information for
periods subsequent to December 27, 1995 and through April 10, 1997 is Nasdaq and
for periods between March 14 and December 26, 1995, and subsequent to April 10,
1997, is the OTC Bulletin Board. Quotations reflect interdealer prices without
retail mark-up, mark-down or commission, and may not represent actual
transactions.

Fiscal Year Ending February 28 or 29,
-----------------------------------------------------
1998 1997 1996
-------------- --------------- ----------------
High Low High Low High Low
------ ------ ------ ------ ------ ------
CLASS A COMMON STOCK:

First Quarter ended 31/32 3/16 4 3 5 1/4 1 3/4
May 31,

Second Quarter ended 1 1/32 1/4 4 1/4 1 3/4 4 3/4 3 1/4
August 31,

Third Quarter ended 2 1/16 7/8 4 1/4 3
November 30,

Fourth Quarter ended 1 1/4 1/2 3 7/8 2 1/2
February 28,

CLASS A WARRANTS:

First Quarter ended 3/16 1/16 13/16 3/8 1 1/8 1/16
May 31,

Second Quarter ended 1/4 3/16 1/2 5/32 1 1/4
August 31,

Third Quarter ended 3/16 1/8 3/4 1/4
November 30,

Fourth Quarter ended 5/32 1/16 7/8 1/2
February 28,

CLASS B WARRANTS:

First Quarter ended 5/32 1/8 7/16 1/32
May 31,

Second Quarter ended 3/16 1/32 7/16 3/16
August 31,

Third Quarter ended 3/32 1/32 5/16 1/8
November 30,

Fourth Quarter ended 3/32 1/32 1/4 1/8
February 28,

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First Quarter ended 1/16 1/16 13/16 5/8
May 31,

Second Quarter ended 1 1/2 3/8
August 31,

Third Quarter ended 5/8 1/8
November 30,

Fourth Quarter ended 1/16 1/16 29/32 3/8
February 29,

IPO UNITS:

First Quarter ended 5/8 3/16 4 1/8 3 3/4 7 2
May 31,

Second Quarter ended 1 5/8 4 1/8 2 5 3 1/4
August 31,

Third Quarter ended 2 1 1/4 5 1/4 3 1/4
November 30,

Fourth Quarter ended 1 7/8 3/8 4 1/4 3
February 28,

- --------------

Each Class E Warrant entitles the holder to purchase one share of Class A
Common Stock at $4.375, is exercisable until December 26, 2000 and is subject to
redemption by the Company at $0.05 per warrant, upon thirty days' written
notice, based upon certain closing bid prices over certain periods of time.
Each Class A Warrant initially entitled the holder to purchase one share of
Common Stock and one Class B Warrant at approximately $9.00 and each Class B
Warrant initially entitled the holder to purchase one share of Common Stock at
approximately $13.50 per share. The number of shares purchasable upon exercise
of the Class A and Class B Warrants, and the respective exercise prices of such
securities, have been adjusted to give effect to certain securities issuances
during fiscal 1996 as a result of antidilution provisions of such securities.
The Class A and Class B Warrants are exercisable until March 30, 1998 and are
subject to redemption by the Company at $0.05 per warrant, upon 30 days' written
notice, based upon certain closing bid prices over certain periods of time. See
Note 7 to "Financial Statements."

There is no established public trading market for the Company's Class B
Common Stock.

On October 15, 1997, the closing bid price for the Class A Common Stock was
approximately $0.20.

During February, 1997 the Company sold 300,000 shares of Class A Common
Stock in a private placement (pursuant to Section 4(2) under the Securities Act
of 1933) to two accredited investors for $100,000 in cash. There were no selling
commissions or discounts.

-18-

<PAGE>

(B) APPROXIMATE NUMBER OF EQUITY STOCK HOLDERS

Based upon information supplied from the Company's transfer agent, the
Company believes that the number of record holders of the Company's equity
securities as of October 15, 1997 are approximately as follows:

Title of Class Number of Record Holders
-------------- ------------------------

Class A Common Stock 99

Class B Common Stock 53

Class E Warrants 9

Class A Warrants 30

Class B Warrants 32

The Company believes that the number of beneficial holders of the Company's
Common Stock as of October 15, 1997 is in excess of 300.

The Company has never declared or paid a cash dividend on any class of its
common stock and anticipates that for the foreseeable future any earnings will
be retained for use in its business. Accordingly, the Company does not expect to
pay cash dividends in the foreseeable future.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. ACTUAL RESULTS AND EVENTS
COULD DIFFER MATERIALLY FROM THOSE PROJECTED

(B) MANAGEMENT'S ANALYSIS AND DISCUSSION OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FINANCIAL CONDITION --

HISTORY -- During the fiscal year ended February 28, 1994, the Company
realized net proceeds of approximately $5.4 million in connection with the
initial public offering of its equity securities. At that time, it was estimated
that the proceeds of the public offering would last the Company for
approximately one year and that the Company may be dependent upon the receipt of
additional financing in order to continue its activities beyond that time.
During the fiscal year ended February 28, 1995, the Company raised an aggregate
of $1.65 million through the private placement of notes payable in 1995 and
warrants. During the fiscal year ended February 29, 1996, the Company raised
$500,000 (approximately $410,000 net proceeds) in a bridge loan transaction and
approximately $4.6 million in net proceeds from a public offering of equity
securities. During the year ended February 28, 1997, the Company raised
approximately $75,000 in a secured note payable to a shareholder due in March
1997 (which note is presently in default as to approximately $13,000 of
principal plus accrued interest and penalty interest) and approximately $100,000
in a private placement with accredited investors of 300,000 shares of the
Company's Class A Common Stock.

AT FEBRUARY 28, 1997 -- FINANCIAL CONDITION AND GOING CONCERN MATTERS -- In
its Form 10-QSB for the quarter ended November 30, 1996, the Company reported
cash of approximately $223,000, losses from operations of approximately $1.8
million for the nine months then ended, negative working capital of over
$100,000 and stockholders' equity of approximately $370,000. The Company also
reported that its ability to continue operations in the fourth

-19-

<PAGE>

quarter beginning December 1, 1996 was uncertain because of the uncertain
realization of receivables from and inventory produced for a related party
customer. Further, the Company disclosed that, if it could continue operations
in the quarter beginning December 1, 1996, its operations beyond that point
would be dependent upon the Company's ability to raise additional financing or
enter into strategic arrangements with others.

Two financings have occurred during the year ended February 28, 1997. These
are a private placement with accredited investors of 300,000 shares of Class A
common stock for $100,000 and an interest bearing note payable to a shareholder
due March 15, 1997 for $75,000 (approximately $13,000 principal amount plus
interest and penalty interest remains outstanding), secured by certain amounts
receivable from the taxing authorities of the United Kingdom and the machine
delivered to a related party in December 1996 but not paid for by that party.
The Company has not been able to complete any larger capital raising
transaction.

Through October 21, 1997, the amounts receivable from the related party
have not been paid, inventory produced for that party has not gone forward into
further production, the Company has been unable to raise adequate additional
financial resources and, as such, has ceased virtually all operations.

The Company has been unable to generate adequate cash flow from sales and
production of its first product and has been unable to complete sufficient
financing to continue its planned operations.

In February 1997, the Board of Directors agreed to retain a consultant
(subject to certain matters to be resolved) and approved a plan of restructuring
of the Company's operations conceived with the assistance of the consultant (the
"Plan"). The Plan has, as its objective, restructuring of the Company's existing
business by elimination of production, marketing and certain system engineering
by strengthening the existing relationship with Elscint Cryomagnetics, Ltd.
("Elscint" - see Item 1-- "Description of Business --Marketing and Distribution"
for a discussion of the relationship with Elscint), and repositioning the
Company into a royalty and development company in the near term. The
repositioning would involve a significant new development initiative in Cardiac
MRI through a joint collaboration with the Mount Sinai School of Medicine (the
Cardiac MRI Initiative"). The Company has received a proposal from Elscint (the
"Elscint Proposal") for certain work which is integral to the Plan but the
Company has been unable to finalize the proposal because of lack of funds. The
Company has concluded an agreement with the Mount Sinai School of Medicine for
the Cardiac MRI Initiative but has been unable to fund its obligations under the
agreement. The Plan involves termination of the majority of the Company's
workforce including the entire sales and marketing staff, the production
department and portions of the engineering staff. Further, the Plan includes
elimination of the Company's production, development and executive facility,
reductions in the need for other assets including leased assets with remaining
non-cancelable terms, and other measures. The Plan also includes raising new
financing in order to support the Cardiac MRI Initiative and the financial
resources needed to go forward with the Elscint Proposal. The Company recorded a
restructuring charge of approximately $1.5 million in February, 1997 for write
downs of fixed assets, inventory and deposits made with strategic vendors which
are non-refundable, as well as accruals for lease termination and other costs.
The ultimate amount may differ from this estimate.

Pursuant to the Plan and after its further attempts to raise sufficient
additional working capital were unsuccessful, on March 5, 1997, the Company
informed 10 of its 20 employees that they were being indefinitely laid off and
between March 5 and March 15, 1997, another 4 employees were laid off due to
insufficient funds for their payroll. The remaining employees were offered the
opportunity to continue with the Company in exchange for deferred compensation
pending successful completion of continuing efforts to complete a financing
(which was not completed). At October 1, 1997, unpaid payroll to terminated and
continuing employees totaled approximately $300,000. Of the remainder, only
Lawrence A. Minkoff, Ph. D., the Company's Chairman, president and Chief
Executive Officer, is in the full time employ of the Company as of October 15,
1997. The remaining employees have terminated their full time relationship with
the Company and approximately four of them serve or have indicated that they may
serve as part time employees or consultants to the Company. When the Company
vacated its principal production, development and executive facility it agreed
to a judgment against it by the landlord for unpaid rent in amounts exceeding
$50,000 and for additional rent totaling approximately $70,000 in settlement of
the unexpired term of the lease. The Company then placed certain inventory and
equipment in storage and several key individuals continued the search for new
capital. The

-20-

<PAGE>

Company's operations have, therefore, all but ceased. Additionally, various
creditors have threatened or initiated legal action to recover amounts due them
which the Company has no ability to pay (See Litigation).

While the Company has ceased virtually all operations, it continues to
search for new capital in order to continue its operations pursuant to the Plan.
The Company has been in negotiation with an investor group to provide certain
limited funding to the Company, predicated on the Company's ability to
significantly reduce its recorded liabilities (through creditor concessions).
The funding, if completed, would result in the issuance of a number of shares of
common stock in excess of the currently outstanding shares. No assurance can be
given that the Company will be able to complete such financing.

On April 10, 1997, the Company's equity securities were removed from
listing on the NASDAQ SmallCap Market after the Company's appeal to the Listing
Qualifications Committee was unsuccessful.

The Company is continuing its efforts to (1) raise additional capital, (2)
enter into a strategic arrangement with others, and (3) move forward with the
new product opportunity in cardiac MRI. There is no assurance that any of these
efforts will be successful and that the Company will be able to continue even
its severely curtailed operations.

As of February 28, 1997 Magna-Lab Inc. (the "Company") had no substantial
current assets, approximately $2.1 million of liabilities and virtually no cash.
Further, the Company has incurred a loss of approximately $4.3 million for the
fiscal year ended February 28, 1997, and has had net cash outflows from
operating and investing activities of approximately $3.2 million, for the year
then ended. Further, losses have continued since February 28, 1997. These
factors, among others, indicate that the Company is in severe financial
distress, in fact insolvent and therefore in need of very significant additional
financing or a strategic business arrangement in order to continue any aspect of
its planned operations.

There can be no assurances that management's plans described in the
preceding paragraphs will be realized. These factors, among others, raise
substantial doubt about the Company's ability to continue operations as a going
concern.

The Company believes, based upon present resources (which are virtually non
existent) and anticipated operations, that it does not have the financial
resources to fund its operations for any period of time including the coming
twelve months without substantial additional capital or a strategic business
arrangement. This belief is based upon estimates and the Company belief about
its financial requirements, as well as other information contained in this
report, are based upon present resources, conditions, developments and
anticipated operations. This belief is based upon estimates and assumptions
including, among other things, levels of existing and projected operating costs.
The foregoing information constitutes forward-looking statements within the
meaning of Section 21E under the Securities Exchange Act of 1934, as amended.

This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Actof 1934. Actual results and events
could differ materially from those projected.

The Company's belief about its financing plans and prospects, Elscint
Proposal and arrangements with Mount Sinai School of Medicine, as well as other
information contained in this report (including its prospects for surviving as a
going concern over the next twelve months) are based upon present conditions and
anticipated developments. This belief is based upon estimates and assumptions
including, among other things, completion of financing (including, without
limitation, with the investment group with which it is negotiating) necessary to
fund the planned activities, timely and successful completion of development
milestones, competitive and intellectual property factors, cooperation of
creditors and others, and successful efforts by Elscint, among other matters.
In the event that the Company's

-21-

<PAGE>

estimates and assumptions prove materially incorrect, the Company does not
presently have the financial resources to fund planned operations. The foregoing
information constitutes forward-looking statements within the meaning of Section
21E under the Securities Exchange Act of 1934, as amended.

RESULTS OF OPERATIONS --

Operations and investing activities utilized approximately $3,200,000 of
cash in the year ended February 28, 1997 due to losses of approximately
$4,300,000, as well as the write off of inventories, amounts receivable from a
related customer and the accrual of liabilities inherent in the restructuring
plan previously discussed.

During the year ended February 28, 1997, capital expenditures totaled
approximately $186,000, including tooling, equipment and software, and
approximately $83,000 was financed by capital leases with third parties (such
leases have gone into default for non-payment, and subsequent to February 28,
1997, the collateral for such lease arrangements have been returned).

Revenues for the year ended February 28, 1997 reflect several factors
including (i) shipment of two MAGNA-SL's to a related party, Beta (one of which
did not generate cash because it had been paid for with customer deposits during
the prior fiscal year and the other of which remains unpaid) (ii) shipment of
components of approximately $99,000 to Elscint in order to accommodate the stage
of their activities to produce and sell the MAGNA-SL prior to the Company's
failure to complete certain critical development tasks to Elscint's
satisfaction, (iii) receipt and recognition of $250,000 in non-refundable
advance royalties from Elscint, (iv) improved gross profit margins on shipment
in the current periods due to improvements in the cost of the MAGNA-SL as well
as the reduction of older, higher cost inventories, (v) a charge of
approximately $1.5 million of restructuring costs in connection with the Plan
and (vi) the reduction of interest and financing expenses associated with bridge
financings in the prior fiscal year. Reduced research and development levels
reflect, among other things, redeployment of certain development personnel in
production and delivery activities as well as a reduced headcount. These
improvements were somewhat mitigated by higher costs in the following areas (i)
substantially higher professional and other costs associated with business
development matters including closing the Elscint licence and distribution
agreement and other matters during the current year, and (ii) higher occupancy
costs associated with the new production facility.

-22-

<PAGE>

ITEM 7. FINANCIAL STATEMENTS

MAGNA-LAB INC.

INDEX TO FINANCIAL STATEMENTS

Page
-------

INDEPENDENT AUDITORS' REPORT .................................... F-1

FINANCIAL STATEMENTS:

BALANCE SHEET ................................................ F-2

STATEMENTS OF OPERATIONS ..................................... F-3

STATEMENTS OF CASH FLOWS ..................................... F-4

STATEMENTS OF STOCKHOLDERS' DEFICIENCY ....................... F-5

NOTES TO FINANCIAL STATEMENTS ................................ F-6 - F-20

-23-

<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Magna-Lab Inc.

We have audited the accompanying balance sheet of Magna-Lab Inc. as of February
28, 1997, and the related statements of operations, cash flows and stockholders'
deficiency for the years ended February 28, 1997 and February 29, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Magna-Lab Inc. as of February
28, 1997, and the results of its operations and its cash flows for the years
ended February 28, 1997 and February 29, 1996 in conformity with generally
accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
has suffered significant and recurring losses from operations and has an
accumulated deficit and working capital deficiency at February 28, 1997.
Furthermore, the Company has been unable to generate adequate cash flow from
sales and production of its first product and has been unable to complete
sufficient financing to continue its originally planned operations. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans regarding those matters also are described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

Rothstein, Kass & Company, P.C.

Roseland, New Jersey
October 9, 1997

F-1
-24-

<PAGE>

MAGNA-LAB INC.

BALANCE SHEET
February 28, 1997

ASSETS

CURRENT ASSETS:
Cash ............................................... $ 10,000
Accounts receivable, net of allowance for
doubtful accounts of $356,000 .................... 61,000
----------
Total current assets .......................... $ 71,000

PROPERTY AND EQUIPMENT ............................... 18,000
----------
$ 89,000
==========

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

CURRENT LIABILITIES:
Note payable ....................................... $ 75,000
Accounts payable ................................... 1,126,000
Accrued expenses and other current liabilities ..... 908,000
----------
Total current liabilities ..................... $2,109,000

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIENCY:
Preferred stock, par value $.01 per share,
5,000,000 shares authorized, no shares issued
Common stock, Class A, par value $.001 per share,
40,000,000 shares authorized, 3,765,851 shares
issued and outstanding ........................... 4,000
Common stock, Class B, par value $.001 per share,
3,750,000 shares authorized, 1,824,149 shares
issued and outstanding 2,000
Capital in excess of par value ..................... 13,324,000
Common stock subscribed and to be issued ........... 140,000
Accumulated deficit ................................ (15,490,000)
----------
Total stockholders' deficiency ................ (2,020,000)
----------
$ 89,000
==========

F-2
-25-

<PAGE>

MAGNA-LAB INC.

STATEMENTS OF OPERATIONS
Years Ended February 28, 1997 and February 29, 1996

1997 1996
----------- -----------
REVENUES
Sales .......................................... $ 881,000 $ 730,000
Royalties ...................................... 250,000
----------- -----------
1,131,000 730,000

COST OF REVENUES ................................. 626,000 612,000
----------- -----------

GROSS PROFIT ..................................... 505,000 118,000
----------- -----------

OPERATING EXPENSES:
General and administrative ..................... 1,507,000 971,000
Selling and marketing .......................... 617,000 611,000
Research and development ....................... 1,017,000 1,127,000
Provision for restructuring costs .............. 1,489,000
Provision for doubtful accounts, related party.. 256,000
----------- -----------
4,886,000 2,709,000

LOSS FROM OPERATIONS ............................. (4,381,000) (2,591,000)
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ............................... (19,000) (323,000)
Interest income ................................ 51,000 19,000
----------- -----------
32,000 (304,000)
----------- -----------
NET LOSS ......................................... $(4,349,000) $(2,895,000)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING ............................. 3,751,000 2,710,000
=========== ===========

NET LOSS PER SHARE ............................... $ (1.16) $ (1.07)
=========== ===========

F-3
-26-

<PAGE>

MAGNA-LAB INC.

STATEMENTS OF CASH FLOWS
Years Ended February 28, 1997 and February 29, 1996

1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................... $(4,349,000) $(2,895,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................. 119,000 102,000
Imputed interest .............................. 220,000
Provision for restructuring costs ............. 1,489,000
Provision for doubtful accounts ............... 256,000
Other ......................................... 25,000 7,000
Changes in operating assets and liabilities:
Accounts receivable ......................... (355,000) (62,000)
Inventory ................................... (333,000) 241,000
Deposits and other current assets ........... 253,000 (34,000)
Other assets ................................ 2,000
Accounts payable and other current
liabilities ............................... (207,000) 216,000
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES .............. (3,100,000) (2,205,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES, purchases
of property and equipment ........................ (103,000) (40,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of stock ................................... 100,000 5,781,000
Conversion of notes and warrants
(non-cash portion - see Note 6) ................ 167,000
Proceeds from notes payable ...................... 75,000 675,000
Payments on notes payable ........................ (1,065,000)
Debt and equity offering expenses ................ (1,169,000)
Principal payments on capital lease obligations .. (9,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......... 166,000 4,389,000
----------- -----------

NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................. (3,037,000) 2,144,000
CASH AND CASH EQUIVALENTS:
Beginning of year ................................ 3,047,000 903,000
----------- -----------
End of year ...................................... $ 10,000 $ 3,047,000
=========== ===========

F-4
-27-

<PAGE>

MAGNA-LAB INC.

STATEMENTS OF STOCKHOLDERS' DEFICIENCY
Years Ended February 28, 1997 and February 29, 1996

Common Stock Common
--------------------------------------------------- Capital in Stock
Class A Class B Excess Subscribed
------------------------ --------------------- of Par and to be Accumulated
Shares Amount Shares Amount Value Issued Deficit
--------- ---------- --------- ---------- ------------ ---------- ------------

<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, February 28, 1995 .. 1,163,922 $ 1,000 1,861,078 $ 2,000 $ 7,312,000 $ -- $ (8,246,000)

DEBT/WARRANT CONVERSION ...... 625,000 1,000 1,373,000

CONVERT B SHARES TO A ........ 7,880 (7,880)

PUBLIC OFFERING OF STOCK
AND WARRANTS, net ........... 1,850,000 2,000 4,622,000

CONVERSION OF BRIDGE
NOTES, net .................. 60,000 10,000

SHARES ISSUED TO WARRANT
HOLDERS ..................... 25,000

SHARES ISSUED TO
CONSULTANT .................. 5,000 7,000

NET LOSS ..................... (2,895,000)
--------- ---------- --------- ---------- ------------ ---------- ------------
BALANCES, February 29, 1996 .. 3,736,802 4,000 1,853,198 2,000 13,324,000 (11,141,000)

CONVERT B SHARES TO A ........ 29,049 (29,049)

COMMON STOCK TO BE ISSUED
IN CONNECTION WITH
SUBSCRIPTION AGREEMENTS ..... 100,000

COMMON STOCK TO BE ISSUED
IN SETTLEMENT OF LIABILITY .. 40,000

NET LOSS ..................... (4,349,000)
--------- ---------- --------- ---------- ------------ ---------- ------------
BALANCES, February 28, 1997 .. 3,765,851 $ 4,000 1,824,149 $ 2,000 $ 13,324,000 $ 140,000 $(15,490,000)
========= ========== ========= ========== ============ ========== ============

</TABLE>

F-5
-28-

<PAGE>

MAGNA-LAB INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1 - DISCUSSION OF THE COMPANY'S ACTIVITIES/PRODUCTS AND CASH REQUIREMENTS:

ACTIVITIES/PRODUCTS - Since commencement of operations on February 10,
1992, Magna-Lab Inc. (the "Company") has developed and had intended to
manufacture and market the MAGNA-SL, the first of a planned series of
anatomy-specific MRI (Magnetic Resonance Imaging) products which are
smaller and cost less to own, install and operate than present "whole
body" MRI systems.

Since receiving US marketing clearance for the MAGNA-SL in September
1994 from the Food and Drug Administration, the Company has sold and
delivered four MAGNA-SL scanners. Three such sales were made to a
related party with which the Company has entered into a sales,
marketing and distribution agreement. The third scanner delivered to
this related party has not been paid for by such related party and the
Company has provided for this receivable.

Prior to February 29, 1996, the Company had reported its activities as
a development stage company.

GOING CONCERN MATTERS - The financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
has suffered significant and recurring losses from operations and has a
working capital deficiency of $2,038,000 and an accumulated deficit of
$15,490,000 at February 28, 1997. In addition, the Company has been
unable to generate adequate cash flow from sales and production of its
first product and has been unable to complete sufficient financing to
continue its originally planned operations. The Company's current
liquidity is not adequate to meet its obligations as they come due. A
significant likelihood exists that the Company could be forced to seek
protection from the bankruptcy court in order to satisfy its creditors
if it is unable to complete a new financing.

In February 1997, the Board of Directors agreed to retain a consultant
and approved a plan of restructuring of the Company's operations
conceived with the assistance of the consultant (the "Plan"). The Plan
has, as its objective, the restructuring of the Company's existing
business by elimination of production, marketing and certain system
engineering by strengthening the existing relationship with Elscint
Cryomagnetics, Ltd., a subsidiary of Elscint, Ltd. ("Elscint") (see
Note 3), and repositioning the Company into a royalty and development
company in the near term. The repositioning would involve a significant
new development initiative in cardiac MRI through a joint collaboration
with the Mount Sinai School of Medicine (the "Cardiac MRI Initiative")
(see Note 12). The Company has received a proposal from Elscint (the
"Elscint Proposal") for certain work which is integral to the Plan but
the Company has been unable to finalize the proposal because of its
lack of funds. The Company has entered into an agreement with the Mount
Sinai School of Medicine for the Cardiac MRI Initiative but has been
unable to fund its obligations under the agreement.

F-6
-29-

<PAGE>

MAGNA-LAB INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1 - DISCUSSION OF THE COMPANY'S ACTIVITIES/PRODUCTS AND CASH REQUIREMENTS
(CONTINUED):

The Plan involves the termination of the majority of the Company's
workforce including the entire sales and marketing staff, the
production department and portions of the engineering staff. Further,
the Plan includes the elimination of the Company's production,
development and executive facility, reductions in the need for other
assets including leased assets with remaining non-cancelable terms and
other measures. The Plan also includes raising new financing in order
to support the Cardiac MRI Initiative and the financial resources
needed to proceed with the Elscint Proposal. Accordingly, in February
1997, the Company recorded a restructuring charge of approximately $1.5
million for write downs of property and equipment, inventory and
deposits made with strategic vendors which are non-refundable, as well
as accruals for lease terminations and other costs.

Pursuant to the Plan and after its further attempts to raise
substantial additional working capital were unsuccessful, in March
1997, the Company informed the majority of its employees, all of whom
are owed compensation for services prior and subsequent to February 28,
1997, that they were being indefinitely laid off. While the remaining
employees have terminated their full time relationship with the
Company, approximately four of them serve or have indicated that they
may serve as part time employees or consultants to the Company. In May
1997, the Company vacated its principal production, development and
executive facility. The Company then placed certain inventory and
equipment into storage and several key individuals continued the search
for new capital. The Company's operations have, therefore, all but
ceased. Additionally, various creditors have threatened or initiated
legal action to recover amounts due them which the Company is currently
unable to satisfy (see Note 12).

While the Company has ceased virtually all operations, it continues to
search for new capital in order to continue its operations pursuant to
the Plan. The Company has been in negotiation with an investor group to
provide certain limited funding to the Company which is predicated on
the Company's ability to reduce its recorded liabilities (through
creditor concessions) by a significant amount. The funding could result
in the issuance of a number of shares of common stock in excess of the
currently outstanding shares. No assurance can be made that the Company
will be able to complete any such financing.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CASH AND CASH EQUIVALENTS - Included in cash and cash equivalents are
deposits with financial institutions as well as short term money market
instruments with maturities of three months or less when purchased.

RESEARCH AND DEVELOPMENT COSTS - Costs of research and development
activities are charged to operations when incurred. Items of equipment
or materials which are purchased and have alternative future uses
either in production or research and development activities are
capitalized, at cost, as equipment or inventory.

F-7
-30-

<PAGE>

MAGNA-LAB INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

INVENTORY - Inventories are stated at the lower of cost or market,
generally on the first-in, first-out (FIFO) method. Cost includes
materials, labor and manufacturing overhead (Note 9).

PROPERTY AND EQUIPMENT - Property and equipment, including purchased
software, are stated at cost, less accumulated depreciation and
amortization. The Company provides for depreciation and amortization
principally using the declining balance method as follows:

Estimated
Asset Useful life
----- -----------
Machinery and equipment ....................... 5-7 years
Purchased software ............................ 5 years

REVENUE RECOGNITION - The Company recognizes revenue when its products
are shipped to and accepted or first used by the customer. The Company
accrues the cost of the one-year warranty and service it offers to its
customers.

INCOME TAXES - Deferred income tax assets and liabilities are computed
for differences between the financial statement and tax bases of assets
and liabilities that will result in future taxable or deductible
amounts and are based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized.

NET LOSS PER SHARE - Net loss per share is computed based on the
weighted average number of Class A Common and Class B Common shares
outstanding, after subtracting certain shares which are forfeitable
unless certain events occur from shares outstanding.

In March 1997, the Financial Accounting Standards Board released
Statement No. 128, (SFAS 128), "Earnings Per Share", which requires
dual presentation of basic and diluted earnings per share on the face
of the statements of operations. Basic earnings per share excludes
dilution and is computed by dividing income available to common
stockholders by the weighted average common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Diluted
earnings per share is computed similarly to fully diluted earnings per
share pursuant to Accounting Principles Board Opinion No. 15. SFAS 128
is effective for fiscal years ending after December 15, 1997 and, when
adopted, will require restatement of prior years' loss per common
share.

Since the effect of outstanding options is antidilutive, they have been
excluded from the Company's computation of loss per common share.
Management does not believe that SFAS 128 will have an impact upon
historical loss per common share as reported.

F-8
-31-

<PAGE>

MAGNA-LAB INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair values of the Company's
assets and liabilities which qualify as financial instruments under
SFAS No. 107 approximate their carrying amounts presented in the
balance sheet at February 28, 1997.

IMPAIRMENT OF LONG-LIVED ASSETS - The Company periodically assesses the
recoverability of the carrying amounts of long-lived assets. A loss is
recognized when expected undiscounted future cash flows are less then
the carrying amount of the asset. An impairment loss is the difference
by which the carrying amount of an asset exceeds its fair value.

ACCOUNTING FOR STOCK-BASED COMPENSATION - In 1995, the Financial
Accounting Standards Board issued Statement No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation". As permitted by SFAS 123,
the Company continues to apply the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25). The differences between the
recognition and measurement provisions of SFAS 123 are not significant
to the Company's results of operations.

USE OF ESTIMATES AND ASSUMPTIONS - The preparation of financial
statements in accordance with generally accepted accounting principles
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 can, and in many cases will, differ from those
estimates.

NOTE 3 - RELATIONSHIP WITH ELSCINT:

In June 1996, the Company and Elscint entered into a definitive
agreement covering a strategic business arrangement in which Elscint
would manufacture the MAGNA-SL for marketing and sale by Elscint in
certain non-United States territories including Europe, the Peoples
Republic of China, parts of the Middle East and Latin America,
Australia and other territories. The Company would be paid royalties on
each system manufactured and sold by Elscint. To maintain its rights
under the agreement, Elscint was required to sell a minimum number of
systems in the first two year period (commencing after an agreed upon
period of start-up) and a higher number of systems in the first
permitted two year renewal period. Thereafter, the agreement was
renewable by Elscint in two year sales periods at higher minimum
quantities which would be set by the parties in good faith. Elscint had
the right to cure shortfalls by, among other things, making payment of
approximately 87% of the minimum royalties. Additionally, Elscint and
the Company had agreed to cooperate in making certain capital
expenditures and in other areas of manufacturing in order to reduce
production costs and increase operating margins. The parties also
agreed to collaborate in developing new features and improvements to
the MAGNA-SL and the Company agreed to provide certain ongoing research
and development support. Elscint had a right of first negotiation on
certain new products.

F-9
-32-

<PAGE>

MAGNA-LAB INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 3 - RELATIONSHIP WITH ELSCINT, LTD. (CONTINUED):

The parties agreed to certain development tasks and enhancements,
which, if not completed by the Company in November 1996, could, if not
cured, result in termination of the agreement by Elscint. Elscint
informed the Company that it is not satisfied with the completion of
certain of the tasks agreed to by the parties. The parties then
negotiated a new completion date for the tasks with Elscint reserving
all of its rights to complete the tasks itself at the Company's expense
or to terminate the agreement. Elscint informed the Company that it was
not satisfied with the Company's completion of the tasks after the new
completion date. Subsequently, Elscint presented to the Company the
Elscint Proposal (see Note 1) to assume the uncompleted tasks and
resulting in a major alteration and improvement of certain systems
comprising the MAGNA-SL. The Elscint Proposal requires a development
payment of $500,000 plus certain support activities from the Company.
The Company agreed to proceed with the Elscint Proposal but has been
unable to make any of the required payments to initiate or complete the
Proposal. In May 1997, the Company received notification from Elscint
that it would reserve the right to terminate its agreement with the
Company and seek damages from the Company as a result of the Company's
failure to cure the deficiencies identified by Elscint or alternatively
to proceed with the Elscint Proposal. Elscint has subsequently
indicated to the Company that it still wished to proceed with the
Elscint Proposal.

A third party indicated to the Company that it believes the agreement
with Elscint comes within the terms of a Company engagement with that
third party and that a fee is due them with respect thereto. The
Company disputed this. The agreement with the third party contained
provisions for compensation of 6% of certain amounts received and
refers to a minimum fee of $250,000 for covered transactions. The
Company negotiated with this party concerning this matter and, in light
of such negotiations and based upon the advice of counsel, accrued (but
still disputed) an amount of fee based on a percentage of the royalties
received to date. In December 1996, this third party presented the
Company with a demand for immediate payment of the $250,000 minimum fee
it asserts is due under its agreement. During August 1997, the parties
agreed to settle this matter for the issuance of 125,000 shares of the
Company's Class A common stock (Note 7).

F-10
-33-

<PAGE>

MAGNA-LAB INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 4 - DEPOSITS:

In August 1993, the Company made a $480,000 non-refundable deposit
payment pursuant to an agreement with an unaffiliated European supplier
of MRI components (consoles). Such agreement, as amended in July 1994,
provided for purchases of consoles and the license of certain
technology underlying the consoles. The Company had agreed to purchase
initial consoles which, under the amended agreement, would result in an
additional payment of $240,000 (substantially all of which had been
paid as of February 28, 1997) beyond the $480,000 paid as a deposit,
resulting in an unamortized deposit of $320,000 at February 28, 1997.
Such remaining deposit would have been amortized over the remaining
consoles to be purchased under the amended agreement. However, such
remaining deposits have been written off at February 28, 1997 as a
result of (a) the Company's inability to proceed with the purchase
commitments, and (b) the Company's intention to proceed with the
Elscint Proposal which would eliminate this component (Note 9). The
Company believes that its prior relationship with this vendor may no
longer be available. Further, it is possible that this vendor may
assert damages against the Company for the Company's failure to proceed
with plans which affect pricing of units delivered (volume discounts
for volumes not realized) or for other costs or investments made by
this vendor as a result of its relationship with the Company.

NOTE 5 - PROPERTY AND EQUIPMENT:

Property and equipment at February 28, 1997 consists of the following:

Estimated life 1997
-------------- --------
Machinery and equipment ..... 5 - 7 years $360,000
Purchased software .......... 5 years 49,000
--------
409,000
Less accumulated depreciation and amortization ......... (391,000)
--------
$ 18,000
========

During the year ended February 28, 1997, the Company wrote down its
property and equipment by $400,000 (see Note 9).

F-11
-34-

<PAGE>

MAGNA-LAB INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 6 - NOTES PAYABLE:

In May 1995, the Company repaid $400,000 principal amount of 10% bridge
notes (issued in November 1994) at their maturity together with accrued
interest of approximately $20,000. The remaining notes payable of $1.25
million at May 31, 1995 consisted of 12% bridge notes due in December
1995 (or the closing of an earlier equity financing), net of amounts
allocated to warrants issued together with the notes. In May and July
1995, holders of $1.25 million 12% bridge notes and warrants issued
December in 1994 indicated their intention to convert the notes,
accrued interest, warrants to purchase 625,000 shares of Class A common
stock and an additional approximately $167,000 into 625,000 shares of
Class A common stock. Of the notes and warrants, $500,000 and 250,000,
respectively, were held by an entity whose Treasurer became a member of
the Company's Board of Directors during 1996 and resigned as a Director
in December 1996.

In August 1995, the Company issued $500,000 of notes bearing interest
at 10% and payable in August 1997 or upon the earlier offering of
equity securities of the Company ("Bridge Notes"). A portion of the
Bridge Notes ($10,000, the "convertible portion") was repayable in
60,000 shares of Class A common stock. The Company did not allocate a
value to the conversion feature and allocated all of the proceeds of
the debt to notes payable. In January 1996, in accordance with the
terms of the Bridge Notes, all of the Bridge Note holders exercised
their rights to convert the convertible portion into a total of 60,000
shares of Class A common stock and the remaining $490,000 was paid
together with approximately $20,000 in accrued interest. Approximately
$92,000 of issuance costs were incurred in connection with this Bridge
Note financing.

In November 1995, the Company borrowed $100,000 under a 10% note
payable to an individual who is an officer of a corporate shareholder
of the Company. Of such amount, $75,000 was repaid and then reborrowed
in December 1995 and the entire amount, together with interest of
approximately $3,000, was repaid in January 1996.

In February 1997, the Company issued a $75,000 promissory note payable
to a shareholder collateralized by certain accounts receivable and a
machine delivered to a related party but not paid for by that related
party. The note is payable at prime (8.25% at February 28, 1997) plus
2% per annum and was due March 15, 1997. As of October 9, 1997,
approximately $62,000 has been repaid and approximately $13,000 plus
interest is in default.

Total cash interest paid in the years ended February 28, 1997 and
February 29, 1996 was $19,000 and $45,000, respectively.

F-12
-35-

<PAGE>

MAGNA-LAB INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 7 - STOCKHOLDERS' DEFICIENCY:

GENERAL - The Company was incorporated on February 22, 1991 in the
State of New York and commenced operations on February 10, 1992. All
references to share or per share data in the Company's financial
statements refer to amounts after a stock split, approved by the Board
of Directors on October 29, 1992, of approximately 21,532 shares for
one.

DESCRIPTION OF CLASS A AND CLASS B COMMON STOCK

The Class A and Class B common stock are identical in most respects
except that: (i) the Class B common stock has five votes per share and
the Class A common stock has one vote per share, (ii) shares of Class B
common stock are convertible into shares of Class A common stock and
require conversion to Class A for sale or transfer to a non-Class B
stockholder and (iii) by agreement with an underwriter, no more Class B
common stock can be issued. Holders of Class A and Class B common stock
have equal ratable rights to dividends and, upon liquidation, are
entitled to share ratably, as a single class, in the net assets
available for distribution. Shares of Class A and Class B common stock
are not redeemable, have no preemptive rights or cumulative voting
power, and vote as one class, except in certain circumstances, in
matters before the shareholders.

CLASS B COMMON STOCK SUBJECT TO FORFEITURE - Of the shares of Class B
common stock outstanding, 1,000,000 shares are subject to forfeiture,
to be returned to the Company by the holders, if certain conditions are
not met. Such conditions remaining include certain minimum amounts of
net income prior to February 28, 1998. Such conditions are subject to
adjustment upon certain issuances of additional shares of Class A
common stock. In the event that the conditions summarized above are met
and the subject shares are released from restriction, the Company would
be required to recognize a potentially significant charge to
compensation expense, and credit to capital in excess of par value,
with respect to such shares owned by officers or other employees.

INITIAL PUBLIC OFFERING OF CLASS A COMMON STOCK AND WARRANTS - During
the first quarter of fiscal 1994, the Company completed its initial
public offering of 1,150,000 units of its equity securities (including
exercise of the underwriter's over allotment option) yielding gross
proceeds of $6.9 million (approximately $5.4 million, net of
underwriting discounts and expenses). Each unit consists of one share
of Class A common stock, one redeemable Class A warrant (which entitles
the holder to purchase one share of Class A common stock initially at
$9.00 and includes one redeemable Class B warrant) and one redeemable
Class B warrant (which entitles the holder to purchase one share of
Class A common stock initially at $13.50 per share). The Class A and
Class B warrants are exercisable until March 1998 and are subject to
redemption by the Company at $.05 per warrant, upon 30 days' written
notice, based upon maintenance of certain closing bid prices of the
Class A common stock for a specific period. The warrants are also
subject to adjustment under certain conditions (see below).

F-13
-36-

<PAGE>

MAGNA-LAB INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 7 - STOCKHOLDERS' DEFICIENCY (CONTINUED):

In connection with the initial public offering, the Company sold an
option permitting the underwriter to purchase 100,000 units at an
exercise price of $7.20 per unit, subject to adjustment upon certain
issuances of additional shares of Class A common stock (see below). The
units underlying the underwriter's option are identical to the units
described above except that the Class A and Class B warrants contained
therein are not subject to redemption by the Company.

The July and August 1995 issuances of 625,000 shares of Class A Common
Stock as well as the conversion feature of the August 1995 Bridge Notes
and the January 1996 public offering of Class A common stock result in
an adjustment to the number of Class A and Class B warrants and
underwriter's unit purchase option as well as to the respective
exercise prices. The Company estimates that the approximate number of
shares subject to warrants outstanding and approximate warrant exercise
prices are as follows (before giving effect to further adjustment in
light of the subsequent issuances of 425,000 shares of Class A common
stock and the subsequent granting, subject to shareholder approval, of
910,000 options discussed elsewhere in Note 7):

Units or
Shares Subject Unit or
to Warrants Share Price
-------------- -----------
Class A Warrants ...................... 1,267,719 $ 8.16
Class B Warrants ...................... 1,267,719 $ 12.25
Unit Purchase Option (each unit
consisting of one share of
Class A Common Stock, one Class
A warrant and one Class B warrant) ... 109,684 $ 6.56

SECOND PUBLIC OFFERING OF CLASS A COMMON STOCK AND WARRANTS - In
January 1996, the Company completed the public offering of 1,850,000
shares of Class A common stock and 925,000 Class E Warrants sold
through an underwriter in units of two shares and one warrant. Each
Class E Warrant entitles the holder to purchase one share of Class A
common stock at $4.375 per share prior to December 26, 2000. The Class
E Warrants are redeemable by the Company at $0.05 per share at any time
that the average closing bid price of the Class A common stock is in
excess of $5.6875 for twenty consecutive trading days. The offering
yielded gross proceeds of $5.8 million (approximately $4.6 million net
of offering discounts and expenses). The net proceeds were used to pay
down certain indebtedness and to fund working capital and other
requirements of the Company's production of its first product, the
MAGNA-SL.

F-14
-37-

<PAGE>

MAGNA-LAB INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 7 - STOCKHOLDERS' DEFICIENCY (CONTINUED):

STOCK OPTIONS AND WARRANTS - In December 1992, the Company adopted its
1992 Stock Option Plan (the "Plan") which, as amended in 1993 and again
in 1995, provides for the granting of incentive stock options (ISO),
nonqualified stock options to purchase 1,000,000 shares of the
Company's Class A common stock or stock appreciation rights (SAR). The
exercise price of options granted under the Plan shall not be less than
110% of the fair market value of the stock at the date of grant.

In May 1997, the Company determined that the purposes of the 1992 Stock
Option Plan were not being adequately achieved with respect to those
employees and consultants holding options that were exercisable above
current market value and that it was in the best interests of the
Company and the Company's shareholders that the Company retain and
motivate such employees and consultants. Therefore, in order to provide
such optionees the opportunity to exchange their above market value
options for options exercisable at the current market value, the
Company repriced the outstanding options under the 1992 Stock Option
Plan of selected individuals, who were identified by the Company's
Board of Directors to have a continuing role in the Company's plan of
restructure and having exercise prices above $2.00 per share, with new
stock options at an exercise price of $0.25 per share. In aggregate,
750,000 options were repriced. In addition, in recognition of their
efforts to advance the plan of restructuring, the Company awarded,
subject to shareholders' approval, 910,000 new options at $0.25 per
share to certain individuals. 660,000 of such options were granted for
a five year term, immediately exercisable, while 250,000 of such
options would be exercisable ratably over three years. Stock option
activity for the years ended February 28, 1997 and February 29, 1996,
giving effect to the May 1997 repricing, is as follows:

1997 1996
--------------------------- ------------------------
Shares Shares
Under Under
Option Price Option Price
------- ------------- ------- -------------

<S> <C> <C> <C> <C>
Beginning .............. 983,500 $0.25 - $2.81 746,000 $0.25 - $2.81
Canceled ............... 41,000 $2.50 27,500 $2.50
Granted ................ 7,500 $0.25 265,000 $0.25 - $2.63
------- ------------- ------- -------------
End .................... 950,000 $0.25 - $2.81 983,500 $0.25 - $2.81
======= ============= ======= =============
</TABLE>

Of the options granted to date, options to purchase 727,500 shares have
been granted to officers and/or directors of the Company. Options
granted contain various vesting provisions and expiration dates. Of the
options granted to date, approximately 950,000 and 800,000 became
exercisable at February 28, 1997 and February 29, 1996, respectively.

The option agreement with one officer obligates the Company to use its
best efforts to register the shares underlying the options.

F-15
-38-

<PAGE>

MAGNA-LAB INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 7 - STOCKHOLDERS' DEFICIENCY (CONTINUED):

During the year ended February 28, 1995, five year warrants to purchase
825,000 shares of Class A common stock were issued in connection with
the private placement of an aggregate amount of $1.65 million principal
amount of notes payable issued in November and December 1994 and
described in Note 5. Such warrants were valued at approximately
$325,000, an estimate of their fair value at the time of issuance (see
Note 6). In July and August 1995, warrants to purchase 625,000 shares,
together with related notes payable, accrued interest and an additional
cash payment, were exchanged as described in Note 6. Such warrants were
issued with an exercise price of $2.85 per share, a price which was in
excess of the market price of the Class A common stock when issued. The
remaining warrants to purchase 200,000 shares are subject to adjustment
for anti-dilution in certain circumstances and grant the holders
certain other rights including those summarized below.

The agreement with certain holders of warrants to purchase 200,000
shares of Class A common stock permit those holders to obtain warrants
to purchase 200,000 additional shares if they chose to invest $600,000
in an offering by the Company of securities and grant such holders
certain registration rights. On June 16, 1995, the Company agreed to
grant, upon the completion of a public offering, 25,000 shares of stock
to such warrant holders in exchange for their agreement, in connection
with a proposed public offering, not to sell their shares prior to July
1, 1996.

The pro forma effect, as if such transactions had occurred at the
beginning of fiscal 1996, on Net Loss, Net Loss per Share and Weighted
Average Number of Shares Outstanding of: (i) the conversion of $1.25
million principal amount of notes and warrants into 625,000 shares of
Class A common stock (discussed in Note 6), (ii) the conversion of the
convertible portion of the 1995 Bridge Notes (discussed in Note 6) into
60,000 shares of Class A common stock and (iii) the issuance of 25,000
shares of stock to the Class C warrantholders as described above, is as
follows:

As Reported Pro Forma
----------- -----------

Net loss ............................. $(2,895,000) $(2,783,000)
Weighted average number of shares .... 2,710,000 3,043,000
Net loss per share ................... $ (1.07) $ (0.92)

COMMON STOCK SUBSCRIBED AND TO BE ISSUED - Pursuant to January 1997
subscription agreements, the Company sold 300,000 shares of its Class A
common stock in a private placement with accredited investors for
$100,000. Such shares will be issued subsequent to February 28, 1997.

F-16
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<PAGE>

MAGNA-LAB INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 7 - STOCKHOLDERS' DEFICIENCY (CONTINUED):

In connection with the August 1997 settlement of a dispute with a third
party (see Note 3), the Company has agreed to issue 125,000 shares of
its Class A common stock. At the date of settlement, such shares were
valued at $40,000 (approximately $0.31 per share).

NOTE 8 - SALES AND DISTRIBUTION AGREEMENTS/CUSTOMER DEPOSITS:

The Company has entered into various sales, distribution and sales
representation agreements covering the sale of the MAGNA-SL. Such
agreements include an exclusive arrangement for fee-for-service
leasing, mobile applications, veterinary uses and certain overseas
markets with an entity (Beta Numerics, Inc., (Beta), a privately held
company whose shareholders include two directors and beneficial owners
of the Company's stock and one former director and still beneficial
owner of the Company's stock who resigned as a Director in December
1996). The terms of the sales contracts called for a deposit upon order
and further progress payments upon commencement of manufacturing,
shipment to the end user and acceptance or first use of the machine.

NOTE 9 - PROVISION FOR RESTRUCTURING COSTS:

In connection with its plan to restructure its existing business and
reposition itself into a royalty and development company in the near
term (see Note 1 - Going Concern Matters), in February 1997, the
Company recorded a restructuring charge of $1,489,000 detailed as
follows:

Write down of property and equipment due to the
elimination of production and facility .............. $ 400,000
Inventory write-downs relating to discontinuance
of product line ..................................... 532,000
Write-off of nonrefundable deposits, net ............. 332,000
Provision for early cancellation of leases ........... 184,000
Other ................................................ 41,000
----------
$1,489,000
==========
F-17
-40-

<PAGE>

MAGNA-LAB INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 10 - INCOME TAXES:

At February 28, 1997, the Company had net operating loss carryforwards
of approximately $13.8 million to offset future income subject to tax
and approximately $450,000 of research tax credits available to offset
future taxes payable. These resulted in an estimated $4.8 million of
federal and $1 million of state deferred tax assets at February 28,
1997. Of these amounts, approximately $1 million of federal and $.2
million of state deferred tax assets arose in the year ended February
28, 1997. A valuation allowance has been established for these deferred
tax assets since their realization is considered unlikely.

A change in the ownership of a majority of the fair market value of the
Company's common stock could possibly delay or limit the utilization of
existing net operating loss carryforwards and credits. The Company
believes, based upon limited analysis, that such a change may have
occurred in 1993 at a time when net operating losses (subject to
limitation) were less than $2 million. The Company believes that a
significant issuance of additional stock after February 1997 could
trigger an additional change and new limitation.

Such carryforwards and credits expire through 2012.

NOTE 11 - OTHER MATTERS:

INTELLECTUAL PROPERTY RIGHTS - In connection with an agreement dated
February 28, 1992, a founder of the Company assigned his right and
interest to certain MRI technology to the Company. No value is assigned
to this right in the Company's financial statements.

CURRENT LIABILITIES - As of February 28, 1997, included in accrued
expenses and other current liabilities are approximately $225,000,
$125,000 and $126,000 of accrued restructuring costs (see Note 9),
accrued payroll costs and accrued professional fees, respectively.

OBLIGATIONS UNDER CAPITAL LEASES - During the year ended February 28,
1997, the Company made approximately $83,000 of purchases of property
and equipment on a leased basis which did not involve the outlay of
cash. At February 28, 1997, the Company was in default of its lease
arrangements for non-payment and accordingly, the aggregate unpaid
balance of $74,000 has been reflected in current liabilities at
February 28, 1997. The collateral for these lease arrangements was
returned subsequent to February 28, 1997.

RELATED PARTY TRANSACTIONS - A director of the Company, who is also a
principal owner of a company which owns stock in the Company, is a
partner in a law firm which provides legal services to the Company.
Fees to such firm in the fiscal years ended February 28, 1997 and
February 29, 1996 have been recorded at approximately $244,000 and
$275,000, respectively, related to financing and general corporate
matters. The amount owing to such firm is included in the financial
statements at approximately $281,000 at February 28, 1997.

F-18
-41-

<PAGE>

MAGNA-LAB INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 12 - COMMITMENTS AND CONTINGENCIES:

Since April 1996, the Company leased approximately 16,000 square feet
of office, manufacturing and research and development space under a
lease which was to expire in April 2003 and provided for minimum annual
rent plus the Company's share of certain common expenses and increases
in taxes over a base year amount. The lease also called for periodic
increases beginning in the third year of the lease.

As a result of its deteriorating financial condition, in May 1997, the
Company vacated the 16,000 square foot premises. Accordingly, the
Company entered into a stipulation of judgement with its former
landlord calling for payments of past due and future rents of
approximately $120,000.

Prior to April 1996, the Company leased approximately 10,000 square
feet of office, manufacturing and research and development space at a
different location under a lease which was to expire in September 1997.
Under a "Surrender of Lease Agreement", the Company and the landlord
agreed to the early termination of the lease and the forgiveness of
certain amounts payable under the lease which were overdue.

Rent expense related to the facility lease was approximately $141,000
and $120,000 for the years ended February 28, 1997 and February 29,
1996, respectively. The 1996 amount excludes a credit of approximately
$60,000 related to the surrender of the related lease.

The Company and its two key executive officers entered into three year
employment agreements starting in February 1992 and which called for
certain annual salaries, payments in the event of death or disability
and a twenty four month period of non-competition in the event of
termination. Such agreements expired on February 28, 1995 and have been
extended twice to February 28, 1997. In June 1997, one of the two key
executive officers resigned his position with the Company.

In May 1997, the Company entered into an agreement with Mount Sinai
School of Medicine for a collaborative research arrangement devoted to
utilizing MRI in cardiac arterial imaging and requiring payments
totaling approximately $1.5 million over three years. The initial
required payments of $300,000 have not been made by the Company.

As of February 28, 1997, the Company owed approximately $125,000 in
unpaid payroll and related costs. Additionally, unpaid payroll costs
continue to mount since February 28, 1997. There is no assurance that
any employees will not institute actions against the Company to recover
their unpaid payroll.

The Company has been unable to honor its obligations for warranty and
service since approximately March 1997. Additionally, product liability
claims relating to the Company's products may be asserted against the
Company. If such claims are asserted against the Company, there can be
no assurance that the Company will have sufficient resources to defend
against any such claim or satisfy any such successful claim. The
Company had product liability insurance which was terminated during
1997 for non-payment of insurance premiums.

F-19
-42-

<PAGE>

MAGNA-LAB INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED):

As a result of a period of deferral of payment of obligations due to
the lack of cash, the Company is the subject of numerous threatened,
and certain actual, legal actions for nonpayment of obligations or for
breach of agreements. One vendor initiated litigation over certain
contested balances due and certain alleged commitments for services in
the future and, in October 1997, that vendor received a judgment
against the Company totaling $300,000 largely because of the Company's
lack of financial resources to defend itself in this action. Other
judgments for lesser amounts have been entered against the Company.
Many other vendors and some employees have threatened the Company with
litigation to recover amounts due them and a significant number of
these parties have retained counsel who have contacted the Company
regarding these claims. In many, if not most of these situations, the
Company has no defense because it has received and accepted the goods
or services but has been unable to pay. While the ultimate liabilities
in these matters are not known and the vendors, in some cases, are
threatening to seek damages in excess of amounts recorded, the Company
believes, but no assurance can be made, that its liability will not
exceed amounts recorded in the financial statements.

F-20
-43-

<PAGE>

ITEM 8: CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS.

NONE

-44-

<PAGE>

PART III

ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT:

The Company's Directors and executive officers are as follows:

Name Age Positions with the Company
---- --- --------------------------
Lawrence A. Minkoff, Ph.D.(1)(2) ....... 49 Chairman of the Board of
Directors, Chief Executive
Officer and President

Dr. Herbert Moskowitz(1) ............... 55 Director

Irwin M. Rosenthal(2) .................. 69 Director

- ----------

(1) Member of the Compensation Committee

(2) Member of the Audit Committee

Lawrence A. Minkoff, Ph.D. is a co-founder of the Company and has served as
Chairman of the Board, President and Chief Executive Officer since its inception
in February 1991. Since October 1989, Dr. Minkoff has served as President and a
director of the Predecessor. The Predecessor is a principal shareholder of the
Company and prior to the formation of the Company conducted the development
activities relating to the Company's current technology. From October 1989 to
February 1992, Dr. Minkoff was engaged in the development of MRI technology.
From July 1978 to October 1989, Dr. Minkoff was an executive vice-president of
Fonar Corporation, a publicly traded corporation, engaged in developing and
commercializing the use of nuclear magnetic resonance for scanning the human
body. Dr. Minkoff served as a member of its Board of Directors from January 1985
to February 1989.

Dr. Herbert Moskowitz has served as a Director of the Company since
February 1992 and as its Treasurer from February 1992 to July 1994. Dr.
Moskowitz has been the chairman of the board of Life Medical Sciences, Inc., a
publicly traded company engaged in the research, development and
commercialization of technologies for use in medical applications from August
1990 to the present, and was its Chief Executive Officer during various periods.
From 1986 to June 1990 he served in various capacities, including director,
chairman of the board, chief executive officer and president of Advanced Tissue
Sciences, Inc., a publicly traded company previously named Marrow-Tech
Incorporated, a tissue engineering company engaged in the growth of human organ
tissue for potential therapeutic and laboratory applications. Dr. Moskowitz is
also president and a director of Magar Inc. ("Magar"), a private investment firm
which provides management consulting services to companies in which Magar is a
principal investor, and a director of EchoCath, Inc., a publicly traded medical
technology company.

Irwin M. Rosenthal has served as a Director of the Company since February
1992. He has served as a senior partner at Rubin Baum Levin Constant & Friedman
since December 1991. From December 1989 to December 1991, he served as a partner
at Baer Marks Upham, and from 1983 to December 1989, a senior partner, at Botein
Hays & Sklar. Mr. Rosenthal is a director of Life Medical Sciences, Inc., and
EchoCath, Inc. and serves as secretary and director of Magar Inc.

In December 1996, Cynthia R. May resigned as a director and Secretary of
the Company.

In April 1997, Kenneth C. Riscica resigned as Vice President Finance,
Treasurer and Assistant Secretary of the Company.

In May 1997, John D. Haytaian terminated his service as Vice President
Sales and Marketing of the Company.

In June 1997, Joel M. Stutman,Ph. D. resigned as Vice President Operations
and a Director of the Company.

-45-

<PAGE>

The Company had obtained key-person life insurance coverage (which
insurance has lapsed due to non-payment) in the face amount of $1,000,000 for
each of Dr. Lawrence A. Minkoff and Dr. Joel M. Stutman naming the Company as
beneficiary under such policies. Such policies lapsed in 1997 due to non
payment.

ITEM 10: EXECUTIVE COMPENSATION.

The following tables set forth certain information relating to compensation
paid or accrued by the Company for the past three fiscal years to its Chief
Executive Officer and its executive officers whose cash paid compensation
exceeded $100,000 for the year ended February 28, 1997 (the "Named Executive
Officers"). Only those columns which call for information applicable to the
Company or the Named Executive Officers for the periods indicated have been
included in such tables.

SUMMARY COMPENSATION TABLE

Year Annual Long Term
Ended Compensation Compensation
Feb. 28 ---------------------- --------------
Name & Principal Position or 29, Salary ($) Bonus ($) Option/SAR (#)
- ------------------------- ------- ----------- --------- --------------
Lawrence A. Minkoff, Ph.D. ... 1997 $102,666(b) -- --
Chairman of the Board, 1996 $112,000(a) -- 100,000
President and Chief 1995 $112,000(a) -- --
Executive Officer

Joel M. Stutman, Ph. D. ...... 1997 $102,666(b) -- --
Vice President-Chief 1996 $112,000(a) -- 100,000
Operating Officer 1995 $112,000(a) -- --

- -------------

(a) Of amounts earned in the fiscal year ended February 28, 1995, approximately
$23,333 each for Messrs. Minkoff and Stutman had been deferred due to the
cash position of the Company at the time. A portion of such amounts was
paid later in 1995 and new amounts were subsequently deferred. In December
1995, such amounts were paid to Messrs. Minkoff and Stutman.

(b) Amounts due Messrs. Minkoff and Stutman since February 1, 1997 have not
been paid due to the Company's financial condition.

See "Report on Repricing of Options" relating to repricing of options
granted to Messrs. Minkoff and Stutman in prior fiscal years.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

The following table sets forth information with respect to options granted
during the last fiscal year to the Named Executive Officers of the Company.

INDIVIDUAL GRANTS

% of Total Exercise
Options/SARs or
Options/ Granted to Base
Sars Employees Price Expiration
Name Granted(#) in Fiscal Year ($/Share) Date
---- ---------- -------------- --------- ----------

Lawrence A. Minkoff, Ph.D .. 0

Joel M. Stutman, Ph.D. ..... 0

- -----------------

-46-

<PAGE>

Subsequently, during May 1997, Messrs. Minkoff and Stutman were granted
(subject to shareholder approval of an increase in the number of shares
available to be granted under the 1992 Stock Option Plan (the "Shareholder
Approval"), which Shareholder Approval has not yet been obtained) options for
150,000 and 125,000 shares, respectively, at an exercise price of $.25 per share
(above the then current market price), expiring in five years. See "Report on
Repricing of Options" below.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES

The following table sets forth certain information with respect to stock
option exercises by the Named Executive Officers during the fiscal year ended
February 28, 1997 and the value of unexercised options held by them at year-end.

Value of
Number of Unexercised
Unexercised In-the-Money
Shares Options/SARs Options/SARs
Acquired at F/Y End(#) at F/Y End ($)
on Value Exercisable/ Exercisable/
Name Exercise(#) Realized($) Unexercisable Unexercisable(1)
---- ----------- ----------- ------------- ----------------

Lawrence A. Minkoff, Ph. D. 0 0 100,000/-0- $-0-/-0-

Joel M. Stutman, Ph. D. 0 0 100,000/-0- $-0-/-0-

- ---------------

(1) Based on a closing price of $.53125 per share of Class A Common Stock on
February 28, 1997, less the exercise price.

REPORT ON REPRICING OF OPTIONS

There were no repricing of options during the fiscal year ended February
28, 1997.

In May 1997, the Board of Directors of the Company determined that the
purposes of the 1992 Stock Option Plan were not being adequately achieved with
respect to those employees and consultants holding options that were exercisable
above current market value and that it was essential to the best interests of
the Company and the Company's shareholders that the Company retain and motivate
such employees and consultants. The Board concluded that such retention was
particularly important given the Company's severely strained financial situation
and the sacrifices made by the key employees to work without current pay and put
forth their own cash to support the Company's Plan. The Board further determined
that it would be in the best interests of the Company and the Company's
shareholders to provide such optionees the opportunity to exchange their above
market value options for options exercisable at the current market value. On May
7, 1997, the Board of Directors repriced the outstanding options of selected
individuals under the 1992 Stock Option Plan who were identified by the Board to
have a continuing role in the Company's Plan of restructure with exercise prices
above $2.00 per share with new stock options at an exercise price of $0.25 per
share. The bid price for the Class A Common stock on Nasdaq on that date was
$0.22. 100,000 options were repriced for each of Messrs. Minkoff & Stutman. In
addition, in recognition of their efforts to advance the Plan, the completion of
the agreement with Mount Sinai School of Medicine and the results of the
preliminary work with Mount Sinai School of Medicine, the Board awarded new
options (subject to the Shareholder Approval) at $0.25 per share to Dr. Minkoff
(150,000), Dr. Stutman (125,000), Mr. Rosenthal (150,000), Dr. Moskowitz
(150,000), Mr. Riscica (75,000) and the consultant for the restructure plan, Mr.
Mulvena (250,000). Each of the new options were granted for a five year period
of exercise with all options except Mr. Mulvena's being immediately exercisable.
Mr. Mulvena's options are exercisable ratably over a three year period.

EMPLOYMENT AGREEMENTS

On February 28, 1992, the Company entered into three year employment
agreements with Dr. Lawrence A. Minkoff, its Chairman of the Board, Chief
Executive Officer and President and a principal beneficial shareholder, and Dr.
Joel M. Stutman, its Vice President, Chief Operating Officer, Director and a
principal shareholder (the "Employment Agreements"). Effective February 28,
1995, the terms of the Employment Agreements were extended to August 9, 1996,
and subsequently extended to February 28, 1997. The Employment Agreements
provided for an initial salary of $96,000 per annum, which amounts were
increased to $112,000 for the fiscal year ended February 28 or 29, 1994, 1995,
1996 and 1997. They each agreed to devote all of their business time, attention
and skills to the business of the Company. Each of them was entitled to
participate in employee benefit plans. In June 1997, Dr. Stutman resigned his
position as Director and Vice President -- Operations.

-47-

<PAGE>

Each of them had agreed not to disclose to anyone confidential information
of the Company during the term of his employment or thereafter and will not
compete with the Company during the term of his employment and for a period of
24 months following termination of his employment. All work, research and
results thereof, including, without limitation, inventions, processes or
formulae made, conceived or developed by Dr. Lawrence A. Minkoff or Dr. Joel M.
Stutman during the term of employment which are related to the business,
research and development work or field of operation of the Company shall be the
property of the Company.

DIRECTORS' COMPENSATION

The Company has agreed to pay all outside Directors $500 for each Board or
committee meeting attended. Outside Directors may be reimbursed for expenses
incurred by them in acting as a Director or as a member of any committee of the
Board of Directors. In March and April 1993 Mr. Rosenthal was awarded options to
purchase 25,000 shares of Class A Common Stock of the Company at an exercise
price of $6.00 per share and expiring in 1998. In February 1995, Mr. Rosenthal
and Dr. Moskowitz were awarded options to purchase 75,000 and 100,000 shares,
respectively, of Class A Common Stock of the Company at an exercise price of
$2.50 per share, and an option held by Mr. Rosenthal to purchase 25,000 shares
at $6.00 was cancelled and regranted with an exercise price of $2.50. Each such
option expires in February of 2000. In January 1996, Mr. Rosenthal was granted
an option to purchase 25,000 shares of Class A Common Stock at $2.63 and
expiring in 2001. In May 1997, Messrs. Moskowitz and Rosenthal were each granted
(subject to Shareholder Approval) options for 150,000 shares of Class A Common
Stock. See "Option/SAR Grants in Last Fiscal Year" regarding these options and
for options granted to Drs. Minkoff and Stutman and for options repriced in May
of 1997. Accrued but unpaid director fees totaled approximately $10,000 at June
27, 1997.

ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Class A and Class B Common Stock as of October 15,
1997 for (i) each of the Company's directors and the executive officers named in
the Summary Compensation Table, (ii) each person known by the Company to own
beneficially 5% or more of the outstanding shares of any class of its voting
securities and (iii) all directors and executive officers as a group.

<TABLE>
<CAPTION>
Percentage of Percentage
Class Number of Total Class A of
of Shares Percent and Class B Total
Name and Address Common Beneficially of Common Voting
of Beneficial Owner (1) Stock(2) Owned(3) Class(4) Stock(4) Power(2)(3)
----------------------- -------- -------- -------- -------- -----------

<S> <C> <C> <C> <C> <C>
Lawrence A. Minkoff, Ph.D.(5)(6) ...... Class A 100,000 2.6% 10.8% 21.5%
Class B 511,957 29.0%
---------
611,957
---------
Minkoff Research Labs, Inc.(6) ........ Class B 511,957 29.0% 9.2% 20.7%

Harry Minkoff (6) ..................... Class B 511,957 29.0% 9.2% 20.7%

Joel M. Stutman, Ph.D. (5) ............ Class A 100,000 2.6%
Class B 398,503 22.6%
---------
498,503 9.8% 16.9%
---------

Dr. Herbert Moskowitz (7)(8)(9) ....... Class A 410,936 10.0%
Class B 572,670 32.4%
---------
983,606 18.3% 26.5%
---------

-48-

<PAGE>

<CAPTION>
Percentage of Percentage
Class Number of Total Class A of
of Shares Percent and Class B Total
Name and Address Common Beneficially of Common Voting
of Beneficial Owner (1) Stock(2) Owned(3) Class(4) Stock(4) Power(2)(3)
----------------------- -------- -------- -------- -------- -----------

<S> <C> <C> <C> <C> <C>
Irwin M. Rosenthal (7)(8)(10) ......... Class A 125,000 3.1%
Class B 103,920 5.9%
---------
228,920 4.0% 5.1%
---------

Magar Inc.(7) ......................... Class B 103,920 5.9% 1.9% 4.2%

Martin D. Fife (7)(8) ................. Class B 103,920 5.9% 1.9% 4.2%

Marathon Investments, L.L.C.(11) ...... Class A 272,706 7.1% 4.9% 2.2%

Cynthia R. May(12) .................... Class A 309,606 8.1% 5.5% 2.5%

Theodore J. Murin (12) ................ Class A 272,706 7.1% 4.9% 2.2%

Fred Kassner(11) ...................... Class A 250,000 6.5% 4.5% 2.0%

All Executive Officers and Directors
as a Group (3 persons) ............... Class A 635,936 16.6%
Class B 1,084,627 61.4%
---------
1,720,563 30.8% 49.1%
---------
</TABLE>

(see following page for additional notes)

- ----------------------

(1) All shares are beneficially owned and sole voting and investment power is
held by the persons named, except as otherwise noted.

(2) Class B Common Stock is entitled to five votes per share but is otherwise
substantially identical to the Class A Common Stock, which has one vote per
share. Each share of Class B Common Stock is convertible into one share of
Class A Common Stock.

(3) Each holder of Class B Common Stock has agreed that approximately 53.3% of
his or its shares of Class B Common Stock are subject to transfer to the
Company for no consideration upon the failure of certain stock price or
earnings levels to be achieved. So long as such shares are subject to such
conditions, the holder may vote, but not dispose of, the Class B Common
Stock. It is currently anticipated that these shares will be required to be
so re-transferred to the Company after March 30, 1998.

(4) Based upon 3,825,142 shares of Class A Common Stock (which does not include
an additional 300,000 and 125,000 shares of Class A Common Stock which the
Company has agreed to issue in a February 1997 private placement and an
October 1997 settlement of a dispute, respectively, but have not yet been
issued) and 1,764,858 shares of Class B Common Stock outstanding and
reflecting as outstanding, with respect to the relevant owner, the shares
which that beneficial owner could acquire upon exercise of options which
are presently exercisable or become exercisable within the next 60 days.

(5) The address for each of Messrs. Minkoff (Lawrence) and Stutman is c/o
Magna-Lab Inc., P.O. Box 1313, Brentwood, NY 11717-0689. Amounts for
Messrs. Minkoff (Lawrence) and Stutman include currently exercisable
options to purchase 100,000 shares of Class A Common Stock. Does not
include shares underlying options which are subject to the Shareholder
Approval.

(6) Dr. Lawrence A. Minkoff and Harry Minkoff are each officers and directors
and principal shareholders of Minkoff Research Labs, Inc. and as such may
be considered to beneficially own, and to have shared investment and voting
power with respect to, all shares of Class B Common Stock owned by Minkoff
Research Labs, Inc. Harry Minkoff is the father of Lawrence A. Minkoff.
Information relating to shares owned by each of these individuals assumes
that each beneficially owns all shares of Class B Common Stock owned of
record by Minkoff Research Labs, Inc. The address for Minkoff Research
Labs, Inc. and for Harry Minkoff is P.O. Box 338, Locust Valley, NY 11560.

(7) Dr. Moskowitz and Messrs. Rosenthal and Fife are each officers and
directors and principal stockholders of Magar Inc. As such, these
individuals may be considered to beneficially own, and to have shared
investment and voting power with respect to, all shares of Class B Common
Stock owned by Magar Inc. Information relating to shares owned by each of
these individuals assumes that each beneficially owns all shares of Class B
Common Stock owned of record by Magar Inc. The address of these individuals
is c/o Magar Inc., 30 Rockefeller Plaza, New York, NY 10112.

-49-

<PAGE>

(8) Includes 103,920 shares of Class B Common Stock owned by Magar Inc.

(9) Class A Common Stock beneficially owned includes 150,900 shares of Class A
Common Stock(including 2,100 shares of stock held by Dr Moskowitz' wife),
approximately 52,345 shares of Class A Common Stock issuable pursuant to
Class A Warrants (exercisable at approximately $8.16 per share),
approximately 77,691 shares of Class A Common Stock issuable pursuant to
Class B Warrants (exercisable at approximately $12.25 per share), 15,000
shares of Class A Common Stock issuable pursuant to Class E Warrants
(exercisable at $4.375 per share) and options to acquire an aggregate of
100,000 shares of Class A Common Stock. Class B Common Stock beneficially
owned includes 468,750 shares held by Dr. Moskowitz and the shares held by
Magar Inc. (see notes 7 and 8). Does not include shares underlying options
which are subject to the Shareholder Approval.

(10) Includes currently exercisable options to purchase an aggregate of 125,000
shares of Class A Common Stock. Does not include shares underlying options
which are subject to the Shareholder Approval.

(11) The address for Marathon Investments L.L.C. is 13260 Spencer Road, Hemlock,
Michigan 48626. The address for Mr. Kassner is c/o Lib/Go Travel, 69 Spring
St., Ramsey, New Jersey 07446.

(12) Includes 272,706 shares owned by Marathon Investments, L.L.C. and with
respect to which Ms. May & Mr. Murin share investment and voting power.
Amounts for Ms. May also include 26,900 shares of Class A Common Stock
owned of record by GRQ L.L.C. and 10,000 shares of Class A Common Stock
underlying Class E Warrants (exercisable at $4.375 per share) owned of
record by GRQ L.L.C. The address for each of Ms. May & Mr. Murin is c/o
Marathon Investment, L.L.C. See Note 11

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Such persons are required by SEC regulations to furnish the Company with copies
of all Section 16(a) reports they file.

To the Company's knowledge, based solely on review of copies of such
reports furnished to the Company, all section 16(a) filing requirements
applicable to the Company's officers, directors and greater than ten percent
shareholders have been complied with during the last fiscal year.

ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In November 1994, Dr. Moskowitz and Mr. Rosenthal advanced $90,000 and
$10,000, respectively, to the Company for working capital purposes. In November
1994, the Company sold $400,000 principal amount of bridge notes and 200,000
Class C Warrants for $400,000 to five individuals in a private placement. The
bridge notes carried interest at 10% and were repaid at their maturity on May
23, 1995. Dr. Moskowitz and Mr. Rosenthal agreed to pledge certain assets in
connection with these bridge notes and the amounts advanced by Dr. Moskowitz and
Mr. Rosenthal were repaid, in November 1994, out of the proceeds of the notes
and warrants. The Class C Warrants grant the holders the right to purchase a
total of approximately 212,000 shares of Class A Common Stock at a per share
price estimated at $2.70 (subject to adjustment) prior to November 1999 and
carry certain registration rights. The warrant holders also have certain rights
to participate in a private offering of Company securities and, under certain
circumstances in connection therewith, receive additional warrants to purchase
200,000 shares of Class A Common Stock at $2.85 (subject to adjustment). In
connection with a public offering of equity securities completed in January
1996, the Company agreed to issue 25,000 shares of Class A Common Stock to the
Class C Warrantholders in exchange for their agreement to not sell the shares
underlying the Class C Warrants as well as such 25,000 shares before July 1,
1996 and deferral of their registration right relating to the shares underlying
the Class C Warrants.

In December 1994 the Company sold for $1,250,000 a total of $1,250,000
principal amount (including $500,000 to Marathon Investments, L.L.C. and
$500,000 to Fred Kassner) of 12% bridge notes payable in December 1995 (or
earlier completion of a public or private offering of securities) and five year
warrants to purchase a total of 625,000 shares (including 250,000 to Marathon
Investments, L.L.C. and 250,000 to Fred Kassner) of Class A Common Stock at
$2.85 (subject to adjustment) in a private placement. During July and August
1995, all of the holders of $1,250,000 principal amount of the 12% Notes
converted their 12% Notes (together with accrued interest), Class D Warrants to
purchase 625,000 shares of Class A Common Stock (at an exercise price of $2.85
per share) and an additional $166,667 in cash (including $100,000 from Marathon
Investments, L.L.P. and $66,667 from Fred Kassner) into 625,000 shares of Class
A Common Stock. Ms. Cynthia May, who served on the Board of Directors from
January to December 1996, is a beneficial owner and officer of Marathon
Investments, L.L.C. In November 1995, Ms May loaned to the Company$100,000 under
a 10% note which was paid in January 1996. In December 1995, $75,000 of this
amount was repaid and the reborrowed. During February 1997, Fred Kassner loaned
the Company $75,000 under a Note due March 15, 1997, bearing interest at prime
plus 2% and secured by certain amounts receivable form the taxing authorities of
the United Kingdom and the

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<PAGE>

machine delivered to a related party (Beta Numerics, Inc.-see following
paragraph) in December 1996 but not paid for by that party. $62,000 of the Note
has been repaid and $13,000, plus interest, is in default.

In December 1994, the Company entered into a sales, marketing and
distribution agreement with Beta Numerics, Inc. ("Beta"). Beta is a private
company, two founders and stockholders of which are Dr. Herbert Moskowitz and
Mr. Irwin Rosenthal, each of whom is a director and stockholder of the Company.
Further, Marathon Investments, L.L.P. and Fred Kassner also have financial
investments in Beta. Under the agreement, Beta was granted the following rights:
(i) an exclusive worldwide right to distribute the Company's MAGNA-SL on a
fee-for-service lease basis, (ii) a non-exclusive right to act as an additional
leasing source for customers preferring to lease rather purchase the Company's
scanners, (iii) an exclusive worldwide right to distribute the MAGNA-SL in the
veterinary market, (iv) an exclusive worldwide right to distribute mobile
versions of the MAGNA-SL which may be developed in the future and (v) an
exclusive right to distribute the MAGNA-SL in certain territories other than the
United States. The agreement, which has a term of ten years (subject to renewal
by Beta for an additional ten year period), is terminable by the Company if Beta
fails to place orders for a minimum of eight scanners in year one, 16 scanners
in year two and 24 scanners in each year thereafter. Under the agreement, the
purchase price to be paid is to be at a minimum discount of 15% from the then
list price. The Company is required to offer Beta any better pricing, or other
terms, with respect to the same number of units, offered to any other customer.
Beta had agreed to fund up to $350,000 of expenses in connection with the
development of a mobile version of the MAGNA-SL, subject to its right to
terminate such funding if it determines that such development is not
advantageous. Beta had not met its minimum unit commitments under the first year
of the agreement. Through May 31, 1996, Beta had paid the Company approximately
$1,075,000, representing payment on the first system delivered, deposits on
another six additional scanners and advance payments for development of the
mobile version. Four of the deposits received from Beta do not represent orders,
and under the present relationship with Beta, will not be converted to orders.
In February and April 1996, the Company returned an aggregate of $110,000 in
deposits to Beta at Beta's request. Beta has asserted that the Company is not
servicing Beta's scanners. Under the current circumstances, the continuing
viability of the Beta agreement is uncertain. Beta owed the Company $345,000
with respect to a machine shipped in December 1996 and the Company owed Beta
$100,000 based on a customer deposit. Both the receivable and payable were
written off in connection with the $1.5 million restructuring charge recorded to
the fourth quarter ending February 28, 1997.

The Company sublet approximately 950 square feet of space at former
Corporate Headquarters to a company of which Magar Inc. is a principal
shareholder and Irwin M. Rosenthal and Dr. Herbert Moskowitz are directors. The
sublease provided for a minimum annual rental commitment of approximately
$18,000 (excluding allocated real estate taxes, utilities and other costs)
through September 1997. During 1995, the sublease was terminated by the Company
after collection of a total of approximately $28,000 of rent and related costs.

Transactions between the Company and its Directors, officers and principal
shareholders have been approved by the disinterested directors of the Company
and determined to be on terms no less favorable than those available from
independent third parties.

ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K

(A) Exhibits

See Index to Exhibits on Page E-1.

(B) Reports on Form 8-K

No reports on Form 8-K were filed during the last quarter of the fiscal
year ended

February 28, 1997. However, a report on Form 8-K was filed on June 3, 1997
disclosing (under Item 5) the Company's deteriorated financial condition and the
restructuring Plan.

-51-

<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.

MAGNA-LAB INC.
Dated: October 20, 1997

By: /s/ LAWRENCE A. MINKOFF
----------------------------------
Lawrence A. Minkoff
President, Chairman of the Board
and Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

Signature Title Date
--------- ----- ----

/s/ LAWRENCE A. MINKOFF President, Chairman of the
- --------------------------- Board and Chief Executive October 20, 1997
Lawrence A. Minkoff Officer (principal executive
officer), Acting Chief
Financial Officer (principal
financial and accounting
officer)

- --------------------------- Director October 20, 1997
Herbert Moskowitz

/s/ IRWIN M. ROSENTHAL
- --------------------------- Director October 20, 1997
Irwin M. Rosenthal

-52-

<PAGE>

INDEX TO EXHIBITS

Exhibit
No. Description
- ------- -----------

1.1 Form of Underwriting Agreement between the Company and the
Representative. (7)

1.2 Form of Representative's Warrant Agreement. (7)

1.3 Form of Merger and Acquisition Agreement between the Company and the
Representative. (7)

1.4 Form of Financial Consulting Agreement between the Company and the
Representative. (7)

3.1 Restated Certificate of Incorporation of the Company. (1)

3.1(a) Form of Certificate of Amendment to Restated Certificate of
Incorporation of the Company. (3)

3.1(b) Certificate of Amendment of Restated Certificate of Incorporation (4).

3.2 By-Laws of the Company. (1)

3.2(a) Amendment to By-Laws of the Company. (3)

4.1 Form of Class E Warrant Agreement among the Company, the
Representative and American Stock Transfer and Trust Company. (7)

4.2 Form of Specimen Class A Common Stock Certificate. (3)

4.3 Intentionally omitted

4.4 Intentionally omitted

4.5 Intentionally omitted

4.6 Form of Specimen Class E Warrant Certificate. (7)

5.1 Opinion of Rubin Baum Levin Constant & Friedman re: legality. (7)

10.1 1992 Stock Option Plan of the Company, as amended. (7)

10.2 Form of Stock Restriction Agreement among the Company, Class B
Common shareholders of the Company and D. H. Blair Investment
Banking Corp. (2)

10.3 License Agreement, dated February 28, 1992, between the Company and
Dr. Lawrence A. Minkoff. (1)

10.4 Employment Agreement, dated February 28, 1992, between the Company and
Dr. Joel M. Stutman. (1)

10.4(a) Letter Agreement dated as of February 28, 1995 between the Company and
Dr. Joel M. Stutman. (7)

10.5 Employment Agreement, dated February 28, 1992, between the Company and
Dr. Lawrence A. Minkoff. (1)

10.5(a) Letter Agreement dated as of February 28, 1995 between the Company and
Dr. Lawrence A. Minkoff. (7)

10.6 Form of Subscription Agreement (with certain Exhibits, including form
of Notes and Warrant Agreement) for 10% notes and Class C Warrants.
Incorporated by reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended November 30, 1994 (File
No. 0-21320)

10.7 Form of Subscription Agreement (with certain Exhibits, including form
of Notes and Warrant Agreement) for 12% Notes and Class D Warrants.
Incorporated by reference to Exhibit 4.2 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended November 30, 1994 (File
No. 0-21320).

10.8 Sales, Marketing and Distribution Agreement between Beta Numerics Inc.
and Magna-Lab Inc. Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended
November 30, 1994 (File No. 0-21320).

10.9(a) Medical Advisory Board Agreement, dated as of December 31, 1992,
between the Company and Dr. Kurt Isselbacher. (2)

10.9(b) Medical Advisory Board Agreement, dated as of December 31, 1992,
between the Company and Dr. Valentin Fuster. (3)

10.9(c) Medical Advisory Board Agreement between the Company and Dr. Thomas
Brady. (3)

10.10 Lease dated February 28, 1992 between Grumman Aerospace Corporation
and the Company. (1)

10.11 Form of Indemnification Agreement entered into between the Company and
each officer and Director of the Company. (1)

10.12 Assignment from Dr. Lawrence Minkoff to the Company dated December 22,
1992. (1)

10.13 Agreement, dated November 22, 1991, between the Company and John
Haytaian, as amended. (1)

10.14 Form of Stock Option Agreement between the Company and each officer
and Director of the Company (7)

10.15 Employment Agreement between the Company and Kenneth C. Riscica. (5)

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<PAGE>

Exhibit
No. Description
- ------- -----------

10.16 Form of Consulting Agreement between the Company and D.H. Blair
Investment Banking Corp.(3)

10.18 Agreement between Magna-Lab Inc. and Surrey Medical Imaging Systems
Limited dated August 23, 1993. Incorporated by reference to Exhibit
10.18 to the Company's Quarterly Report on Form 10-QSB for the quarter
ended August 31, 1993 File No. 0-211320)

10.19 Letter Amendment dated December 8, 1993 to Agreement with Surrey
Medical Imaging Systems Limited. Incorporated by reference to the
Company's Quarterly Report on Form 10-QSB for the quarter ended
November 30, 1993 (File No. 0-21320)

10.19(a) Letter of amendment dated July 11, 1994 to agreement with Surrey
Medical Imaging Systems Limited. Incorporated by reference to exhibit
10.20 to the Company's Quarterly Report on Form 10-QSB for the
quarter ended May 31, 1994. (File Number 0-21320)

10.20 Foreign Distributorship Agreement and Coordination Foreign Distributor
Agreement between Magna-Lab Inc. and Apic-Medarax dated January 22,
1994. (5)

10.20(a) Letter amendment dated September 1, 1994 to Foreign Distributor
Agreement dated January 22, 1994. Incorporated by reference to Exhibit
10.20(a) to the Company's Quarterly Report on Form 10-QSB for the
quarter ended August 31, 1994. (7)

10.20(b) Letter amendment dated October 20, 1995 to Foreign Distributor
Agreement dated January 22, 1994. (7)

10.21 Form of stock option agreement between the Company and each non
executive option holder. (5)

10.22 Medical Advisory Board Agreement, dated January 19, 1994, between the
Company and Dr. William Abbott. (5)

10.23 Form of Underwriting Agreement, dated March 30, 1993, between the
Company and D.H. Blair Investment Banking Corp. Incorporated by
reference to Exhibit 1.1 to Amendment No. 2 to the Registration
Statement described in notes 1 and 3 to this Exhibit Index.

10.24 Form of Unit Purchase Option, dated April 6, 1993 between the Company
and D.H. Blair Investment Banking Corp. Incorporated by reference to
Exhibit 1.2 to Amendment No. 2 to the Registration Statement described
in notes 1 and 3 to this Exhibit Index

10.25 Form of Warrant Agreement among the Company, D.H. Blair Investment
Banking Corp. and American Stock Transfer and Trust Company.(3)

10.26 Placement Agent Agreement, dated as of June 20, 1995, among the
Company, the Representative and, for purposes of certain sections,
Dreyer & Traub, L.L.P. (7)

10.27 Form of Subscription Agreement, dated as of August 4, 1995, between
the Company and Bridge Note investors. (7)

10.28 Lock-up letters from Bridge Note investors. (7)

10.29 Letter Agreements, dated June 19, 1995, between the Company and Class
C Warrantholders. (7)

10.30 Letter of Intent, dated November 25, 1995, between the Company and
Elscint, Ltd. (7)

10.31 Surrender of Lease agreement dated April 4, 1996 between the Company
and Grumman Aerospace Corporation.(8)

10.32 Lease Agreement, dated April 4, 1996, between the Company and
Heartland Rental Properties Partnership.(8)

10.33 Letter amendment to Lease Agreement, dated April 4, 1996, between the
Company and Heartland Rental Properties Partnership.(8)

10.34 Note Agreement between the Company and Beta Numerics, Inc. dated April
15, 1996.(8)

10.35 Collaborative Research Agreement, dated as of May 7, 1997, between the
Company and Mount Sinai School of Medicine of the City University of
New York.

11 Statement re computation of per share earnings. (6)

27 Financial Data Schedule.

- ----------
(1) Incorporated by reference to the correspondingly numbered exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 33-56344)
filed on December 24, 1992 and declared effective on March 30, 1993 (the
"S-1").

(2) Incorporated by reference to the correspondingly numbered exhibit to
Amendment No. 1, filed on March 3, 1993, to the S-1.

(3) Incorporated by reference to the correspondingly numbered exhibit to
Amendment No. 2, filed on March 25, 1993, to the S-1.

(4) Incorporated by reference to the correspondingly numbered exhibit to the
Company's Quarterly Report on Form 10-QSB for the quarter ended August 31,
1994 (File No. 0-21320).

(5) Incorporated by reference to the correspondingly numbered exhibit to the
Company's Annual Report on Form 10-KSB for the year ended February 28, 1994
(File No. 0-21320).

(6) Incorporated by reference to Exhibit 11 to the February 28, 1994 Form
10-KSB; current year not required.

-54-
<PAGE>

(7) Incorporated by reference to the correspondingly numbered exhibit to the
Company's Registration Statement on Form SB-2 (Registration Statement No.
33-96272) filed on August 28, 1995 including Amendment No. 1 filed on
October 20, 1995 and Amendment No. 2 filed on December 19, 1995.

(8) Incorporated by reference to the correspondingly numbered exhibit to the
Company's Annual Report on Form 10-KSB for the year ended February 29, 1996
(File No. 0-21320).

-55-

EXHIBIT 10.35

COLLABORATIVE RESEARCH AGREEMENT

This agreement made as of the 7th day of May, 1997 ("Effective Date"),
between Magna-Lab Inc., a New York corporation, having a principal place of
business at 250Z Executive Drive, Edgewood, New York 11717 (hereinafter called
"MAGNA") and Mount Sinai School of Medicine of the City University of New York,
having an address at One Gustave Levy Place, New York, New York 10009
(hereinafter called "MSSM").

WHEREAS, MAGNA and MSSM desire to engage in a collaborative research
program related to the use of magnetic resonance imaging ("MRI") in cardiac and
vascular imaging; and

NOW THEREFORE, the parties hereto agree as follows:

1. DEFINITIONS

1.1 The term "PROJECT" shall mean the research project appended hereto as
Appendix I and incorporated herein.

1.2 The term "PRINCIPAL INVESTIGATOR" shall mean Valentin Fuster, M.D.

1.3 The term "INVESTIGATOR" shall mean PRINCIPAL INVESTIGATOR and any other
member of MSSM's professional staff, student, fellow, or employee of MSSM who
shall participate in the performance of the PROJECT.

1.4 The term "RESULTS" shall mean any results, inventions, discoveries,
technology, know- how, data, and other information created, conceived, developed
or produced by an INVESTIGATOR in the performance of the PROJECT, whether solely
or jointly (with any other person or entity including, but not limited to, MAGNA
or any other INVESTIGATOR or INVESTIGATORS).

1.5 The term "INVENTION" shall mean any invention or discovery which any
INVESTIGATOR, solely or jointly (with any other person or entity including, but
not limited to, MAGNA or any other INVESTIGATOR or INVESTIGATORS) conceives or
reduces to practice in the performance of the PROJECT.

2. PERFORMANCE OF PROJECT AND SUPPORT THEREOF

2.1 During the term of this Agreement, MSSM shall: (i) through PRINCIPAL
INVESTIGATOR and any other INVESTIGATOR perform the PROJECT; and (ii) within 10
days after the end of each three-month period from the date of this Agreement,
disclose to MAGNA in written reports (with as much detail and in such form as
MAGNA shall reasonably request) the progress achieved during the most recently
completed three-month period in connection with the PROJECT and any RESULTS
arising during such period.

2.2 The PRINCIPAL INVESTIGATOR shall supervise the INVESTIGATORS'
activities in the performance of the PROJECT and shall use his best efforts to
bring about completion of the PROJECT in accordance with the goals thereof.

2.3 During the term of this Agreement, the PRINCIPAL INVESTIGATOR and
representatives of MAGNA shall meet from time to time (but no less frequently
than quarterly) to discuss the planning and progress of the PROJECT, and to
afford MAGNA an opportunity to contribute in a meaningful way to the successful
performance of the PROJECT.

2.4 Subject to Section 2.5 below, MAGNA agrees to provide MSSM with funding
for the PROJECT in the following amounts: $600,000 for each of the first and
second years of this Agreement and $300,000

<PAGE>

for the third year of this Agreement. Such amounts shall be payable quarterly,
with the first payment being payable promptly following execution of this
Agreement. Payments by MAGNA to MSSM hereunder are to be used by MSSM in
accordance with the budget included on Appendix II attached hereto, provided
that MSSM shall be permitted to reallocate the expenditures provided in said
budget (but subject to the foregoing annual amounts) as its deems appropriate in
order to best achieve the purposes of the PROJECT in light of the funding
provided.

Payment shall be made by check payable to "Mount Sinai School of Medicine"
and shall be sent to:

Frank R. Landsberger
Director, Office of Science and Technology Development
Box 1007, One Gustave L. Levy Place
New York, New York 10029

2.5 Between 90 and 60 days prior to each anniversary of this Agreement, a
committee (the "Committee") consisting of the PRINCIPAL INVESTIGATOR and a
designee of MSSM and two designees of MAGNA, shall meet to discuss the progress
being made on the PROJECT and the advisability of a change to the amount or
timing of the funding to be provided by MAGNA pursuant to Section 2.4 above (the
"Section 2.4 Payment Schedule"). If the Committee agrees on a change in the
amount or timing of funding from the Section 2.4 Payment Schedule (a "Revised
Payment Schedule"), the Revised Payment Schedule shall be binding upon all
parties hereto, except that no funding increase or acceleration of the timing
thereof shall be binding upon MAGNA unless made with the approval or
ratification of MAGNA's Board of Directors. If the Committee is unable to agree
on a change in the amount and timing of the funding to be provided by Magna, the
Section 2.4 Payment Schedule (or, if a previously agreed upon Revised Payment
Schedule is then in effect, such Revised Payment Schedule) shall continue to be
binding upon the parties hereto. The initial MAGNA designees to the Committee
shall be Drs. Lawrence Minkoff and Herbert Moskowitz.

2.6 It is understood that neither MSSM nor any INVESTIGATOR will enter into
any agreement with a third party commercial sponsor, a nonprofit sponsor, the
United States government or any person or entity other than MAGNA to fund or
support this PROJECT and will not cause any third party to become involved in
the PROJECT in any manner without the prior written consent of MAGNA; provided,
however, that upon prior notice to MAGNA, MSSM reserves the right to obtain
grants from the National Institute of Health and not-for-profit institutions. In
addition, no INVESTIGATOR shall engage in, or seek or accept funding (for itself
or MSSM) from any source for, any other research the subject matter of which (i)
would conflict with the terms and conditions of this Agreement or (ii) could
advance or contribute to a product (or development of a product) competitive
with any product contemplated by the parties hereto to result or benefit from
the Project.

3. CONFIDENTIALITY AND PUBLICATION RIGHTS

3.1 In the course of performing the PROJECT, proprietary and confidential
information and materials may be exchanged between MAGNA and its personnel, on
the one hand, and MSSM and its personnel, on the other. MAGNA, MSSM and
PRINCIPAL INVESTIGATOR each agrees that any information or materials submitted
to it by the other in connection with the PROJECT and designated in writing as
"Confidential" either at the time of submission or promptly thereafter
("CONFIDENTIAL INFORMATION"), shall be maintained in secrecy, and that it will
use all reasonable diligence to prevent disclosure by it except to its necessary
personnel (and then only if such personnel have consented in writing to be bound
by the provisions of this Section). The parties agree that, subject to Section
3.2 hereof, the RESULTS shall also be deemed and treated as CONFIDENTIAL
INFORMATION.

No obligation of confidentiality shall exist as to information or material
which, as demonstrated by documentary evidence:

(i) is in the public domain (prior to its submission in connection with
the Project), or hereafter comes into the public domain (without MSSM
or any INVESTIGATOR having breached

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<PAGE>

its confidentiality obligations hereunder), by public use,
publication, general knowledge or the like;

(ii) is properly obtained by the receiving party from a third party not
under a confidentiality obligation;

(iii) was already in the possession of the receiving party prior to receipt
from the disclosing party; or

(iv) is demonstrated to have been independently developed by the receiving
party, by individuals who did not have access to the submission in
connection with the PROJECT.

Upon termination of this Agreement, all proprietary written materials or
other information in tangible form received by any party shall, upon request by
the disclosing party, be promptly returned to the disclosing party, except that
the receiving party shall be entitled to retain one copy for its records.

3.2 MAGNA shall not impede any INVESTIGATOR's right to publish or present
the RESULTS generated in the PROJECT, provided that (a) INVESTIGATOR's proposed
publication, presentation or abstract does not disclose CONFIDENTIAL INFORMATION
and (b) the procedures hereinafter set forth in this Section 3.2 shall have been
observed. PRINCIPAL INVESTIGATOR agrees to consult with MAGNA regarding the
timing, mode and substance of any publication or presentation of RESULTS and
will not include therein any material which MAGNA deems to be CONFIDENTIAL
INFORMATION after MAGNA's timely objection. PRINCIPAL INVESTIGATOR agrees to
provide to MAGNA for review and comment: a copy of (i) the first draft of any
proposed publication of RESULTS within three business days after completion
thereof; (ii) any revision of a draft previously reviewed by MAGNA at least 10
business days prior to its submission for publication, and (iii) any abstract or
presentation, prior to the earlier of (x) submission of the abstract or (y) 10
business days prior to its presentation or other publication. In addition,
PRINCIPAL INVESTIGATOR shall provide MAGNA with a final draft of any proposed
manuscript prior to or simultaneous with its submission for publication. MAGNA
shall be identified as the source of the material for the PROJECT and MAGNA
shall be named as the sponsor of the PROJECT in any publication, abstract or
presentation. MSSM and PRINCIPAL INVESTIGATOR agree to cooperate with MAGNA so
that a patent application or applications for an INVENTION that MAGNA reasonably
believes should be filed prior to any publication or presentation may be filed
expeditiously in accordance with Section 6 hereof prior to submission for
publication or presentation, as the case may be. MSSM and PRINCIPAL INVESTIGATOR
each agrees to use its best efforts to cause each INVESTIGATOR participating in
the PROJECT to consent in writing to the provisions of this Section 3.2 so that
each is subject to the same restrictions on publications, presentations and
abstracts as are applicable to the PRINCIPAL INVESTIGATOR.

4. OWNERSHIP OF RESULTS

4.1 All RESULTS shall be owned as follows:

(a) All RESULTS created, conceived, developed and produced solely by
MSSM or its personnel shall be owned exclusively by MSSM;
provided, however that MAGNA shall have a perpetual, sole and
exclusive, worldwide right and license to use, make, have made,
sell and otherwise exploit the RESULTS; further provided that
MSSM shall have a perpetual right to use the RESULTS, without
charge, for its internal research and internal education purposes
only. To maintain its rights under any such license, MAGNA shall
pay MSSM royalties as provided in Section 5.1(i) below.

(b) ALL RESULTS created, conceived, developed or produced jointly by
MAGNA or its personnel, on the one hand, and MSSM or its
personnel, on the other, shall be owned jointly by MAGNA and
MSSM. The parties agree that MAGNA shall

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<PAGE>

have a perpetual, sole and exclusive, worldwide right and license
to use, make, have made, sell and otherwise exploit the RESULTS;
further provided that MSSM shall have a perpetual right to use
the RESULTS, without charge, for its internal research and
internal education purposes only. To maintain its rights under
any such license, MAGNA shall pay MSSM royalties as provided in
Section 5.1(ii) below.

Any license granted to MAGNA under Sections 4.1(a) or (b) above, shall
include the right to sublicense.

4.2 Neither MSSM nor any INVESTIGATOR shall have any right or interest in
or to any result, invention, discovery, technology, know-how, data and other
information created, conceived, developed or produced in connection with the
PROJECT solely by MAGNA (or its personnel) or jointly by MAGNA (or its
personnel) and persons other than MSSM or its personnel, all of which, as
between MAGNA and MSSM (or its personnel) shall belong exclusively to MAGNA.

5. ROYALTIES.

5.1 Subject to the final sentence of this Section 5.1 and the proviso in
Section 5.5 below, MAGNA agrees to pay MSSM royalties on the following basis:

(i) 2-4 percent (2-4%) of Net Sales (as defined in Section 5.5 below)
of products covered by one or more valid, issued and unexpired
patent claims to an Invention or Inventions developed solely by
MSSM or its personnel; and

(ii) 1-3 percent (1-3%) of Net Sales of products covered by one or
more valid, issued and unexpired patent claims to an Invention or
Inventions developed jointly by MSSM or its personnel, on the one
hand, and MAGNA or its personnel, on the other.

MAGNA may deduct from the royalties otherwise payable to MSSM for any year
up to 10% of such royalties to cover patent costs actually incurred pursuant to
Section 6.2 hereof and patent and trade secret litigation costs.

5.2 The royalty rates set forth in Section 5.1 above assume that 100% of
the value of covered products is attributable to an Invention or Inventions for
which MSSM is entitled to royalties hereunder. To the extent less than 100% of
the value of any such product is attributable to such Inventions, proportionate
adjustment shall be made to such royalty rates. MSSM and MAGNA shall use their
best efforts to agree on the value of covered products attributable to any such
Invention or Inventions, as well as the applicable royalty rates. In the event
MSSM and MAGNA are unable, on a timely basis, to so agree, the matter shall be
submitted for arbitration in accordance with Section 9 hereof.

5.3 Only a single royalty shall be paid with respect to any covered
product, either under Section 5.1 (i) or 5.1 (ii) above, regardless of the
number of patent claims or whether the Inventions claimed were developed solely
or jointly.

5.4 MSSM and MAGNA shall use their best efforts to determine, on a timely
basis, the exact royalty rate (within the specified range) for each covered
product under Sections 5.1 (i) and 5.1 (ii) above. Such determination shall be
made in light of the parties' respective contributions, in terms of time, effort
and financial support, to the development thereof, as well as expected
profitability to MAGNA, but shall also take into consideration (in the case of
each covered product) factors like restrictions on use of the Mount Sinai name
and provision of appropriate indemnification and/or product liability insurance
with respect to such covered product. In the event MSSM and

-4-

<PAGE>

MAGNA are unable to agree upon a royalty rate with respect to any covered
product, the matter shall be submitted to arbitration in accordance with Section
9 hereof.

5.5 The term "Net Sales" shall mean the gross amount invoiced by either
MAGNA or a sublicensee of MAGNA to a third party for covered products (as
described in Section 5.1 above) less: all trade, quantity and cash discounts
actually allowed and taken; credits or allowances actually granted on account of
rejection or returns; actual charges for bad debt and billing errors; value
added and excise taxes and duties; freight charges and insurance costs; and
sales taxes (excluding taxes paid on income) or other governmental charges
actually paid; provided that notwithstanding the provisions of Section 5.1 and
the preceding portion of this Section 5.5, the royalty payable by MAGNA to MSSM
on Net Sales by a sublicensee shall not exceed 25% of the sublicensing royalties
which Magna actually receives from such sublicensee.

6. PATENTS

6.1 INVESTIGATORS shall promptly report any RESULTS to MSSM and shall
assign all of his or her rights, title and interest in the RESULTS to MSSM. MSSM
shall promptly advise MAGNA in writing of each RESULT so disclosed to MSSM or
otherwise developed by MSSM, and shall discuss with MAGNA whether a patent
application or applications pertaining to such RESULTS should be filed and in
which countries. If both parties mutually agree that a patent application or
applications with respect thereto should be filed, applications shall be filed
as mutually agreed upon by the parties by either Messrs. Dalby & Dalby, Messrs.
Pennie & Edmond or such other firm as may be mutually agreed upon by the parties
hereto. Any patent application which only claims RESULTS developed solely by
MSSM shall be assigned solely to MSSM, and any patent application which claims
RESULTS developed jointly by MAGNA personnel and MSSM personnel shall be
assigned jointly to MSSM and MAGNA. In the event either MAGNA or MSSM is not
interested in having a patent application filed with respect to any such
RESULTS, such party shall promptly advise the other of such fact, shall assign
all of its rights, title and interest in such RESULTS to the other party and the
other party shall be free to file a patent application or applications at its
own expense and to license the same and any resulting patent to any other person
or entity, provided that if MSSM is the party which is not interested in having
a patent application filed and MSSM's standard procedures require it under such
circumstances to assign all of its right, title and interest in such RESULTS to
the INVESTIGATOR or INVESTIGATORS credited by MSSM for the development of such
RESULTS (the "Responsible Investigators") then, concurrently with the execution
and delivery by the Responsible Investigators to MAGNA of a license in form and
substance satisfactory to MAGNA providing MAGNA with the rights to such RESULTS
set forth in Section 4.1 hereof, MSSM may assign all of its right, title and
interest in such RESULTS to the Responsible Investigators subject to the terms
and conditions of this Agreement, and the Responsible Investigators shall
thereafter be entitled (in place of MSSM) to royalties subject to the terms of
and, determined in accordance with, Section 5 hereof with respect to Net Sales
of products covered by valid, issued and unexpired claim; to an Invention or
Inventions developed by the Responsible Investigators and covered by an
assignment of RESULTS by MSSM to the Responsible Investigators pursuant to this
Section 6.1; provided further that if a covered product includes multiple patent
claims in some of which MSSM has rights and in some of which the Responsible
Investigators have rights, a royalty shall be paid only to MSSM, in accordance
with Section 5.3 hereof.

6.2 All patent costs pertaining to any patent or patent application filed
by mutual agreement of MAGNA and MSSM, including preparation, filing,
prosecution, issuance and maintenance costs and interference proceedings costs,
shall be borne by MAGNA.

MAGNA shall have the right, but not the obligation, to enforce against
infringer(s), any patent or patents that may issue respecting an INVENTION or
INVENTIONS. If, within six (6) months after MSSM notifies Magna of such
infringements, MSSM fails to take action to enforce such patent or patents
against the infringer(s), MSSM shall have the right to take such action to
enforce the patent or patents against the infringer(s). The party commencing the
action shall be solely responsible for its costs and expenses incurred in
connection therewith and shall be entitled to retain any and all monetary
recovery therefrom, whether by way of judgment or settlement. Regardless of
which party commences such action, the other party and the INVESTIGATORS who are
inventors of the patent or patents, shall cooperate in the prosecution thereof
and may, at its/their own expense, participate in the conduct thereof with
its/their

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<PAGE>

own counsel. Neither party shall settle any such action in a way that
adversely affects the rights of the other party without first obtaining the
consent of the other party.

7. TERMINATION

7.1 Subject to the provisions of this Section 8, this Agreement shall
remain in effect for a term of three years from the Effective Date, subject to
extension upon written agreement of the parties.

7.2 If either party shall fail to faithfully perform any of its obligations
under this Agreement, the non-defaulting party may give written notice of the
default to the defaulting party. Unless such default is corrected within sixty
(60) days after such notice, the notifying party may terminate this Agreement
upon sixty (60) days prior written notice.

7.3 In the event that MAGNA determines in its reasonable business judgment
after consultation with MSSM that the PROJECT cannot be successfully completed,
or that the PROJECT, when completed, will have insufficient commercial value
(due, for example, to unanticipated costs of completion of development, market
conditions or other factors) to warrant further investment by MAGNA, or if MAGNA
cannot obtain sufficient acceptable financing required to fund further
development, then MAGNA may terminate this Agreement on sixty (60) days' prior
written notice to MSSM.

7.4 The rights and obligations of the parties hereunder shall terminate
upon termination of this Agreement; provided, however, that the rights and
obligations of the parties under Sections 3, 4, 5, and 6 shall survive the
termination of this Agreement.

8. ARBITRATION

8.1 Any matter for which any provision of this Agreement expressly provides
for arbitration shall be submitted for arbitration in New York, New York before
a panel of three arbitrators, one of which shall be selected by the party
initiating such arbitration, one of which shall be selected by the other party
and the third of which (hereinafter referred to, as the "Third Arbitrator")
shall be selected by the two arbitrators so selected; provided, however, that in
the event that such other arbitrators shall not agree on the selection of the
Third Arbitrator the Third Arbitrator shall be selected by the American
Arbitration Association located in New York, New York. Any dispute or
controversy submitted to arbitration in accordance with these provisions shall
be determined by such arbitrators in accordance with the Commercial Arbitration
Rules of the American Arbitration Association then existing.

8.2 The arbitrators may award any relief which they shall deem proper in
the circumstances, without regard to the relief which would otherwise be
available to any party in a court of law or equity including, without
limitation, an award of money damages, specific performance, injunctive relief
and/or declaratory relief. The determination of the arbitrators shall be
conclusive and binding upon all of the parties hereto, whether or not all
parties hereto participate in the arbitration proceeding, and judgment upon the
award may be entered in any court of competent jurisdiction upon the application
of any party.

8.3 The costs of the arbitration shall be borne equally by the MSSM and
MAGNA and each party shall bear its own associated costs, except that if one
party prevails in arbitration hereunder the prevailing party shall be entitled
to recover reasonable attorney fees and costs incurred in connection with the
arbitration.

8.4 Notwithstanding the foregoing, the parties reserve the right to seek
and obtain injunctive relief, whether in the form of a temporary restraining
order, preliminary injunction, injunction to enforce an arbitration award, or
other order of similar import, from any court of competent jurisdiction prior
to, during, or after commencement or prosecution of arbitration proceedings or
the final decision and award of the arbitrators.

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<PAGE>

9. MISCELLANEOUS

9.1 This Agreement constitutes the entire understanding between the parties
with respect to the subject matter hereof, and supersedes and replaces all prior
agreements, understandings, writings and discussions between the parties
relating to said subject matter.

9.2 This Agreement may be amended and any of its terms or conditions may be
waived only by a written instrument executed by the parties or, in the case of a
waiver, by the party waiving compliance. The failure of either party at any time
or times to require performance of any provision hereof shall in no manner
affect its rights at a later time to enforce the same. No waiver by either party
of any condition or term in any one or more instances shall be construed as a
further or continuing waiver of such condition or term or of another condition
or term.

9.3 This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the parties hereto and their respective successors and permitted
assigns.

9.4 This Agreement shall not be assignable by MSSM without MAGNA's written
consent except for the right to receive payments hereunder.

9.5 This Agreement shall be governed by the substantive laws of the State
of New York regardless of the choice of law rules of any jurisdiction.

IN WITNESS WHEREOF, MSSM and MAGNA have caused this instrument to be
executed.

MAGNA-LAB INC.

By: /s/ LAWRENCE A. MINKOFF
----------------------------------
NAME: Lawrence A. Minkoff
TITLE: President
DATE: 5/7/97

MOUNT SINAI SCHOOL OF MEDICINE

By: /s/ NATHAN KASE
----------------------------------
NAME: Nathan Kase, M.D.
TITLE: Dean
DATE: May 8, 1997

Agreed to and Accepted by:

/s/ VALENTIN FUSTER
- ---------------------------------
Valentin Fuster, M.D.

-7-

<PAGE>

APPENDIX I

The following is the proposed project for the Magna-Lab Inc./Mt. Sinai
collaboration:

1. Radio Frequency MRI probes. Magna-Lab Inc. shall support the
development and testing of radio frequency probes for cardiovascular
diagnosis. These probes shall include surface coils, transesphageal
coils, as well as intravascular coils.

2. Small animal work. Magna-Lab Inc. shall support the development of a
facility for the MR imaging of small animals, especially mice. MRI
offers the pharmaceutical companies a way of noninvasively monitoring
the effects of drug therapy on plaque progression and regression, as
well as tumor progression and regression.

-8-

<PAGE>

APPENDIX II

- --------------------------------------------------------------------------------
EQUIPMENT | |
- ---------------------------------------------------------|----------|-----------
Electronics Lab | $ 80,000 |
(network analyzer, oscilloscope, wave generator, | |
machining equipment, supplies) | |
- ---------------------------------------------------------|----------|-----------
Bruker High resolution magnet and accessories | $550,000 |
- ---------------------------------------------------------|----------|-----------
Computer Graphics Laboratory | $150,000 |
Sparc20 for pulse programming | |
- ---------------------------------------------------------|----------|-----------
SGI for image analysis | |
- ---------------------------------------------------------|----------|-----------
Advantage workstation | |
- ---------------------------------------------------------|----------|-----------
2 Macintoshes for word processing, slide making | |
- ---------------------------------------------------------|----------|-----------
Printer, high resolution color for images, slide maker | |
- ---------------------------------------------------------|----------|-----------
Software for image processing | |
- ---------------------------------------------------------|----------|-----------
TOTAL EQUIPMENT | | $780,000
- -------------------------------------------------------------------------------

-9-

<PAGE>

Appendix III

- --------------------------------------------------------------------------------
PROPOSED BUDGET FOR
MAGNA LABORATORIES (NEW)
- --------------------------------------------------------------------------------
REVISED | | | | $0 |
- ------------------------------|------|---------------------|----------|---------
PERSONNEL |%TIME | SALARY AND BENEFITS | |
- ------------------------------|------|---------------------|----------|---------
Meir Shinnar, M.D., Ph.D., | 20% | $140,000 | $41,020 | $ 36,204 |
Director | | | | |
- ------------------------------|------|----------|----------|----------|---------
Physicist for magnet | 0% | 60,000 | 17,580 | $0 |
- ------------------------------|------|----------|----------|----------|---------
Engineer for Coil design | 100% | 70,000 | 20,510 | $0 |
- ------------------------------|------|----------|----------|----------|---------
Research Nurse | | | $0 | $0 |
- ------------------------------|------|----------|----------|----------|---------
TOTAL PERSONNEL | | | | | $ 36,204
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
RECURRING EXPENSES PER YEAR
- --------------------------------------------------------------------------------
Animals--maintenance--surgery | | $ 70,000 | | |
- ------------------------------|------|----------|----------|----------|---------
Electronics | | $ 5,000 | | |
- ------------------------------|------|----------|----------|----------|---------
Computer upgrades | | $ 5,000 | | |
- ------------------------------|------|----------|----------|----------|---------
Magnet time | | $ 20,000 | | |
- ------------------------------|------|----------|----------|----------|---------
Magnet expenses (film | | $ 5,000 | | |
contrast agent) | | | | |
- ------------------------------|------|----------|----------|----------|---------
Miscellaneous (xerox, phone, | | $ 5,000 | | |
fax, storage) | | | | |
- ------------------------------|------|----------|----------|----------|---------
Magnet gases, maintenance | | $ 25,000 | | |
- ------------------------------|------|----------|----------|----------|---------
TOTAL | | | | | $135,000
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
OVERALL TOTALS FOR THREE
YEARS -- OVERHEAD
- --------------------------------------------------------------------------------
Total for year 1 | | $171,204 | $59,921 | $231,125 |
- ------------------------------|------|----------|----------|----------|---------
Year 2 (4% inflation) | | $178,052 | $62,318 | $240,370 |
- ------------------------------|------|----------|----------|----------|---------
Year 3 | | $185,174 | $64,811 | $249,985 |
- ------------------------------|------|----------|----------|----------|---------
TOTAL | | | | | $721,481
- --------------------------------------------------------------------------------

<ARTICLE> 5

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<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-1-1996
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