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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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FORM 10-K



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|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|           |  | For the fiscal year ended September 30,
    2003                                                
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-49867



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CTI Molecular Imaging, Inc.

(Exact Name of Registrant as Specified in Its
Charter)


|                                               |  |                                     
|---------------------------------------------- |  | ------------------------------------
|Delaware                                       |  | 62-1377363                          
|(State of Incorporation)                       |  | (I.R.S. Employer Identification No.)
|810 Innovation Drive, Knoxville,
    Tennessee |  | 37932                               
|(Address of Principal Executive
    Offices)   |  | (Zip Code)                          

Registrants Telephone Number, Including
Area Code: (865) 218-2000

Securities registered pursuant to
Section 12(b) of the Act:None

Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $0.01 par value

Series C Junior Participating Preferred
Stock Purchase Rights




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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
form 10-K.     þ

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).     Yes þ          No þ

The aggregate market value of common stock held
by non-affiliates of the registrant was $468,191,923 as of
March 31, 2003, based upon the last sale price of such
stock as reported on the Nasdaq National Market on that day
(assuming for purposes of this calculation, without conceding,
that all executive officers and directors are affiliates).

There were 45,164,233 shares of common stock
outstanding at December 1, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the registrants proxy statement
for its 2004 Annual Meeting of Stockholders are incorporated by
reference in Part III of this Form 10-K.



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TABLE OF CONTENTS



|                                                       |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------------ | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
|PART I                                                
|                                                       | Item 1. Business                                                                                       
|                                                       | Item 2. Properties                                                                                     
|                                                       | Item 3. Legal Proceedings                                                                              
|PART II                                               
|                                                       | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|                                                       | Item 6. Selected Financial Data                                                                        
|                                                       | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                       | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                    
|                                                       | Item 8. Financial Statements and Supplementary Data                                                    
|                                                       | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|                                                       | Item 9A. Controls and Procedures                                                                       
|PART III                                              
|                                                       | Item 10. Directors and Executive Officers of the Registrant                                            
|                                                       | Item 11. Executive Compensation                                                                        
|                                                       | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                       | Item 13. Certain Relationships and Related Transactions                                                
|                                                       | Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K                 
|SIGNATURES                                            
|EX-10.21 AMENDMENT DATED DECEMBER 9, 2003             
|EX-10.23 CHANGE IN CONTROL AGREEMENT                  
|EX-10.47 SUPPLY AGREEMENT DATED AUGUST 1, 2003        
|EX-10.48 LEASE AGREEMENT DATED NOVEMBER 1, 2003       
|EX-10.49 CODE OF BUSINESS CONDUCT AND ETHICS          
|EX-21.1 SUBSIDIARIES OF THE COMPANY                   
|EX-23.1 CONSENT OF PRICEWATERHOUSECOOPERS LLP         
|EX-31.1 SECTION 302 CERTIFICATION OF THE CEO          
|EX-31.2 SECTION 302 CERTIFICATION OF THE CFO          
|EX-31.1 SECTION 906 CERTIFICATION OF THE CEO          
|EX-32.2 SECTION 906 CERTIFICATION OF THE CFO          



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##### Table of Contents



CTI MOLECULAR IMAGING, INC.

FORM 10-K


TABLE OF CONTENTS

|                                                           |  |                                                                                                    |    |      |    | 
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                                           |  |                                                                                                    |    | Page
|                                                           |  |                                                                                                    |    |     
|CAUTIONARY NOTICE REGARDING FORWARD-LOOKING
    STATEMENTS |  |                                                                                                    | 1  |     
|PART I                                                    
|Item 1.                                                    |  | Business                                                                                           |    |      | 2  | 
|Item 2.                                                    |  | Properties                                                                                         |    |      | 28 | 
|Item 3.                                                    |  | Legal Proceedings                                                                                  |    |      | 28 | 
|Item 4.                                                    |  | Submission of Matters to a Vote of Security
    Holders                                            |    |      | 29 | 
|PART II                                                   
|Item 5.                                                    |  | Market for Registrants Common Equity and
    Related Stockholder Matters                          |    |      | 29 | 
|Item 6.                                                    |  | Selected Financial Data                                                                            |    |      | 31 | 
|Item 7.                                                    |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |    |      | 31 | 
|Item 7A.                                                   |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |    |      | 65 | 
|Item 8.                                                    |  | Financial Statements and Supplementary Data                                                        |    |      | 66 | 
|Item 9.                                                    |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |    |      | 66 | 
|Item 9A.                                                   |  | Controls and Procedures                                                                            |    |      | 66 | 
|PART III                                                  
|Item 10.                                                   |  | Directors and Executive Officers of the Registrant                                                 |    |      | 66 | 
|Item 11.                                                   |  | Executive Compensation                                                                             |    |      | 66 | 
|Item 12.                                                   |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |    |      | 66 | 
|Item 13.                                                   |  | Certain Relationships and Related Transactions                                                     |    |      | 66 | 
|PART IV                                                   
|Item 14.                                                   |  | Exhibits, Consolidated Financial Statement
    Schedules, and Reports on Form 8-K                  |    |      | 67 | 
|SIGNATURES                                                 |  |                                                                                                    | 68 |     



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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING
STATEMENTS

This report contains forward-looking
statements. Forward-looking statements relate to
expectations, beliefs, future plans and strategies, anticipated
events or trends and similar expressions concerning matters that
are not historical facts or that necessarily depend upon future
events. In some cases, you can identify forward-looking
statements by terms such as may, will,
should, could, would,
expect, plan, anticipate,
believe, estimate, project,
predict, potential, and similar
expressions. Specifically, this report contains, among others,
forward-looking statements about:



| |   |                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our expectations regarding financial condition or
    results of operations for periods after September 30, 2003;                                                                                                      
|
| |  | our critical accounting policies;                                                                                                                                                                                      
|
| |  | the timing of the exercisability of the Siemens
    option to purchase an additional ownership interest in CTI PET
    Systems and the effect of the Siemens option, or its exercise,
    on our business;             
|
| |  | our expectations regarding the size and growth of
    the market for our products and services and the market
    acceptance of CTIs products and services;                                                           
|
| |  | our business strategies and our ability to grow
    our business;                                                                                                                                                      
|
| |  | competition, pricing, the seasonality of capital
    equipment sales, the timing of orders from and shipments to
    distribution partners and customers, and the availability of
    financing services for customers;
|
| |  | our ability to enhance existing, or develop new,
    products and services and the impact of any such enhancements or
    developments;                                                                                
|
| |  | the development and timing of new applications
    for PET and the impact of any such new applications;                                                                                                                
|
| |  | the implementation or interpretation of current
    or future regulations and legislation;                                                                                                                             
|
| |  | the number and scope of procedures involving our
    products and services for which third-party reimbursement is
    available, and the reimbursement levels of third-party payors;                                   
|
| |  | our ability to maintain contracts and
    relationships with key suppliers, customers, distributors or
    research and development collaboration partners;                                                            
|
| |  | our ability to maintain our existing, or to
    develop additional, valuable intellectual property rights; and                                                                                                         
|
| |  | our future sources of and needs for liquidity and
    capital resources.                                                                                                                                               

The forward-looking statements contained in this
report reflect our current views about future events, are based
on assumptions and are subject to known and unknown risks and
uncertainties. Many important factors could cause actual results
or achievements to differ materially from any future results or
achievements expressed in or implied by our forward-looking
statements. Many of the factors that will determine future
events or achievements are beyond our ability to control or
predict. Important factors that could cause actual results or
achievements to differ materially from the results or
achievements reflected in our forward-looking statements
include, among other things, the factors discussed in
Part II, Item 7 of this report under the sub-heading
Risk Factors.

You should read this report, the information
incorporated by reference into this report and the documents
filed as exhibits to this report completely and with the
understanding that our actual future results or achievements may
be materially different from what we expect or anticipate.

The forward-looking statements contained in this
report reflect our views and assumptions only as of the date
this report is signed. Except as required by law, we assume no
responsibility for updating any forward-looking statements.

We qualify all of our forward-looking statements
by these cautionary statements. In addition, with respect to all
of our forward-looking statements, we claim the protection of
the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.

1



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PART I

For convenience in this annual report,
CTI, we, us, and the
Company refer to CTI Molecular Imaging, Inc. and our
consolidated subsidiaries, taken as a whole.






|        |         
|------- | --------
|Item 1. | Business

Overview

We are a leading manufacturer of positron
emission tomography imaging equipment and related products used
in the detection and treatment of cancer, cardiac disease and
neurological disorders. Positron emission tomography, or PET, is
a medical imaging technology that images the biology of
disorders at the molecular level before anatomical changes are
visible. This allows physicians to diagnose and treat a broad
range of diseases earlier and more accurately than other imaging
technologies that focus on anatomic abnormalities. We provide
the most complete and integrated product line for PET, including
scanners, cyclotrons, radiopharmaceuticals, detector materials
and support services. Our business model emphasizes our
exclusive focus on PET, our ability to provide a total
solution for our customers, our proprietary technology
rights and our proven track record of technological innovation.

PET scans allow physicians to view metabolic
activity on a non-invasive basis using minute quantities of
injected radioactive molecules. Procedures conducted with PET
technology provide information that is not available from
traditional imaging technologies such as X-ray, computed
tomography (CT), ultrasound and magnetic resonance imaging
(MRI), where changes in body structure or anatomy must occur
before an abnormality can be detected. Unlike X-ray, CT,
ultrasound and MRI, PET evaluates biological and biochemical
processes that precede anatomical changes or lesions from
disease, thereby enabling earlier detection of diseases such as
cancer and neurological disorders. PET also offers advantages in
the treatment of disease due to its ability to monitor the
effects of therapy at the molecular level. Our combined PET/CT
scanner, which we introduced commercially in November 2001, was
selected by TIME Magazine as the medical science Invention
of the Year in 2000. This scanner combines PET and CT
technologies into one device that reveals both metabolic
processes and anatomical details within the body to improve
image quality and localization of abnormalities as well as to
guide biopsies, radiation therapy and surgical treatments.

The market for PET products and services has
recently experienced rapid growth, and we believe it will
continue to grow rapidly, for the following reasons:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the increasing number of PET procedures for which
    Medicare and private insurance reimbursement is available;                                                                                       
|
| |  | increasing recognition by physicians of the
    clinical advantages of PET and an increasing number of PET
    providers;                                                                              
|
| |  | the expansion of PET applications beyond the
    diagnosis of disease and into the monitoring of disease therapy;                                                                                      
|
| |  | the discovery of additional clinical applications
    for PET;                                                                                                                                         
|
| |  | the aging of the population and the growing
    number of patients with cancer, cardiac disease, neurological
    disorders and other diseases for which PET scans are performed;                      
|
| |  | technological innovations involving PET that
    shorten scan times and improve imaging capabilities, such as the
    current generation of LSO-based scanners and the combined PET/CT
    scanner; and
|
| |  | the increasing availability of the
    radiopharmaceuticals used in PET, as well as the development of
    new radiopharmaceuticals that extend PET technology to new
    applications.                

We believe we are well positioned to benefit from
the anticipated growth in the PET market due to our total
solution approach of offering health care providers a
comprehensive line of the products and services necessary to
incorporate the benefits of PET into their clinical settings. We
manufacture and

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distribute a broad line of sophisticated PET and
PET/CT scanners through CTI PET Systems (CPS), which we market
through CPS as our ECAT® scanners and through our
subsidiary CTI Services, Inc. as REVEAL scanners. We manufacture
the detection materials utilized in PET scanners including our
proprietary lutetium oxide, or LSO, technology. We have a
nationwide network for the production and distribution of the
highly specialized radioactive pharmaceuticals used in PET
imaging, and we are a leading manufacturer of the cyclotron
equipment used to produce those pharmaceuticals. Through our
subsidiary, Mirada Solutions Limited, which we acquired in
August 2003, we produce Mirada workstations with Reveal-MVS
software, which is designed to improve the patient care
delivered by our customers with innovative, unique and
productive tools for the creation, display and analysis of
molecular images. We also provide a variety of valuable services
including marketing support, site planning, installation
services, technical support and repair and maintenance for users
of PET technology.


Industry Background



| |                   
| | ------------------
| | The Science of PET

The basis of PET imaging is the labeling of
small, biologically important molecules, such as glucose, amino
acids, pharmaceuticals or even water, with positron-emitting
radionuclides that are injected into patients. These injected
materials are referred to as radiopharmaceuticals. The
radionuclides undergo radioactive decay, whereby their nuclei
emit positrons that travel a very short distance in tissue
before colliding with electrons, converting their total mass
into detectable forms of energy. In the modern PET scanner,
thousands of small detectors are oriented in a ring
configuration surrounding the patients body. Computer
reconstruction of the data acquired by these detectors permits a
visual depiction of a metabolic process within cells of the
organ systems of the body.

In common applications relating to cancer, a few
milliliters of a water-based solution containing a minute amount
of sugar tagged with the radionuclide fluorine-18, known as
F-18-fluorodeoxyglucose, or FDG, is injected into a patient. FDG
is delivered throughout the body via the blood stream, and like
natural sugar in the blood, FDG is taken into normal cells of
organs as well as cancerous cells. Because many types of cancer
cells use sugar and grow faster than normal cells, they consume
FDG at a much higher rate than normal cells. The PET scanner
produces an image of the consumption of FDG in cells of the
organs and tissues throughout the body. Like many diseases,
cancer is a metabolic abnormality. PETs ability to image
the metabolic process enables an earlier and more accurate
diagnosis of the disease and monitoring of the effectiveness of
therapy.

Other promising applications for PET include
cardiac disease and neurological disorders. In cardiology, PET
images can be used to assess coronary artery disease (CAD) and
left ventricular dysfunction. Physicians can use PET images to
determine the presence and extent of heart disease and to assist
in determining whether invasive procedures are necessary and
will benefit the patient. In addition to examining blood flow to
the heart, PET is used for patients with heart disease to
determine whether cells of the heart are dead or alive. The use
of PET prior to angioplasty and bypass surgery to assess the
viability of heart tissue and the likelihood of a successful
outcome could have significant cost advantages to payors by
eliminating expensive, unnecessary revascularization procedures.
PET has been useful scientifically with respect to neurological
disorders such as Alzheimers disease, Parkinsons
disease, and epilepsy.

The effective use of a PET scanner depends on a
readily available supply of radiopharmaceuticals, which are very
short lived, making local availability essential. Most
clinically important radiopharmaceuticals are produced using a
sophisticated piece of electronic equipment called a cyclotron,
which requires specially trained technicians and a licensed
special purpose facility. Historically, institutions performing
PET scans required an on-site cyclotron to produce
radiopharmaceuticals on demand. PET customers now have an
alternative to installing and operating cyclotrons on-site by
obtaining local distribution of radiopharmaceuticals from
specialized pharmacy providers. We expect the market for
radiopharmaceuticals to grow as the adoption and utilization of
PET continues to grow and as new and more effective
radiopharmaceuticals are developed for additional applications
of PET technology.

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The most common medical imaging technologies in
the U.S. today are X-ray, CT and MRI. These imaging technologies
have several advantages over PET, namely they represent the
current standard of patient care, provide clear anatomical
images, generally are reimbursed, are fast (in the case of X-ray
and CT) and todays radiologists are very competent in
reading these types of images. In comparison to CT and MRI, PET
has some disadvantages including the lack of exact anatomical
images to help pinpoint the location of disease, the poor
sensitivity of FDG in certain cancers such as prostate cancer,
the lack of reimbursement for several types of cancer, and the
steep physician learning curve associated with PET. However, we
do not believe that PET and MRI compete with one another as MRI
is primarily used for diagnosing musco-skeletal injuries.
Furthermore, we believe that PET and CT are complementary, as
evidenced by the development of the combined PET/CT scanner.

PET is fundamentally different from X-rays, MRI,
ultrasound and CT technologies. With X-rays, CT, ultrasound and
MRI, an abnormality must manifest itself as a change in body
structure or anatomy, such as the development of a sizeable
tumor, before it can be detected. PET, on the other hand, can,
in many cases, identify diseases earlier and more specifically
than X-rays, CT, ultrasound or MRI by detecting abnormalities in
cellular activity that precede anatomical changes. In addition,
unlike other imaging technologies, which merely confirm the
presence of a mass, PET often enables physicians to distinguish
between benign and malignant disorders or between living and
dead tissue. PET can also be more effective in monitoring the
treatment of disease. For example, treating cancer with
chemotherapy leads to changes in cellular activity, including a
decline in the consumption of sugar and FDG, that are observable
by PET long before structural changes can be measured by X-rays,
CT, MRI or ultrasound. Accordingly, PET can enable a physician
to evaluate the efficacy of a prescribed treatment regimen,
perhaps leading to a modification in treatment, before such an
evaluation could be made using X-rays, CT, MRI or ultrasound.



| |                  
| | -----------------
| | The Growth of PET

Sales of PET imaging equipment and related
products and services have grown rapidly and are expected to
continue to grow rapidly. Based on 2001 and 2003 market analyses
prepared by Frost & Sullivan, a marketing consulting firm,
the estimated installed base of PET scanners in the U.S. grew
from 107 in 1997 to 849 in 2002, and the estimated number of
units shipped annually in the U.S. grew from 12 in 1997 to 299
in 2002. The Frost & Sullivan analysis forecasts that from
2002 through 2009 the U.S. installed base of PET scanners will
grow at an estimated compound annual growth rate of 27.4%, and
the number of units shipped in the U.S. will grow at an
estimated compound annual growth rate of 19.0%.

One of the principal reasons for growth in the
PET market is the increasing number of PET applications being
approved for reimbursement by third-party payors, such as
Medicare, national and local private insurers and HMOs.
Reimbursement is critical to increasing the adoption rate of PET
by clinicians. Through active educational efforts, industry
participants and associations, such as the Academy for Molecular
Imaging, the Society of Nuclear Medicine and the Radiological
Society of North America as well as the National Institutes of
Health, have been successful in increasing the awareness of
PETs benefits to patients, physicians and members of the
payor community and in increasing the number of PET applications
for which reimbursement is available. On July 1, 2001, the
Centers for Medicare and Medicaid Services (CMS), which
administers Medicare and Medicaid, expanded its policy to cover
PET scanning in six oncology applications, two cardiac
applications and one neurological application. Effective
October 1, 2002, CMS expanded coverage for breast cancer
and heart disease. Most recently, on April 16, 2003, and
effective as of October 1, 2003, CMS announced expansion of
Medicare coverage for PET to include thyroid cancer and patients
with potential cardiac disease.

The following table summarizes the PET
applications that have been approved for reimbursement by CMS.
As used in the following table, the term staging
generally refers to the use of PET in the initial diagnosis
process to verify the existence and status of the disease. The
term restaging generally refers to

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the use of PET following, and in some instances
during, the treatment process to determine the status of the
disease and the effectiveness of the treatment regimen.


|                |  |                                                                          |  |                                                                                                                                                                                                                                                               
|--------------- |  | ------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Effective Date  |  | Clinical Condition                                                       |  | Coverage                                                                                                                                                                                                                                                      
|                |  |                                                                          |  |                                                                                                                                                                                                                                                               
|March 14, 1995  |  | Perfusion of the heart (Rubidium 82 tracer)                              |  | Non-invasive imaging of the perfusion of the heart                                                                                                                                                                                                            
|January 1, 1998 |  | Lung cancer (non-small cell)                                             |  | Initial staging                                                                                                                                                                                                                                               
|January 1, 1998 |  | Solitary pulmonary nodules (SPNs)                                       |  | Characterization                                                                                                                                                                                                                                              
|July 1, 1999    |  | Colorectal cancer                                                        |  | Determining location of tumors if rising
    carcinoembryonic antigen (CEA) level suggests Recurrence                                                                                                                                                         
|July 1, 1999    |  | Lymphoma                                                                 |  | Staging and restaging only when used as an
    alternative to gallium scan                                                                                                                                                                                    
|July 1, 1999    |  | Melanoma                                                                 |  | Evaluating recurrence prior to surgery as an
    alternative to a gallium scan                                                                                                                                                                                
|July 1, 2001    |  | Colorectal cancer                                                        |  | Diagnosis, staging and restaging                                                                                                                                                                                                                              
|July 1, 2001    |  | Esophageal cancer                                                        |  | Diagnosis, staging and restaging                                                                                                                                                                                                                              
|July 1, 2001    |  | Head and neck cancers (excluding central nervous
    system and thyroid) |  | Diagnosis, staging and restaging                                                                                                                                                                                                                              
|July 1, 2001    |  | Lung cancer (non-small cell)                                             |  | Diagnosis, staging and restaging                                                                                                                                                                                                                              
|July 1, 2001    |  | Lymphoma                                                                 |  | Diagnosis, staging and restaging                                                                                                                                                                                                                              
|July 1, 2001    |  | Melanoma                                                                 |  | Diagnosis, staging and restaging; not covered for
    evaluating regional nodes                                                                                                                                                                               
|July 1, 2001    |  | Myocardial viability                                                     |  | Covered only following inconclusive single photon
    emission computed tomography (SPECT)                                                                                                                                                                    
|July 1, 2001    |  | Refractory seizures                                                      |  | Pre-surgical evaluation                                                                                                                                                                                                                                       
|October 1, 2002 |  | Myocardial viability                                                     |  | Primary evaluation or initial study to determine
    myocardial Viability prior to Revascularization                                                                                                                                                          
|October 1, 2002 |  | Breast cancer                                                            |  | Staging for metastasis/restaging for regional
    and/or distant metastasis and monitoring response to therapy                                                                                                                                                
|October 1, 2003 |  | Thyroid cancer                                                           |  | Restaging of recurrent or residual thyroid
    cancers of follicular cell origin that have been previously
    treated by thyroidectomy and radioiodine ablation and have a
    serum thyroglobulin> 10 ng/ml and negative I-131 whole body
    scan performed
|October 1, 2003 |  | Perfusion of the heart                                                   |  | Noninvasive imaging of the perfusion of the heart
    or using ammonia N-13 (non-FDG) tracer.                                                                                                                                                                 

5



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Source: Section 50-36 of the CMS
Coverage Manual and CMS Decision Memoranda #CAG-00094A and
#CAG-00098N

As the foregoing table suggests, the majority of
PET scans today are performed for oncology procedures. According
to the U.S. Centers for Disease Control, cancer is the second
leading cause of death in the U.S., with one in four deaths in
the U.S. related to cancer. Incidence of cancer increases with
age. The number of Americans age 45-64 who will reach 65 over
the next two decades increased by 34% during the past decade. We
believe the utilization of PET in the oncology market will
continue to grow due to the aging of the population, a
corresponding increase in the number of patients with cancer and
discoveries involving the use of PET in additional oncology
applications as well as the expansion of reimbursement to
additional cancer indications.

We also expect new innovations involving PET.
Research and development activities in the industry are focused
on decreasing scan times, thereby increasing patient throughput
capacity and improving patient comfort and image quality. For
example, by using detectors made from lutetium oxyorthosilicate,
or LSO, rather than the traditional detector material, bismuth
germanate, or BGO, scan times for certain routine procedures
have decreased from approximately thirty minutes to
approximately ten minutes. Other research and development
activities focused on improving image quality resulted in the
commercial introduction of a combined PET/CT scanner. The
combination of PET and CT technologies in a single scanner
results in better diagnostic and therapy monitoring capability
than either technology alone and allows physicians to identify
the location of biologic abnormality with more precision. By
pinpointing the location of malignant tumors and providing
clearer images, we believe the combined PET/CT has the potential
to revolutionize both the practice and business of cancer
treatment by, for example, facilitating concurrent tumor
ablation or resection.

We also believe that research and development
activities focused on the development of new
radiopharmaceuticals may allow PET scanners to detect and
monitor additional diseases which, in turn, could increase the
number of recognized indications for PET.

Business Strategy

Our business focuses on enabling diagnosis and
therapy management for cancer, cardiac disease and neurological
disorders using molecular imaging technology. Our overall goal
is to expand and integrate PET into standard clinical practice
by delivering innovative total solutions that
support adoption and use of PET technology. We intend to enhance
our position as the leading provider of integrated PET products
and services in order to capitalize on the rapidly growing
molecular imaging market. To achieve this objective, we intend
to pursue the following strategies:

Increase Overall Utilization of PET
Technology.We intend to stimulate
increased utilization of PET procedures by:



| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | supporting efforts to increase the number and
    scope of PET procedures that are approved for reimbursement;                                                                                       
|
| |  | educating physicians, patients, pharmaceutical
    companies and payors regarding the clinical advantages of PET;                                                                                    
|
| |  | expanding the utilization of our PET scanners
    beyond diagnosis to a broader management of the treatment of
    disease; and                                                                      
|
| |  | developing new applications for PET technology by
    developing new radiopharmaceuticals, by supporting clinical
    trials that involve PET and by collaborating with pharmaceutical
    companies.

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Continue Offering Customers a Comprehensive
Line of Integrated PET Products and
Services.We intend to emphasize our
total solutions approach by offering a broad range
of integrated products and services that complement our
sophisticated PET imaging equipment in order to:



| |   |                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | better compete with larger imaging equipment
    companies that have a captive finance company and a broader
    imaging product line but lack the full array of PET products and
    services a customer needs to operate a PET imaging business;
|
| |  | offer products and services that are
    comprehensive yet individually tailored to meet the differing
    needs of a variety of customers in a variety of clinical
    settings;                                                                 
|
| |  | facilitate entry into the PET imaging business by
    offering new providers an integrated total solution of all
    products and services necessary to incorporate the benefits of
    PET into a clinical setting; and                          
|
| |  | capture a greater share of PET-related
    expenditures as the market for PET imaging products and services
    continues to grow.                                                                                                                

Expand Our Direct Sales Force and Distribution
Network.In order to capture a large
portion of the anticipated growth in demand for PET scanners, we
intend to enhance our sales and distribution capacity by:



| |   |                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | expanding our direct sales force, including the
    addition of CTI sales representatives in major U.S. metropolitan
    markets and adding a direct sales force and distributors in key
    international markets; and
|
| |  | pursuing a multiple distributor strategy for our
    PET scanner products through CPS.                                                                                                                                 

Continue to Build Our Production and
Distribution Network for
Radiopharmaceuticals.We intend to
further expand our existing PETNET network of
radiopharmaceutical production and distribution facilities in
order to:



| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | seize first mover advantage by being
    the first PET radiopharmacy in targeted markets and leveraging
    our access to lower cost, self-manufactured cyclotrons;           
|
| |  | continue to grow our recurring revenue streams;
    and                                                                                                                         
|
| |  | extend the reach of the PETNET radiopharmacy
    network and leverage this greater scale to achieve operating
    efficiencies and improve delivery time and quality of service.

Maintain Our Technological Leadership Through
Focused Research and Development.We
have been a leading innovator of PET technology, and through CPS
are dedicated to the continued development of PET scanners in
order to:



| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | take advantage of our exclusive right to use LSO
    in molecular imaging products to advance the state-of-the-art in
    PET scanners;
|
| |  | improve image quality for better diagnosis and
    treatment of patients;                                                              
|
| |  | shorten scan times for increased patient comfort
    and throughput capacity; and                                                      
|
| |  | expand clinical applications of PET technology;
    and                                                                                
|
| |  | lead the application of PET in brain research and
    clinical development.                                                            

Develop New Proprietary
Radiopharmaceuticals.We intend to
focus significant research and development efforts on our
radiopharmaceuticals business, including efforts to:



| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | develop new varieties of radiopharmaceuticals to
    be used as biomarkers to characterize the varied pathways of
    diseases and extend the use of PET imaging to additional
    diseases;
|
| |  | collaborate with leading pharmaceutical companies
    and academic institutions to, among other things, improve their
    process for conducting research and clinical trials; and          

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| |   |                                              
| | - | ---------------------------------------------
| |  | explore new therapeutic applications for PET.

Our Products and Services

Our products and services can be broadly
classified into four principal categories:



| |   |                                 
| | - | --------------------------------
| |  | PET and PET/CT scanners;        
|
| |  | detector material products;     
|
| |  | radiopharmaceuticals; and       
|
| |  | other PET products and services.



| |                        
| | -----------------------
| | PET and PET/CT Scanners

Our subsidiary, CPS, manages the development,
manufacturing, distribution and sale of the ECAT® line of
PET scanners. This line of scanners consists of stand-alone PET
scanners and the combined PET/CT scanner. The scanner system
consists of a scanner frame known as the gantry, a patient bed,
an acquisition computer and a high-speed operators
workstation. The ECAT® scanner line performs simultaneous
acquisition, image reconstruction, processing, and data
analysis, which enhances patient throughput and generates prompt
results. The scanners produced by CPS range in price from
$800,000 to $2.4 million and offer customers a range of
throughput times, resolution and image quality. With the variety
in pricing and function, we are able to meet the needs of small
and mid-sized imaging centers, as well as larger facilities that
require more extensive equipment for clinical research purposes.
For a discussion of segment financial information, see
Segments in note 13 of the notes to our consolidated
financial statements appearing elsewhere in this annual report.



| |                           
| | --------------------------
| | Detector Material Products

We are the only manufacturer of lutetium
oxyorthosilicate, or LSO, as a detector material for use in our
PET scanners. LSO is a lutetium based scintillator material the
chemical compound of which was patented by Schlumberger
Technology Corporation. By using LSO as a detector material in
our products, our scanners provide improved performance and
diagnostic accuracy by decreasing patient scan times and
increasing image quality. We have exclusive rights to the
development and manufacturing of LSO as a detector material. We
acquired these exclusive rights from Schlumberger in February
1995. The exclusive rights terminate upon the expiration of
Schlumbergers patents for LSO, which are currently
scheduled to expire in October 2008. While LSO is the only
lutetium based scintillator material currently used in the PET
industry, it may be possible for others to produce a lutetium
based detector that does not contain LSO without violating the
Schlumberger patent and, therefore, our exclusive license.
Previously we manufactured bismuth germanate, or BGO, a detector
material, which is still used in competitive scanners.

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The following table highlights the benefits of
LSO versus BGO as a detector material in PET scanners:

|                                                                                                                   |  |                                                                                                  |  |                                                                                              |  |                                                                                                                                                                                                                                                                                    
|------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                   |  |                                                                                                  |  |                                                                                              |  |                                                                                                                                                                                                                                                                                    
|                                                                                                                   |  |                                                                                                  |  |                                                                                              |  | LSO                                                                                                                                                                                                                                                                                
|Feature                                                                                                            |  | LSO                                                                                              |  | BGO                                                                                          |  | Advantage                                                                                                                                                                                                                                                                          
|Scan Time                                                                                                          |  |                                                                                                  |  |                                                                                              |  |                                                                                                                                                                                                                                                                                    
|The shorter the decay constant for the detector
    material, the shorter the patient scan time                    |  | Decay constant of 40 nanoseconds, or more than
    seven times faster than BGO.                  |  | Decay constant of 300 nanoseconds.                                                           |  | LSO-based scanners generally exhibit a shorter
    patient scan time than BGO-based scanners. This shorter scan
    time increases the number of patient scans that can be performed
    each day, thereby reducing the likelihood of image distortion
    due to patient movement.
|Image Quality                                                                                                      |  |                                                                                                  |  |                                                                                              |  |                                                                                                                                                                                                                                                                                    
|Detector materials that provide a higher light
    output allow for higher image resolution and higher sensitivity |  | LSO has a light output of 75 on a scale of 100,
    or five times greater light output than BGO. |  | BGO has a light output of 15 on a scale of 100.                                              |  | The increased light output results in higher
    image resolution for LSO-based scanners and allows the detection
    of smaller lesions.                                                                                                                                          
|                                                                                                                  
|Proprietary Technology                                                                                             |  | We have an exclusive license to use LSO in the
    molecular imaging market.                     |  | We do not have an exclusive right to use BGO and
    it is commonly used by our competitors. |  | We believe the combination of our exclusive
    license to use LSO and the performance benefits of LSO provide
    us with a significant competitive advantage.                                                                                                                    



| |                     
| | --------------------
| | Radiopharmaceuticals

Through our PETNET subsidiary, we currently
operate 39 radiopharmaceutical production and distribution
centers, referred to as PETNET radiopharmacies, located in major
metropolitan areas across the U.S. and one radiopharmaceutical
production and distribution center in the United Kingdom. Of our
40 radiopharmacies, we operate 13 cyclotrons owned by others, or
hosts, pursuant to contracts. Our PETNET radiopharmacies
principally produce and distribute FDG, which is used in
oncology, cardiology and neurology applications, but these
radiopharmacies can also manufacture and distribute research
radiopharmaceuticals. Our PETNET radiopharmacies allow customers
to obtain a cost effective source of radiopharmaceuticals
without having to purchase and operate their own cyclotron. In
addition, our nationwide network of distribution centers
provides our customers with assurance that their
radiopharmaceutical requirements will be satisfied in a timely
manner that reduces scanner downtime and facilitates patient
scheduling. We also provide various PET-related services through
PETNET, including reimbursement education, radiation safety
consulting, licensure assistance and marketing assistance. We
believe that the demand for radiopharmaceuticals will expand
with the future growth of the PET market and the growing demand
for PET services. To meet this demand, we expect to continue the
expansion of our PETNET network.

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| |                                    
| | -----------------------------------
| | Other PET Products and
    Services

Cyclotron Systems.We produce cyclotrons for the production of radiopharmaceuticals
at our PETNET radiopharmacies and for sale to hospitals and
imaging centers that choose to manufacture radiopharmaceuticals
for themselves. Our cyclotrons provide a cost-effective,
easy-to-operate, self-shielded, and automated system that
produces positron-emitting radionuclides and compounds used in
making radiopharmaceuticals such as FDG. We developed these
systems to improve efficiency and lower cost while maintaining
high levels of performance, improved production capacity,
automated operation, and a complete line of automated chemistry
modules. Our cyclotrons combine high beam quality and shielding
with efficiencies in space requirements, building modifications
and operating costs. In 2001, we introduced a new high
performance cyclotron with 100% more production capacity than
our previous model, while maintaining its cost-effective,
self-shielded design. Currently, we offer three cyclotron
models: the ECLIPSE ST, which is designed for hospital use,
ECLIPSE RD, which is configured for research use, and the
ECLIPSE HP, which is built for high-yield commercial use. Each
of our cyclotron systems can be upgraded to meet the needs of
our customers as their business develops.

Reveal Network Solutions.We have introduced an Internet-based
product called Reveal Network Solutions to connect physicians,
PETNET radiopharmacies and patients to PET providers. Reveal
Network Solutions will facilitate the sharing of relevant
information among users, thereby improving efficiency by
automating some aspects of the PET process. Reveal Network
Solutions can be used to schedule imaging procedures and to
obtain information regarding reimbursement. We expect this
network to increase the efficiency of our PETNET radiopharmacies
by allowing PET facilities or hospitals to order
radiopharmaceuticals on line as opposed to ordering by facsimile
or phone. Further, Reveal Network Solutions will provide us with
an on-line method to educate physicians regarding the clinical
advantages of PET.

Mirada Workstations.Through our subsidiary, Mirada
Solutions Limited, we produce Mirada workstations with
Reveal-MVS. Reveal-MVS is software designed to improve the
patient care delivered by our customers with innovative, unique
and productive tools for the creation, display and analysis of
molecular images.

Concorde MicroPET.We have, through PETNET, an exclusive,
royalty-free license agreement to distribute products of
Concorde Microsystems, Inc., a related party, within certain
territories, including high-resolution animal PET tomography
scanners (MicroPET). MicroPET provides researchers in the
biomedical sciences with a compact and very high performance PET
system that can be used non-invasively to image a wide range of
small animals in a routine laboratory setting. PETNET is
responsible for sales, marketing and education activities, while
Concorde is responsible for all product warranty, installation,
training, service and technical support.

Additional Products and Services.Establishing, operating and
maintaining a facility to conduct molecular imaging procedures
requires more than purchasing a molecular imaging scanner. Our
customers face challenges ranging from designing their facility
to educating referring physicians and imaging technologists in
the operation of the scanner. Our extensive experience in the
molecular imaging industry allows us to help our customers
through this process by offering a broad range of services.
These include:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Repair and Maintenance Services.We offer our customers the opportunity
    to enter into long term service contracts with us pursuant to
    which we agree to provide repair and maintenance services,
    including scheduled preventive maintenance, troubleshooting and
    problem diagnosis, service and repair procedures and replacement
    parts installation. Approximately 150 PET scanners are under
    contract for repair and maintenance services at an average price
    of $119,000 per year. Equipment maintenance service contracts
    are recognized ratably over the respective contract periods as
    the services are performed.
|
| | Site Planning and Installation Services.Prior to installing a PET scanner, we
    assist our customers with the development of their sites by
    providing pre-installation site inspections, consultation with
    facility architects, construction management services, system
    requirement and                                                                                                                                                                                                                                                                                                                                                     

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | specification development and development of site
    planning documentation. Once a site is completed, we will then
    provide installation services including transporting the system
    to the facility, connecting all subsystems, completing the
    system start-up and safety check and conducting the initial
    performance testing.                                                                                                                                                   
|
| | Radioactive Materials Licensing.A radioactive materials license is
    required to operate a molecular imaging center. Gathering the
    forms and information needed for the license application is a
    lengthy and cumbersome process. We work with our customers to
    collect the necessary information and then prepare the license
    application for submission. Once submitted, we track the
    progress of the application until it is received from the
    applicable state agency.
|
| | Technologist Recruiting and Training.The day-to-day responsibilities for
    operating a molecular imaging scanner and interacting with
    patients are generally handled by a molecular imaging
    technologist. As a result of our extensive contacts in the
    molecular imaging industry, we have the capability to help our
    customers recruit and hire these technologists. Once hired, we
    can also provide them with additional training.                                         
|
| | Physician Training.We have a preceptorship program in
    operation at several facilities to train physicians in the
    details of PET imaging. We arrange for the physician to attend
    these courses. This training allows the physician to gain
    hands-on experience in an operational molecular imaging
    facility. The preceptorships typically last five days and
    include continuing medical education credits.                                                                  
|
| | Telephone Support.We also provide our customers access to a telephone support, or
    help desk, hotline where we have service personnel
    standing by to assist our customers with questions related the
    operation of our products. This hotline can also be used to
    order spare parts and request emergency on site assistance.                                                                                                                                                      
|
| | Calibration Sources.Through our subsidiary, CTI Services,
    Inc., we produce the radioactive sources used to calibrate our
    ECAT® scanners. All dedicated PET scanners require
    transmission sources as well as calibration sources. These
    sources are used by CPS to evaluate newly manufactured scanners
    and we also sell replacement sources to the end users, generally
    through the scanner distributors.                                                                  

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Research & Development

Our founders and directors are recognized leaders
in the development of PET technology. For example, our President
and Chief Executive Officer and director, Ronald
Nutt, Ph.D., has been credited with co-developing the
combined PET/CT and our director, Michael Phelps, Ph.D.,
one of the original inventors of the PET scanner, is a leading
academic figure in PET. As a result of their leadership, we have
been responsible for the development of many of the major
commercial innovations in PET since our formation in 1983. The
following table highlights some of these innovations:

|     |  |                                                                                                                                                                                                                                                          
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date |  | Innovation                                                                                                                                                                                                                                               
|     |  |                                                                                                                                                                                                                                                          
|1985 |  | Invented the block detector which assisted in the
    commercial introduction of PET by lowering the cost and
    increasing the performance of PET equipment                                                                                            
|1990 |  | Developed the first three dimensional high
    resolution PET that images human organs in a single frame                                                                                                                                                 
|1992 |  | First to develop whole body imaging capability                                                                                                                                                                                                           
|1995 |  | Developed the first whole body three dimensional
    PET scanner for cancer                                                                                                                                                                              
|1997 |  | Commercially introduced the RDS 111 cyclotron
    which incorporated proprietary technology that lowered the cost,
    target volumes and power requirements for our cyclotrons and
    provided electronic automated preparation of radiopharmaceuticals
|1998 |  | Developed the first 2mm multi-slice brain scanner
    for research                                                                                                                                                                                       
|1998 |  | Invented the combined PET/CT and demonstrated the
    first clinical image using a PET/CT                                                                                                                                                                
|2001 |  | Introduced LSO scanners on a commercial basis                                                                                                                                                                                                            
|2003 |  | Introduced high resolution (Hi-Rez) PET/CT                                                                                                                                                                                                               

Our research and development team focuses on
developing the next generation of PET scanners, cyclotrons and
radiopharmaceuticals. In addition to our internal ideas, our
research and development department collaborates with a network
of leading physicians, academic imaging experts and, in the case
of CPS, with Siemens. We actively involve scientists and
physicians during the research and development process in order
to produce products that are truly customer driven and customer
focused. We incurred $31.3 million in 2003,
$21.7 million in 2002 and $19.0 million in 2001 in
research and development expenses, including clinical and
regulatory expenses.

In order to enhance our research capabilities, we
have also entered into collaboration arrangements with a number
of universities and research institutions. For example, in 1994
we entered into a collaboration agreement with UCLA for the
development of new molecular imaging technology. This
relationship has led to a number of breakthrough developments in
molecular imaging, from imaging the expression of genes to the
development of new experimental radiopharmaceuticals. For
example, our image of Alzheimers-related plaques using a
new radiopharmaceutical was selected as the image of the year in
2001 by the Society of Nuclear Medicine. CPS also worked with
Dr. David Townsend at the University of Geneva, who was
named the Distinguished Clinical Scientist of the Year for
2004 by the Academy of Molecular Imaging, to develop the
PET/CT, which was recognized by TIME Magazine as the medical
science Invention of the Year in 2000. Further, CPS
worked with the Max Planck Institute in Germany to develop the
first large field of view clinical scanner in 1990 and, more
recently, a 2mm brain scanner used for neurological research.
These collaboration arrangements have increased our access to
world-class physicians and scientists and have given us a
platform to expand our name recognition in the scientific and
medical communities and to increase understanding among
physicians of the benefits of PET.

Our role as a leader in the area of research and
development is exemplified by the academic and research
institutions that use our products. Today, our products are used
by many of the leading medical

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and scientific institutions including The
Cleveland Clinic, Columbia Presbyterian, Emory University,
Washington University in St. Louis, Baylor University,
UCLA, MD Anderson Cancer Center, Hospital San Raffaele in Milan,
Italy, DKFZ German Cancer Research Center in Heidelberg,
Germany, Peking Union Medical College in Beijing, China, and Max
Planck Institute in Koln, Germany.


Products Under Development

CPS develops dedicated PET scanners that use our
advanced LSO-based detector materials. These scanners provide
substantially higher patient throughput while providing improved
image quality and upgradeable performance. CPS also develops
PET/CT scanners that incorporate advanced LSO-based detector
systems. Future PET/CT scanners are expected to better integrate
PET and CT technologies and are anticipated to substantially
decrease body scan time to be consistent with the scan times of
a CT while improving image quality.

We are also expending significant resources in
the development of the next generation of commercially available
radiopharmaceuticals. Through this development process, we hope
to expand the number of PET indications by, among other things,
creating new proprietary radiopharmaceuticals that will allow
PET to diagnose and manage an increasing number of diseases and
to produce a closer alignment between molecular imaging of
disease with PET radiopharmaceuticals and the treatment of
disease with pharmaceuticals. Currently, we are working on the
development of new radiopharmaceuticals to enhance the ability
of PET to detect disorders such as inflammation, breast cancer,
prostate cancer, Parkinsons disease and Alzheimers
disease.

In order to further enhance our role as a leader
in developing new PET technology and radiopharmaceuticals,
PETNET has established a collaborative research and development
facility with the UCLA School of Medicine. We refer to this
facility as the LA Tech Center. One of the goals of the
LA Tech Centers research is to establish new
biomarkers that will eventually allow medical personnel to probe
the various pathways of disease, using methods similar to those
used today by in vitro laboratory techniques. Another primary
goal of the LA Tech Center is to expand the use of PET
technology to accelerate the drug development process. We
believe PET has a number of advantages over other imaging
modalities that will allow pharmaceutical companies to use PET
to more quickly identify whether their developmental drugs are
reaching their intended targets and achieving the desired
therapeutic results. We anticipate that the use of PET by
pharmaceutical companies could help to improve their success
rate in clinical trials and speed up the drug development
process. In addition, by increasing the labeled pharmaceuticals
available in the PET imaging modality, we expect the process
will result in increasing the number of radiopharmaceuticals for
use in PET imaging.

Our Relationship with Siemens



| |                 
| | ----------------
| | Ownership of CPS

In 1987 we entered into a joint venture agreement
with Siemens Medical Solutions USA, Inc., a wholly owned
subsidiary of Siemens AG, pursuant to which Siemens acquired
49.9% of the outstanding capital stock of our subsidiary, CPS.
The cash consideration paid by Siemens for its 49.9% interest
was paid directly to the individual shareholders of CPS. The
amount of the consideration, and the determination of the
ownership percentage acquired by Siemens, was negotiated at
arms length between Siemens and the shareholders of CPS.
Neither Siemens nor any of its affiliates has any ongoing
financial obligations, commitments or guarantees with respect to
CPS related to the formation or operation of the joint venture.
We entered into the joint venture agreement in order to provide
us with access to Siemens global distribution network and
to include our scanners in its product line.

Put/Call Provision.The joint venture agreement contains, among other things, a
put/call provision pursuant to which Siemens has the right to
acquire from us for cash up to that number of shares of CPS
common stock necessary to bring Siemens aggregate
ownership interest in CPS to 80%. We refer to this as the call
right. The call right becomes exercisable upon CPS exceeding
certain PET scanner unit sales volumes, as described below. Upon
an exercise by Siemens of the call right, we have a one-time
right to

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defer the sale for a period of one year. Upon CPS
exceeding the same minimum unit sales volumes, we have a right
to require Siemens to purchase from us the same number of shares
of CPS common stock. We refer to this as the put right. Upon our
exercise of the put right, Siemens also has a one-time right to
defer its purchase for a period of one year.


The exercisability of the put/call right is
contingent upon CPS selling, during the year preceding exercise,
in excess of the cumulative total number of units specified in
the Siemens minima plus 20% plan attached to the
joint venture agreement. The Siemens minima plus 20%
plan provides for annual increases in the cumulative total
number of units sold by CPS beginning on December 9, 1987.
As of September 30, 2003, the cumulative total number of
units sold by CPS was 697 and CPS would need to have sold a
cumulative total of 981 units to achieve the required cumulative
sales level for the put/call right to be exercisable. The
cumulative unit sales requirement increases by 74 units
each year. It is impossible to definitively state when the
put/call right will become exercisable by either party. However,
based upon our current forecasts, we believe it is unlikely that
the minimum sales volumes will be met in 2005. Assuming that
sales volumes are met in 2005 and further assuming the exercise
of the one-year deferral right, the sale of CPS is not expected
to occur before 2006.

Upon exercise of either the put or the call, the
joint venture agreement provides that the parties will attempt
to negotiate the price to be paid for the CPS shares. In the
event the parties are unable to agree upon the price within
60 days, the price will be determined through an appraisal
process with each party obtaining a valuation of the CPS shares
by an independent professional experienced in the valuation of
closely held corporations similar to CPS. If the valuations that
are obtained are within 20% of each other, the price to be paid
for the CPS shares will be the average of the two valuations. If
the difference between the valuations is more than 20%, the two
appraisers will select another independent appraiser to provide
a third valuation. In this case, the price to be paid for the
CPS shares will be the average of the two valuations that are
the closest to each other.

If the put/call right is exercised and
Siemens aggregate ownership interest in CPS increases to
80%, Siemens will then be able to effect a merger of CPS with
another Siemens-controlled entity and acquire the remaining 20%
from us. Siemens will only be required to pay us either a
negotiated price for the remaining 20% or, if we and Siemens are
unable to agree, the fair value of the shares as determined in
accordance with applicable provisions of the Tennessee Business
Corporation Act. In the event Siemens acquires a controlling
interest in CPS, CTI will no longer include CPS in its
consolidated financial statements.

Use of Proceeds from Sale.If the put/call right is exercised, we
will have broad discretion with respect to the use of the
proceeds received from Siemens in connection with our sale of
the shares of CPS. We anticipate that we will evaluate
appropriate alternatives as we approach the cumulative totals.
Possible uses of the proceeds include the repayment of debt,
strategic acquisitions, investment in product development and
repurchase of a portion of our outstanding shares.

Distributions.The
joint venture agreement does not provide for any mandatory
dividends or distributions by CPS to us or to Siemens. Since the
formation of the joint venture, CPS has not paid any dividends
or made any distributions on its capital stock. Payment of
future dividends or distributions, if any, on the capital stock
of CPS would be at the discretion of the CPS board of directors.

Non-Competition Agreement.The joint venture agreement contains
covenants not to compete which will prohibit us from
participating in or owning an interest in any business that
develops, sells or manufactures products that compete with the
products offered by CPS. This non-compete provision will remain
in effect for a period of three years following the sale of our
shares of CPS pursuant to the exercise of the put/call right.
Siemens is subject to a substantially similar covenant not to
compete, which will also remain in effect following the exercise
of the put/call right.

Ownership of Intellectual Property and Other
Assets.Following an exercise of the
put/call right, Siemens will acquire control of CPS and will
therefore control the rights to the patents and other
intellectual property then held by CPS. These patents cover
various electronics, detector technologies and

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algorithms incorporated into our ECAT®
scanners. We would not retain any right to use this patented
technology following a sale except to the extent of any then
existing licenses or other agreements between us and CPS.
Siemens would also acquire control of the other tangible and
intangible property owned by CPS, including the assets used to
manufacture and develop ECAT® scanners. However, the
patents and other technology held or licensed by us, such as the
license for the use of LSO and the patents for our cyclotron
technology, would not be affected by an exercise of the put/call
right.


LSO Supply
Arrangements.During the term of an
existing sublicense agreement between us and CPS, we are
obligated to sell LSO-based products to CPS on terms more
favorable than we sell such products to any other party.
However, we are not restricted from selling LSO to a competitor
of CPS. This sublicense automatically terminates upon the
termination of our current LSO license, which expires in
October 2008.

Governance of CPS and
CTI.The joint venture agreement
grants various rights to Siemens regarding the governance of
CPS, including the right to:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | designate two members of the five member board of
    directors of CPS (we also have the right to designate two
    members of the CPS board);                                                         
|
| |  | select the fifth director of CPS from a list of
    candidates that we submit to Siemens; and                                                                                                          
|
| |  | nominate one individual to serve as either the
    chairman of the board of directors or the president of CPS with
    the appointment to the specific office to be at the discretion
    of the board.

We have also agreed that for so long as we and
Siemens each own more than 20% of the outstanding shares of CPS,
our board of directors will nominate a representative of
Siemens, chosen by Siemens, to serve as a member of our board of
directors. Several of our stockholders, who collectively own an
aggregate of 38.8% of the outstanding shares of our common
stock, have agreed to vote in favor of the Siemens
nominee. Currently, Bernd Haetzel is the nominee selected by
Siemens to serve on our board of directors.

The joint venture agreement also contains
provisions for the orderly and prompt resolution of disputes
among the parties. In the fifteen years since the formation of
the joint venture, the parties have only elected to avail
themselves of the dispute resolution procedures twice. Most
recently, the process was used to address a contract
interpretation issue with respect to the implementation of the
multiple distributor strategy. A favorable resolution was
reached that has led to the expansion of our sales and marketing
force for the distribution of products manufactured by CPS.
Additionally, this process resulted in the signing of a number
of new long-term contracts with Siemens and increased joint
projects with Siemens on several new initiatives, including the
development of more advanced PET/CT capabilities.

Intercompany Services between CPS and
CTI.We have entered into an
administrative services agreement with CPS pursuant to which we
provide certain administrative services to CPS. Currently we
provide CPS with human resources services, information
technology services, facilities support and maintenance
services, regulatory services and various other corporate
services. We also allow employees of CPS to participate in our
employee benefit programs, including our stock option plan.



| |                        
| | -----------------------
| | Distribution Agreements

Siemens served as our exclusive distributor of
ECAT® scanners from 1987 to 1997. From 1997 until 2001,
Siemens and CPS served as the only distributors of ECAT®
scanners. In 2001, CPS adopted a multiple distributor strategy
in order to expand its distribution channels. In
November 2001 we added Hitachi Medical Systems America,
Inc. as a third-party distributor of CPS products and in
October 2003 we added Toshiba Medical Systems Corporation
as a third-party distributor of CPS products in Japan. As
a result, we are now serving as a direct distributor of the
products manufactured by CPS. Our distribution agreement with
CPS grants us a non-exclusive worldwide right to distribute PET
scanners manufactured by CPS. Pursuant to the terms of our
distribution agreement, CPS has an obligation to sell scanners
to us at a price that is no less favorable than the price
offered by CPS to any of its other distributors based on

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comparable volumes. In connection with this
multiple distributor strategy, CPS also entered into a new
distribution agreement with Siemens that contained terms that
are substantially similar to the terms of our agreement.


As a result of our distribution agreement with
CPS, following the exercise of the put/call right we will
continue to have a right to distribute PET products manufactured
by CPS through at least 2010. During the term of our
distribution agreement, we will have access to new products
developed by CPS on the same terms and conditions that CPS
grants distribution rights to Siemens.



| |                
| | ---------------
| | Credit Facility

Pursuant to the terms of our revolving credit
facility with SunTrust Bank, CPS is allowed to borrow up to
$55.0 million under the credit facility to finance its
operations. At September 30, 2003, CPS had no outstanding
balance under the credit facility. CPS pays its pro rata portion
of all fees and commissions under this credit facility. Our
subsidiaries guarantee all obligations under the credit
facility, except that the guarantee by CPS is limited to
$55.0 million and does not include any advances under the
credit facility that are loaned (on an intercompany basis) to
our PETNET subsidiary. The credit facility and the obligations
of our subsidiary guarantors under the credit facility are
secured by a lien on substantially all of our assets (including
the capital stock or other forms of ownership interests we hold
in our subsidiaries) and the assets of our subsidiary
guarantors, except that the lien securing the guarantee of CPS
is principally limited to the accounts receivable and inventory
of CPS.



| |                    
| | -------------------
| | Other Relationships

In addition to the relationships previously
discussed, we have entered into various other commercial
arrangements with Siemens. For example, Siemens and CPS have an
agreement pursuant to which Siemens supplies CPS with CT
scanners for the purpose of manufacturing a combined PET/CT
scanner. Siemens also provides us with replacement parts,
training and other support for the CT scanners incorporated into
the combined PET/CT systems. CPS also has a license to use
Siemens syngo® software which is an important
component of the operating system for the PET/CT.

Competition

The primary competitive factors in the PET
equipment market are quality, technical capability, breadth of
product line, distribution capabilities, price, the ability to
offer vendor financing, and the ability to provide quality
service and support. Our principal competition in the market for
PET scanners comes from divisions or subsidiaries of much larger
corporations such as GE Medical Systems and Philips Medical
Systems. GE Medical Systems markets and sells a combined PET/CT,
which is the main competitor to the PET/CT manufactured by CPS.
We also compete with Siemens in connection with the sale and
distribution of the PET scanners manufactured by CPS, as well as
for service and support business. Our competitors also include
academic institutions and other public and private research
organizations that conduct research, seek patent protection and
establish arrangements for commercializing products that compete
with our products. We are a relatively modest-sized company
compared to our primary competitors in the PET equipment market,
GE Medical Systems and Philips Medical Systems. These two
competitors have substantially greater access to capital and the
ability to bundle PET sales with the sale of other medical
devices in their respective product lines. However, they both
have more limited PET product lines than CTI. Because we offer a
comprehensive, integrated line of PET related products and
services that complement our PET scanners, we believe we have
some competitive advantages over these and other competitors
with more limited PET product lines. We also believe that our
position as a technological leader in the PET industry helps us
to compete in the market for PET scanners.

We believe the primary competitive factors in the
radiopharmaceutical market are national distribution
capabilities, reliability of delivery, price, the ability to
develop new radiopharmaceuticals and the ability to obtain
proprietary rights to any newly developed radiopharmaceuticals
and cyclotron technology. In the radiopharmaceutical market, we
have three principal groups of competitors. The first

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group consists of national radiopharmacy
companies such as Amersham, Tyco, Cardinal Health and Ion Beam
Applications (and its subsidiary, Eastern Isotopes). The second
group consists of independent regional radiopharmacy companies
such as Geodax and Pharmalogic. The third group of competitors
consists of large academic institutions. Setting up a
radiopharmacy is capital intensive, involving a significant
up-front investment. In addition, the first entrant in a given
geographic market often benefits from the ability to establish
relationships with key customers without significant
competition. These factors can make it advantageous to be the
first radiopharmacy, or first mover, in a given
market. We were the first FDG distributor to enter many of the
markets serviced by our network of 40 radiopharmacies. We
believe this first mover advantage provides us some
competitive advantage over other companies that might attempt to
enter, or expand their presence in, the radiopharmaceutical
markets we already serve. Currently, we estimate that no other
single competitor has more than ten radiopharmacies containing
cyclotrons that produce and distribute FDG.


In the cyclotron business, the primary
competitive factors are distribution capabilities, effective
shielding design, quality, production capacity and automated
production capability. We believe our position as a leader in
developing cyclotron technology combined with our integrated
product line will help us to compete in the cyclotron market.

Sales and Marketing

Our sales and marketing efforts are focused on
two primary segments of the PET market. The first segment
includes hospitals, universities and other research
institutions. The second segment includes customers such as
freestanding imaging centers and cancer treatment centers, often
owned by physicians and other entrepreneurs, who we believe are
particularly well suited to benefit from our ability to offer a
complete, integrated line of PET products and services. In order
to effectively target each of these segments, CPS has a multiple
distributor strategy for scanners. Through a distribution
arrangement with Siemens, we are able to leverage Siemens
large sales and marketing force to sell dedicated PET scanners
and combined PET/CT scanners to hospitals and research
institutions. As an additional direct distributor of ECAT®
scanners sold as REVEAL scanners through CTI Services, CTI
targets customers whom we believe would particularly benefit
from our integrated line of PET products and services. As a
direct distributor of CPS products, we have also entered
into sub-distribution agreements in certain international
markets in an effort to sell more ECAT® and (by CTI
Services) REVEAL scanners abroad and in order to provide us
access to new markets in which to sell our other PET products
and services.

Our marketing and sales strategy emphasizes our
complete and integrated line of PET related products and
services, including PET scanners, radiopharmaceuticals,
cyclotrons and services such as physician training and facility
planning and design. Unlike many of our competitors who focus on
limited aspects of the PET market, our sales and marketing team
is able to present CTI as a single source for all PET related
needs. In order to implement this strategy, which we call the
total solutions approach, sales personnel from each
of our business segments work together with prospective
customers to develop a customized package of products and
services.

Our success in assisting the Thompson Cancer
Center, a Knoxville, Tennessee based cancer center, offers a
good example of our total solutions approach.
Through the combined efforts of a multi-disciplinary team, we
designed and implemented a comprehensive, customized solution
for the development and operation of the Thompson Cancer
Centers new PET center. Our service organization assisted
the center with the design and installation of the facility.
Upon completion of the design and construction phase, the center
acquired an ECAT® scanner manufactured by CPS and today
PETNET provides the center with all of its PET related
radiopharmaceutical requirements.

For fiscal years 2003, 2002 and 2001, our
revenues from U.S. sales were $278.0 million,
$197.7 million and $144.7 million, respectively. For
fiscal years 2003, 2002 and 2001, our revenues from sales
outside the U.S. were $84.3 million, $60.7 million and
$44.2 million, respectively, and substantially all of our
long-lived assets, were located in the U.S. Sales through
Siemens represented approximately

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39.7% of our consolidated revenues for the fiscal
year ended September 30, 2003. We have no other single
third-party customer that accounts for more than 10% of our
sales.


Firm backlog orders at September 30, 2003
and September 30, 2002 were $190.6 million and
$112.2 million, respectively. A majority of this backlog is
expected to be realized as revenues by the end of the 2004
fiscal year.

Customer Service and Support

Due to the anticipated continuing growth in our
business, we continue to expand our customer service and support
staff. We maintain a network of approximately 90 service
engineers and customer support specialists who provide
installation, warranty, repair, training and support services
for our products. We generate service revenue by providing
service to customers on a time-and-materials basis and through
comprehensive service contracts and the sale of parts.

In our capacity as a direct distributor of CPS
products, we warrant ECAT® scanners against recurring and
significant failures for a period of twelve months. We also
warrant our cyclotrons for a period of twelve months. We offer a
variety of post-warranty equipment service agreements and
software support agreements that permit customers to contract
for the level of equipment maintenance and software support they
require.

We believe customer service and support are an
integral part of our competitive strategy. Service capability,
availability and responsiveness play an important role in
marketing and selling medical equipment and systems,
particularly as the technological complexity of the products
increases. Nevertheless, many hospitals use their own biomedical
engineering departments or independent service organizations to
service equipment after the warranty period expires. Therefore,
we cannot depend on the conversion of all customers to service
contracts after the expiration of warranty periods.

Intellectual Property

Our future growth and ability to compete in the
molecular imaging market are substantially dependent on
internally developed technologies. We seek to protect our
technology through a combination of copyright, patent,
trademark, trade secret and other intellectual property laws. As
of September 30, 2003, we held 30 U.S. patents and have 26
patent applications pending, which are generally related to our
PET scanners, cyclotrons and radiopharmaceutical production. We
believe it could take up to four years, and possibly longer, for
our pending U.S. patent applications to result in issued
patents. Certain technologies already patented in the U.S. are
either patented or subject to pending patents in Europe, Canada
and Japan. We have also received trademark registrations for
CTI, ECAT and our logo. We also rely on
trade secrets and other unpatented proprietary information,
which we attempt to protect by entering into confidentiality
agreements with certain employees, consultants, suppliers,
distributors, and other partners. We also seek to control access
to and distribution of our documentation and other proprietary
information.

In addition to developing our own technology, we
have entered into several license agreements to use third-party
technology. For example, we have an exclusive worldwide license
from Schlumberger Technology Corporation to use the LSO
technology. This license expires upon the expiration of the LSO
patents, which are expected to expire in October 2008. We have
sublicensed to CPS and Concorde Microsystems, Inc. the right to
use the LSO technology until such time as the License Agreement
between CTI and Schlumberger has expired.

Manufacturing

CPS assembles our ECAT® and REVEAL scanners,
and we assemble cyclotrons, from components manufactured by us
and components supplied to us by suppliers to whom we have
outsourced portions of our manufacturing process. For our
scanners, the most significant internal manufacturing process
involves the production of detector materials, which includes
several proprietary processes. Examples of components

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manufactured on an outsourced basis include
circuit boards, wiring harnesses, computer hardware, mechanical
gantries and patient couches. Outsourced components are either
standard products or are manufactured according to our
specifications. Typically, outsourced components that are
manufactured according to our specifications are tested by the
outsource manufacturer using test systems designed and supplied
by our engineers and manufacturing staff. Each major outsourced
component has an assigned outsource manager from our
manufacturing staff. We use ongoing periodic inspection to help
us monitor whether our outsource manufacturers are continuing to
meet our quality standards. We believe that outsourcing enables
us to reduce fixed costs and capital expenditures while also
providing us with the flexibility to increase production
capacity.


A number of components used in our existing
products, as well as products under development, are purchased
from single sources. For example, we purchase a substantial
portion of the raw material used to create our LSO detector
material from a single source. Disruptions or loss of supply
from any of our single source suppliers could disrupt our
manufacturing process or cause significant unanticipated costs
in obtaining alternative components or in incorporating
alternative components into our production process.

Our facility and quality system is inspected by
TÜV Essen, which is an independent auditing firm
responsible for granting accreditations of European Union
medical devices and quality assurance systems. Our facility and
CAN/CSA ISO 13485:1998 quality assurance systems have been
found by TÜV Essen to conform to the requirements of
ISO-9001: 2000, ISO 13485: 1996, and the European Union
Medical Device Directive.

Government Regulation

Our business is subject to many governmental and
regulatory requirements relating to health care matters. We
believe our current arrangements and practices are in material
compliance with applicable statutes and regulations. However, we
have not received or requested legal opinions from counsel or
from any federal or state regulatory authority to this effect,
and many aspects of our business operations, including PETNET
manufacturing, have not been the subject of federal or state
regulatory interpretation. As a result, we cannot assure you
that our current or prior practices or arrangements will not be
found to be in compliance with applicable laws and regulations,
and any such noncompliance could result in a material adverse
effect to us.



| |               
| | --------------
| | Licensure Laws

We are subject to licensing and regulation under
multiple federal and state laws, including laws relating to the
use and handling of radioactive materials and laws relating to
the operation of pharmacies. We also are required to register
with the appropriate state agencies our radioactive sealed
sources and each cyclotron that we own and operate. In addition,
some states require us to obtain a reciprocity license before
delivering products or servicing machines utilizing radioactive
materials in those states. The pharmacists operating in the
PETNET sites must be licensed, and many states require imaging
technologists that operate PET systems to be licensed. We
believe our operations are in material compliance with
applicable federal and state licensure laws and regulations.
Nevertheless, there can be no assurance that our current or past
operations would be deemed to be in compliance with applicable
laws and regulations, and any noncompliance could result in a
material adverse effect on us.



| |                         
| | ------------------------
| | Certificate of Need Laws

In some states, a certificate of need or similar
regulatory approval is required prior to the acquisition of
high-cost capital items or services, including diagnostic
imaging systems or provision of diagnostic imaging services by
our clients. Certificate of need regulations may limit or
preclude our clients from providing diagnostic imaging services
or systems. At present, a number of states in which we sell PET
systems have certificate of need laws that restrict the supply
of PET systems and other types of advanced medical equipment.
Certificate of need laws were enacted to contain rising health
care costs, prevent the unnecessary duplication of health
resources, and increase patient access for health services. In
practice,

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certificate of need laws have prevented hospitals
and other providers who have been unable to obtain a certificate
of need from acquiring new machines or offering new services. A
significant increase in the number of states regulating our
business through certificate of need or similar programs could
adversely affect us.




| |                                                                              
| | -----------------------------------------------------------------------------
| | U.S. Food and Drug Administration, or FDA,
    and State or Foreign Approvals

Numerous governmental authorities, principally
the FDA and corresponding state and foreign regulatory agencies,
strictly regulate our products and research and development
activities. The Federal Food, Drug, and Cosmetic Act, the
regulations promulgated under this act, and other federal and
state statutes and regulations, govern, among other things, the
pre-clinical and clinical testing, design, manufacture, safety,
efficacy, labeling, storage, record keeping and reporting,
advertising and promotion of medical devices and/or
radiopharmaceuticals.

Devices.Generally,
before we can market a new medical device, we must obtain
marketing clearance through 510(k) premarket notification. The
FDA will typically grant a 510(k) clearance if we can establish
that the device is substantially equivalent to a predicate
device. It generally takes us several months from the date of a
510(k) submission to obtain clearance, but it may take longer,
particularly if a clinical trial is required. We have obtained
510(k) clearance covering our PET scanners for use in a broad
range of PET imaging applications for the purpose of determining
various metabolic (molecular) and physiologic functions in
humans. This general clearance covers diagnostic applications
and applications for monitoring the treatment of disease.

The FDA generally requires premarket approval for
a medical device that does not have a predicate device. The FDA
will typically grant a premarket approval if a sponsor provides
valid scientific evidence that establishes the safety and
effectiveness of the device. We do not anticipate that a
premarket approval will be required for any of the PET scanners
we develop in the foreseeable future.

If human clinical trials of a device are required
for a 510(k) submission and the device presents a significant
risk to the patient in the trial, the sponsor of the trial,
usually the manufacturer or the distributor of the device, must
file an investigational device exemption application prior to
commencing human clinical trials. The investigational device
exemption application must be supported by data, typically
including the results of animal and/or laboratory testing. If
the investigational device exemption is allowed to go forward by
the FDA and one or more appropriate institutional review boards,
human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as
detailed in the investigational device exemption. If the device
presents an insignificant risk to the patient, a sponsor may
begin the clinical trial after obtaining approval for the study
by the institutional review boards alone. Submission of an
investigational device exemption does not give assurance that
the FDA will allow the investigational device exemption to
progress and if allowed to progress there can be no assurance
the FDA will determine that the data derived from the studies
supports the substantial equivalence of the device or warrants
the continuation of the clinical trials. An investigational
device exemption supplement must be submitted to the FDA before
a sponsor or investigator may make a change to the
investigational plan that may affect its scientific soundness,
study indication or the rights, safety or welfare of human
subjects.

In addition to granting marketing clearances for
our products, the FDA and international regulatory authorities
periodically inspect our facilities and operations. We must
comply with the host of regulatory requirements that apply to
medical devices marketed in the U.S. and internationally. These
requirements include labeling regulations, manufacturing
regulations, Quality System Regulation requirements, medical
device reporting regulations that require a manufacturer to
report to the FDA adverse events involving its products, and the
FDAs general prohibitions against promoting products for
unapproved or off-label uses. The FDA periodically inspects
device and drug manufacturing facilities in the U.S. or
manufacturers of product to be marketed in the U.S. in order to
assure compliance with applicable regulations.

Cyclotrons.We
believe that our cyclotrons are manufacturing equipment, rather
than medical devices as defined under the Food, Drug and
Cosmetic Act (i.e., they are not intended for use in the
diagnosis, cure, mitigation, treatment, or prevention of
disease, or intended to affect the structure or any

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function of the human body), and thus are not
subject to regulation as medical devices. The FDA has not
disputed our position regarding the regulatory status of our
cyclotrons after numerous agency inspections of our facilities
and operations over the past several years.


Radiopharmaceuticals.Our PET radiopharmaceutical products currently are produced and
sold through our PETNET radiopharmacies, which operate under
applicable state pharmacy licenses and compound PET products in
response to the prescription order of a licensed practitioner.
The Food and Drug Administration Modernization Act of 1997 (the
1997 Act) authorized the production of PET products
that conform to the United States Pharmacopoeia
(USP) positron emission tomography compounding standards
and the official monographs of the USP. Under these terms, we
are manufacturing and distributing several PET products.

FDA generally requires sponsors to submit a new
drug application prior to marketing a drug to demonstrate that
the drug is safe and effective for its intended uses. FDA will
approve the new drug application only if the drugs safety
and effectiveness has been demonstrated by extensive, controlled
clinical data, or by references to such data, and the sponsor
has shown adequate manufacturing and controls. A sponsor may
also submit an abbreviated new drug application, which does not
require safety and effectiveness data, but generally requires a
demonstration that the drug is bioequivalent to an
already approved drug. Under the 1997 Act, FDA currently cannot
require the submission of a new drug application or abbreviated
new drug application for any compounded PET product that
conforms to the PET compounding standards and the official
monographs of the USP until two years after the agency adopts
appropriate new drug approval procedures and current good
manufacturing practice requirements for these products.

On March 10, 2000, FDA published a
Federal Register notice announcing that the agency has
concluded that certain commonly used PET products (e.g.,
FDG injection) are safe and effective for certain indications
when produced under conditions specified in approved new drug
applications and abbreviated new drug applications. In that
notice, FDA invited producers of these products to voluntarily
submit applications for marketing approval and set out the
approval procedures and type of application required for these
PET products. FDA stated that the agency has not yet addressed
the procedures for approval of other PET products and of new
indications for approved PET drug products.

The language of the 1997 Act and FDA
pronouncements within the March 10, 2000 notice strongly
suggests that any FDA regulations pertaining to marketing
approval for PET products would apply to the compounded PET
products produced in our state-licensed PETNET radiopharmacies.
Within two years after FDAs new drug approval procedures
and current good manufacturing practice requirements for PET
products take effect, our PET products would require FDA
approval for a labeled (i.e., promoted) indication,
including any indications related to the monitoring of disease.

We believe, however, that the costs and time
associated with obtaining FDA approval for FDG will not have a
material impact on our business, financial condition, or results
of operations; however, any failure to comply with applicable
current good manufacturing practice requirements could delay FDA
approval. We could incur significant costs and time to obtain
FDA approval for any new PET product or for any new indication
for an approved PET product. Such additional costs and
expenditure of time in obtaining any required FDA approval could
have a material adverse effect on our business, financial
condition, and results of operations.

On April 1, 2002, FDA published draft
proposed current good manufacturing practice requirements for
PET products. FDA states that it has determined that the
production of a PET product would include all operations to the
point of release of a finished dosage form (includes unit dose
containers, multiple containers, and pharmacy bulk packages),
and these activities would be subject to current good
manufacturing practice.

Until FDA adopts final current good manufacturing
practice requirements for PET products, it is uncertain whether
any such requirements will have a material impact on our
radiopharmaceutical business. However, we may incur significant
costs in establishing and maintaining procedures and in certain
facilities

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improvements to comply with these requirements.
Our failure to comply with agency requirements could result in
FDA enforcement actions. These actions include, but are not
limited to, recalls or product seizure, warning letters, fines,
injunction, FDA refusal to grant approval of any required new
drug applications or abbreviated new drug application, FDA
withdrawal of approved applications, and criminal prosecution.
Any such enforcement actions could have a material adverse
effect on our business, financial condition, and results of
operations.


Finally, the 1997 Act established certain
restrictions on pharmacy compounding that include, among other
things, the prohibition of a pharmacy from advertising or
promoting the compounding of any particular drug, class of drug,
or type of drug. An April 2002 decision of the U.S. Supreme
Court in the lawsuit Thompson v. Western States Medical
Centerheld that the prohibition on promotion and
advertising violates the free speech guarantees of the First
Amendment. The U.S. Supreme Court was not asked to rule on the
appellate court decision that the advertising restriction
invalidates the entire pharmacy compounding section of the 1997
Act. Notwithstanding this advertising decision of the U.S.
Supreme Court, FDA has clearly evidenced its desire to regulate
the practice of pharmacy compounding, and in June 2002 reissued
a Compliance Policy Guide that describes the FDAs
short-term policy on pharmacy compounding. FDA is currently
considering the long-term implications of the U.S. Supreme Court
decision. Any such other regulatory limitations not related to
advertising restrictions could adversely impact the operations
of our PETNET radiopharmacies with respect to the compounding of
PET drug products in general or of specific PET
radiopharmaceuticals. We were not a party to the Thompson v.
Western States Medical Centerlawsuit.



| |              
| | -------------
| | International

In order to market our products in European and
other foreign countries, we must obtain required regulatory
approvals and comply with extensive regulations governing
product safety, quality and manufacturing processes. These
regulations vary significantly from country to country and with
respect to the nature of the particular medical device. The time
required to obtain these foreign approvals to market our
products may be longer or shorter than that required in the
U.S., and requirements for licensing may differ from FDA
requirements.

In order to market our products in the member
countries of the European Union, we are required to comply with
the Medical Devices Directive and obtain CE mark certification.
CE mark certification is an international symbol of adherence to
quality assurance standards and compliance with applicable
European medical device directives. Under the Medical Devices
Directives, all medical devices must qualify for CE marking.

All of our products sold internationally are
subject to appropriate foreign regulatory approvals, like CE
marking for the European Union. Our products are manufactured in
ISO 9001: 2000 and ISO 13485: 1996 and CAN/CSA ISO 13485: 1996
certified facilities.

We also must obtain European marketing approval
for our radiopharmaceuticals sold in Europe. We have obtained
approval in the United Kingdom from the Medicines Control Agency
(MCA) to produce and distribute FDG in England from our
Mount Vernon facility.



| |                                                          
| | ---------------------------------------------------------
| | Laws and Regulations Related to Radioactive
    Materials

Our scanners, cyclotrons, and radiopharmaceutical
business require the use of radioactive materials, and our
cyclotrons are utilized to produce radioactive materials. While
the radioactive materials utilized in our radiopharmaceuticals
have relatively short half-lives, meaning it quickly breaks down
into inert, or non-radioactive substances, the storage, use, and
disposal of these materials presents the radiation risk for our
employees and the risk of accidental environmental releases. We
are subject to federal, state and local regulations governing
storage, handling, and disposal of these materials and waste
products. Outside of the U.S. we are also subject to radiation
regulations that vary from country to country and sometimes vary
within a given country. Although we believe that our safety
procedures for storing, handling and disposing of these
hazardous materials comply in all material respects with the
standards prescribed by law and

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regulation, we cannot completely eliminate the
radiological risks from those radioactive materials. In the
event of an accident, we could be held liable for any damages
that result, and any liability could exceed the limits or fall
outside the coverage of our insurance. We may not be able to
maintain insurance on acceptable terms, or at all. We could
incur significant costs and the diversion of our
managements attention in order to comply with current or
future environmental laws and regulations. We have not had
significant material expenses associated with laws or
regulations governing radioactive materials.




| |              
| | -------------
| | Reimbursement

In the U.S., as well as in foreign countries,
government-funded or private insurance programs, commonly known
as third-party payors, pay the cost of a significant portion of
the patients medical expenses. A uniform policy of
coverage and reimbursement does not exist among all these
payors. Therefore, reimbursement for an item or service can be
quite different from payor to payor. We believe that
reimbursement is an important factor in the success of any
medical device. Consequently, we seek to obtain third-party
payor coverage and reimbursement for all of our products and
services.

In order to receive reimbursement from government
funded insurance programs such as Medicare and Medicaid and to
market our products in the U.S., we must first obtain FDA
clearances and approvals. Reimbursement also depends on our
ability to demonstrate the short-term and long-term clinical and
cost-effectiveness of our products from the results we obtain
from clinical experience. We present these results at major
scientific and medical meetings and publish them in respected,
peer-reviewed medical journals.

All third-party reimbursement programs, whether
government funded or insured commercially, whether inside the
U.S. or outside, are developing increasingly sophisticated
methods of controlling health care costs through prospective
reimbursement and capitation programs, prior authorization of
procedures, group purchasing, redesign of benefits, requiring
second opinions prior to major surgery, careful review of bills,
encouragement of healthier lifestyles and exploration of more
cost-effective methods of delivering health care. In August
2000, CMS implemented the Hospital Outpatient Prospective
Payment System in an effort to control costs to the Medicare
program. The Hospital Outpatient Prospective Payment System
applies to items and services furnished in hospital outpatient
departments and other facilities that are considered to be
provider-based. Under this new system, items and
services are grouped into ambulatory payment classifications
(APC), with most ambulatory payment classifications
having a pre-determined payment rate based on historical cost
and charge data. The hospitals bill for items and services using
Healthcare Common Procedure Coding System codes, and these codes
are used to determine the ambulatory payment classifications
that are paid for the billed items and services. In order to
accommodate new technologies, additional payments are made for
new technology services and for drugs, biologicals
and devices that are eligible for pass-through
payments. New technology services are paid as part
of special cost-based ambulatory payment classifications while
CMS collects sufficient data to determine the appropriate
ambulatory payment classification for the service. Separate
payments are made for pass-through items for two to three years,
after which they will be incorporated into ambulatory payment
classifications.

Under The Hospital Outpatient Prospective Payment
System, PET services currently are treated as new
technology services. It is not certain how much longer
this status will apply. Pursuant to a recent adjustment to The
Hospital Outpatient Prospective Payment System made by CMS, some
of the radiopharmaceuticals we sell currently are no longer
eligible for pass-through payments. Instead, CMS has
incorporated these products into ambulatory payment
classifications. It is expected that CMS will continue to refine
The Hospital Outpatient Prospective Payment System as it
collects more data on various reimbursable items and services.
We cannot predict what impact the forthcoming changes in
payments under The Hospital Outpatient Prospective Payment
System for our products and services will have on the demand for
such products from hospitals and provider-based entities.

In addition, non-governmental third-party payors,
such as commercial health maintenance organizations, preferred
provider organizations and other insurers, may similarly impose
varying requirements and

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limitations on reimbursement for our products or
for services utilizing our products, thereby affecting the
demand for our products from health care providers.


Currently, we are working with the Academy of
Molecular Imaging to form a European organization which, among
other things, will work to increase the level of reimbursement
for PET applications in the European market.

On April 16, 2003, CMS announced that it
affirmed its prior non-coverage decision of the application of
PET to Alzheimers disease, saying that the clinical
benefit of PET has not yet been demonstrated. However, CMS
announced two special efforts to help determine the potential of
PET for Alzheimers disease. A demonstration will be
designed to evaluate the appropriate role of PET in patients
with suspected dementia and CMS will work with the National
Institutes of Heath to convene a multidisciplinary expert
meeting with geriatricians, neurologists, radiologists, PET
experts and patient advocates to fully explore the value of PET
for Alzheimers disease. The CMS decision was consistent
with our expectation that gaining reimbursement approval for
Alzheimers disease will take some time. On August 14,
2003, a new and more restrictive coverage request for the use of
PET in the diagnosis of mild to moderate Alzheimers
disease was filed with CMS. On October 7, 2003, CMS
formally accepted this request and indicated that an expected
completion date for the new coverage decision of January 2004.
We remain confident that CMS will provide coverage of PET in
Alzheimers disease as there is evidence from scientists
representing the Academy of Molecular Imaging that PET is the
only technology available that can definitively diagnose
Alzheimers disease.



| |                     
| | --------------------
| | Fraud and Abuse Laws

The federal health care programs
anti-kickback law, the Anti-Kickback Law, prohibits persons from
knowingly and willfully offering, paying, soliciting, or
receiving remuneration, directly or indirectly, in exchange for
or to induce either: (i) the referral of an individual, or
(ii) the purchasing, leasing, ordering, or arranging for,
or recommending the purchase, lease or order of, any service or
item for which payment may be made by Medicare, Medicaid or
certain other federal health care programs. The definition of
remuneration has been broadly interpreted to include
gifts, discounts, the furnishing of free supplies or equipment,
commercially unreasonable credit arrangements, payments of cash
and waivers of payments. The statute itself has been broadly
interpreted to mean that if any one purpose of a payment
arrangement is to induce referrals of federal health care
program covered business, the statute has been violated. The
penalties for violating the Anti-Kickback Law can be severe.
These sanctions include criminal penalties and civil sanctions,
including fines and imprisonment.

The Anti-Kickback Law is broad, and it prohibits
many arrangements and practices that are lawful in businesses
outside of the health care industry. Recognizing that the
Anti-Kickback Law is broad and may technically prohibit many
innocuous or beneficial arrangements within the health care
industry, the U.S. Department of Health and Human Services (HHS)
has issued a series of regulations, known as the safe
harbors. These regulations set forth certain safe harbors
which, if all applicable requirements are met, can protect
health care providers and other parties from being prosecuted
under the Anti-Kickback Law. Although full compliance with all
applicable safe harbors can provide protection against
prosecution under the Anti-Kickback Law, the failure of a
transaction or arrangement to fit within one or more safe
harbors does not necessarily mean that the transaction or
arrangement is illegal or that prosecution under the
Anti-Kickback Law will be pursued. However, conduct and business
arrangements that do not fully satisfy each applicable safe
harbor may result in increased scrutiny by government
enforcement authorities such as the Office of the Inspector
General of the HHS, referred to as the OIG. To provide specific
guidance on the application of the Anti-Kickback Law, Congress
required the OIG to implement an advisory opinion process. In an
advisory opinion, the OIG may determine that it will not
sanction the advisory opinions requestor even if the
arrangement or practice in question technically violates the
Anti-Kickback Law. Although these advisory opinions are binding
on the OIG and the parties requesting the opinions, no
third-party may legally rely on them.

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Many states have adopted laws similar to the
Anti-Kickback Law. Some of these state prohibitions apply to
referrals for health care items and services reimbursed by any
source, not only the Medicare and Medicaid Programs. Some of
these state prohibitions may be more restrictive than the
Anti-Kickback Law in material respects, and the federal safe
harbors may not apply.

These laws constrain the sales, marketing and
other promotional activities of manufacturers of medical
devices, such as us, by limiting the kinds of financial
arrangements (including sales programs) we may have with
hospitals, physicians, imaging centers, and other potential
purchasers of medical devices. We have in place formal policies
related to compliant marketing practices. These laws are also
implicated by a manufacturers compensation or ownership
arrangements with customers (or physicians in a position to
recommend the purchase of a manufacturers products). We
have various types of compensation arrangements with customers
and physicians, including consulting agreements, research and
development agreements, and lease agreements. Furthermore, we
have certain joint venture arrangements with customers to
establish and operate PETNET radiopharmacies. We believe that
these various arrangements have been structured to comply with
federal and state anti-kickback laws. For example, we believe
the various compensation arrangements, which we have with
customers, provide for fair market value compensation for
services and/or space furnished to us. Additionally, we believe
that the PETNET joint venture arrangements require at-risk
investments and provide for returns on investment, which are
proportional to the level of investment. Given the breadth of
the federal and state anti-kickback laws, however, there can be
no assurance that federal or state regulatory authorities will
determine that all of our arrangements comply with these laws.
We have attempted to structure our business arrangements to
comply with the Anti-Kickback Law and similar state laws, but
there can be no assurances to this effect.

Other federal and state laws prohibit individuals
or entities from presenting, or causing to be presented, claims
for payment to third-party payors (including Medicare and
Medicaid) that are false or fraudulent or are for items or
services not provided as claimed. Violations of these laws can
result in substantial criminal and civil penalties. Although we
do not submit claims on our own behalf to third-party payors, we
may provide some billing and reimbursement advice to purchasers
of our products. Since we cannot assure that the government will
regard any billing errors that may be made by a customer relying
on our advice as inadvertent, these laws are potentially
applicable to us.

Both federal and state government agencies are
continuing heightened and coordinated civil and criminal
enforcement efforts. The federal government has increased
funding to fight health care fraud, and it is coordinating its
enforcement efforts among various agencies, such as the United
States Department of Justice, the OIG, and state Medicaid fraud
control units. We believe that the health care industry will
continue to be subject to increasing government scrutiny and
investigations.



| |              
| | -------------
| | The Stark Law

Congress has also passed significant prohibitions
against certain physician referrals of patients for health care
services. These prohibitions are commonly known as the Stark
Law. The Stark Law prohibits a physician from making referrals
for particular health care services (called designated health
services) to entities with which the physician, or an immediate
family member of the physician, has a financial relationship. If
an arrangement is covered by the Stark Law, the requirements of
a Stark Law exception must be met for the physician to be able
to make referrals to the entity for designated health services.

The term financial relationship is
defined very broadly to include most types of ownership or
compensation relationships. The Stark Law also prohibits the
entity receiving the referral from seeking payment under the
Medicare and Medicaid programs for services rendered pursuant to
a prohibited referral. If an entity is paid for services
rendered pursuant to a prohibited referral, it may incur civil
penalties and could be excluded from participating in Medicare
or Medicaid.

As originally enacted, the Stark Law restricted
referrals for clinical laboratory services. This version of the
Stark Law is also called Stark I. Effective January 1,
1995, the Stark Law was expanded to include physical therapy
services; occupational therapy services; radiology services,
including magnetic resonance imaging (MRI), computerized axial
tomography (CAT) scans, and ultrasound services; radiation
therapy

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services and supplies; durable medical equipment
and supplies; parenteral and enteral nutrients, equipment, and
supplies; prosthetics, orthotics, and prosthetic devices and
supplies; home health services; outpatient prescription drugs;
and inpatient and outpatient hospital services. This version of
the Stark Law is also known as Stark II.


The Stark Law defines a financial relationship to
include (1) a physicians ownership or investment
interest in an entity and (2) a compensation relationship
between a physician and an entity. Under the Stark Law,
financial relationships include both direct and indirect
relationships. We have various compensation arrangements with
physicians, including consulting agreements, research and
development agreements, and lease agreements. Also, we have a
number of joint venture arrangements to establish and operate
PETNET radiopharmacies. In connection with these different
arrangements there are physicians who would have a financial
relationship with us under the Stark Law. Accordingly, these
physicians would not be able to refer patients to us for
designated health services unless a Stark Law exception applies.

The definition of designated health
services includes radiology services, including
magnetic resonance imaging, computerized axial tomography and
ultrasound services. On January 4, 2001, HHS issued
final regulations to the Stark II provisions of the Stark
Law. These regulations became effective on January 4, 2002.
The final regulations exclude from the definition of covered
designated health services nuclear medicine services and
supplies. We believe that this exclusion covers the
equipment and services we provide.

HHS has accepted comments to the Stark II
final rules and has stated that it will issue further
regulations to the Stark Law in the future. In addition, HHS has
indicated that it will propose new regulations to amend the
definition of radiology and certain other imaging
services to include diagnostic nuclear medicine services
and supplies. If enacted, this amendment would mean that our
nuclear medicine services and supplies would be included under
the definition of designated health services under the Stark
Law. We cannot predict whether HHS will implement this amendment
or will adopt additional regulations that affect our business.

If the Stark Law applies to the relationships
between us and referring physicians, there are exceptions to the
Stark Law which, if certain requirements are met, would permit
those physicians to refer patients to us for designated health
services. The Stark Law contains exceptions for certain
physician ownership or investment interests in entities and
certain physician compensation arrangements with entities. The
exceptions for compensation arrangements include employment
relationships, personal services contracts, and space and
equipment leases. If a compensation arrangement between a
physician, or immediate family member, and an entity satisfies
all requirements for a Stark Law exception, then the Stark Law
will not prohibit the physician from referring patients to the
entity for designated health services. We believe that our
compensation and joint venture arrangements with physicians who
refer to us would meet or could be restructured to meet the
requirements for an exception under the Stark Law.

If an entity violates the Stark Law, it could be
subject to civil penalties of up to $15,000 per prohibited
claim and may be excluded from participation in Medicare and
Medicaid. If the Stark Law applies to the relationships between
us and our referring physicians and no exceptions under the
Stark Law are available, then we will be required to restructure
these relationships or refuse to accept referrals for designated
health services from these physicians. If we were found to have
submitted claims to Medicare for services provided pursuant to a
referral prohibited by the Stark Law, then we would be required
to repay amounts received from Medicare for those services and
could be subject to civil monetary penalties. If we were
required to repay amounts to Medicare or were subject to fines,
the Company could be harmed.

Many states have physician relationship and
referral statutes that are similar to the Stark Law. We believe
we are in substantial compliance with applicable state laws on
physician relationships and referrals. However, any finding that
we are not in compliance with these state laws could require us
to change our operations and could have a negative impact on us.

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| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | HIPAA Regulations Relating to the Privacy,
    Security, and Electronic Transmission of Health
    Information

In 1996 Congress passed the Health Insurance
Portability and Accountability Act of 1996 (HIPAA). Among other
things, HIPAA established several requirements regarding the
privacy, security and transmission of health information. HHS
has issued several sets of regulations in accordance with its
authority under HIPAA. In general, these regulations apply
directly to health care providers, health plans, and health care
clearinghouses, as well as indirectly, in certain instances, to
those who provide services on behalf of these entities which
involve the receipt or disclosure of health information. Our
employee health plan will be subject to the HIPAA regulations.
Some of our operations may also be subject to these regulations.

Pursuant to HIPAA, HHS issued final privacy
regulations establishing comprehensive federal standards
relating to the use and disclosure of protected health
information. These regulations, among other things, establish
limits on the use and disclosure of protected health
information, provide for patients rights to access,
request amendments, and receive an accounting of certain uses
and disclosures of protected health information, and require
covered health entities to implement certain safeguards to
protect identifiable health information. The federal privacy
regulations do not supersede state privacy laws that are more
stringent. Thus, to the extent we are subject to the privacy
regulations, we must determine which state privacy laws are more
stringent than the federal laws and comply with those state laws
in addition to the federal privacy regulations. The compliance
date for the federal privacy regulations was April 14,
2003. On July 6, 2001, HHS issued its first guidance
document relating to these regulations. On August 14, 2002,
HHS issued a final rule modifying certain provisions of the
HIPAA privacy regulations. HHS may propose additional
modifications in the future.

Like the privacy regulations, the regulations
providing electronic transaction standards for the processing of
health claims also are finalized. These regulations establish
uniform standards relating to data reporting, formatting, and
coding that covered entities must use in conducting certain
health care transactions electronically. The electronic
transaction standards presently apply to eight different
transactions, including transactions relating to health care
claims and health care payment and remittance advice. The
compliance date for these regulations was October 16, 2002.
However, we obtained a one-year extension of the transaction
standards compliance date. We filed a compliance plan with HHS
for purposes of the transactions conducted by our health plan.
Outside of our health plan, we do not believe we are subject to
the electronic transaction standards since we do not otherwise
conduct any of the covered transactions.

The security regulations promulgated pursuant to
HIPAA were finalized on February 20, 2003 and covered
entities are required to be in compliance with them by
April 21, 2005. The purpose of the proposed security
regulations is to establish a minimum standard for the
protection of individual health information that is stored or
transmitted electronically. The regulations provide
administrative procedures, physical safeguards, and technical
mechanisms that may be implemented to satisfy the regulations.

Violations of the privacy regulations are
punishable by civil and criminal penalties. State privacy laws
may impose similar sanctions on us. Violations of the electronic
transactions standards are punishable by civil penalties.

The HIPAA privacy, security and transaction
standards regulations could result in significant financial
obligations for us and will pose increased regulatory risk. At
this time, we are not able to determine the full consequences of
the HIPAA regulations for our business or the total cost of
complying with these regulations. However, the HIPAA regulations
could have a significant impact on us operationally and
financially.

Employees

As of September 30, 2003, we employed
directly and through our subsidiaries 915 people. Of these
915 people, 283 work in our PET scanner manufacturing
business, 226 work in our radiopharmaceutical

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business, 54 work in our detector materials
business, 242 work in our services business for scanners,
cyclotrons, and other products, and the remaining 110 work
in various administrative functions supporting all of these
businesses. None of our employees is subject to a collective
bargaining agreement. We consider our relationships with our
employees to be good.


Available Information

Our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 are available through our website (www.ctimi.com)
under the Investor Relations caption free of charge
as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the Securities and
Exchange Commission (SEC). We are not including the information
on our website as a part of, nor incorporating it by reference
into, this Form 10-K.




Item 2.     Properties

We currently own 201,000 square feet of
office, research and development, manufacturing and warehouse
space in Knoxville, Tennessee, and 63,000 square feet of
production space in Rockford, Tennessee. We have entered into a
lease for approximately 22,000 square feet of additional
office space and 10,000 square feet of warehouse space in
Knoxville, Tennessee. Except for the space located in Rockford,
Tennessee, which is used primarily by our Detector Materials
segment, each of the foregoing facilities is used in part by
each of our financial reporting segments.

CPS leases office, research and development,
manufacturing and warehouse space in Knoxville, Tennessee from
CTI under a lease agreement which runs through December 31,
2012. During 2003, CPS purchased approximately
21,000 square feet of office and warehouse space located in
Rockford, Tennessee.

We currently lease space for 30 PETNET
radiopharmacies throughout the U.S., including metropolitan
areas such as New York, Chicago, Tampa, San Francisco, Los
Angeles, Phoenix, Dallas, Detroit and Nashville. Four of these
leased properties are locations for future radiopharmacies. We
operate 13 of our radiopharmacies in facilities that are owned
by other parties and for which our use of the facilities is
governed by our commercial agreements with those parties rather
than separate facility leases. In addition, we have a PETNET
radiopharmacy located in Mount Vernon, United Kingdom.

CTI Services has offices in Europe that house
sales and service personnel who provide support for products
sold in Europe. These facilities are used by our CTI Services
segment.




Item 3.     Legal
Proceedings

In May 2002, Cox Nuclear Pharmacy,
Inc. & Accuscan LLC filed an action against CTI, PETNET
Pharmaceuticals, Inc. and an employee of PETNET, in the United
States District Court for the Southern District of Alabama,
Southern Division, civil action no. 02-cv-0321-CG-C. The
plaintiffs set forth fourteen causes of action against the
defendants, including a breach of contract claim related to the
sale of a cyclotron and various tort claims alleging violation
of a covenant not to compete in the Mobile, Alabama market. The
plaintiffs sought $20 million in compensatory damages on
the breach of contract claims and $50 million in aggregate
compensatory and punitive damages on the tort claims. The claims
against the PETNET employee have been dismissed. On
December 5, 2003, the District Court granted summary
judgment against the plaintiffs as to all remaining claims but
leaving unaffected CTIs counterclaim for liquidated
damages under CTIs purchase order with the plaintiffs.

On November 21, 2002, General Electric
Company filed an action against us and a former General Electric
employee now employed by us in the District Court of Johnson
County, Kansas, civil case no. 02-CV-07947. The complaint
charges us and our employee with alleged misappropriation of
trade secrets and unfair competition, and the employee with
breach of contract and breach of fiduciary duty. The complaint
seeks injunctive relief and an undisclosed amount of damages. On
November 21, 2002, General Electric, without notice to us
or our employee, obtained a temporary restraining order enjoining

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the employee from using General Electrics
confidential information and trade secrets, and enjoining us
from disclosing or using any confidential information or trade
secrets gained by the employee during his employment at General
Electric. We have denied liability and intend to vigorously
defend this suit; however, given the circumstances inherent in
the litigation process, we are unable to predict the ultimate
outcome of this suit.


On September 19, 2002, General Electric
filed a complaint against two former employees of General
Electric who are now employed by CTI in the United States
District Court, Eastern District of Wisconsin. The complaint
alleged threatened or actual misappropriation of trade secrets,
breach of contract and unfair competition. CTI was not named as
a defendant in that action. The defendants answered the
complaint and denied liability. On September 23, 2003, the
District Court in Wisconsin granted General Electrics
motion for voluntary dismissal without prejudice, which afforded
General Electric an opportunity to refile the action in another
United States District Court and potentially include additional
defendants in addition to the two former employees. On
November 24, 2003, General Electric refiled this action in
the United States District Court for the Eastern District of
Tennessee, Knoxville Division, against the two employees, CTI
and PETNET. The defendants filed their motion for dismissal
against all of GEs claims on December 15, 2003. Due
to the early stage of this action we are not able at the present
time to render an opinion as to the likelihood of an outcome
unfavorable to CTI or PETNET or as to the amount or range of
potential loss by CTI or PETNET in the event of an unfavorable
outcome, but we intend to vigorously contest this suit.

We are also involved in various other lawsuits
and claims arising in the normal course of business. Although
the outcomes of these other lawsuits and claims are uncertain,
we do not believe any of them will have a material adverse
effect on our business, financial condition or results of
operations.



|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

No matter was submitted to a vote of security
holders during the fiscal quarter ended September 30, 2003.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Price Range of Common Stock

The Companys Common Stock has been traded
on the Nasdaq National Market (Nasdaq symbol: CTMI) since
June 21, 2002. The following table sets forth the high and
low sales prices as reported on the Nasdaq National Market for
quarter ends during our 2003 and 2002 fiscal years.

|                    |  |      |       |     |  |   |       | 
|------------------- |  | ---- | ----- | --- |  | - | ----- | 
|Quarter Ended       |  | High |       | Low
|                    |  |      |       |    
|June 30, 2002       |  | $    | 23.45 |     |  | $ | 17.35 | 
|September 30, 2002. |  | $    | 25.94 |     |  | $ | 13.53 | 
|December 31, 2002.  |  | $    | 27.70 |     |  | $ | 21.30 | 
|March 31, 2003.     |  | $    | 26.34 |     |  | $ | 16.22 | 
|June 30, 2003       |  | $    | 20.13 |     |  | $ | 16.26 | 
|September 30, 2003. |  | $    | 17.90 |     |  | $ | 12.80 | 

Holders

The number of record holders of the
Companys Common Stock at December 1, 2003 was 137,
excluding beneficial owners of shares registered in nominee or
street name.

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Dividend Policy

The Company has not paid any cash dividends on
its common stock since its inception and does not intend to pay
any such dividends in the foreseeable future. Pursuant to the
terms of our existing credit facility, we are restricted from
paying dividends. See Item 7 of this annual report under
the sub-heading Liquidity and Capital Resources.

Securities Authorized for Issuance Under
Equity Compensation Plans

The following table summarizes our equity
compensation plans as of September 30, 2003:

|                                                           |  |                     |           |                   |  |                      |      |  |  |  |           |    
|---------------------------------------------------------- |  | ------------------- | --------- | ----------------- |  | -------------------- | ---- |  |  |  | --------- | ---
|                                                           |  |                     |           |                   |  | Number of Shares    
|                                                           |  |                     |           |                   |  | Remaining Available 
|                                                           |  | Number of Shares to |           | Weighted-Average  |  | for Future Issuance 
|                                                           |  | be Issued Upon      |           | Exercise Price of |  | Under Equity        
|                                                           |  | Exercise of         |           | Outstanding       |  | Compensation Plans  
|                                                           |  | Outstanding         |           | Options,          |  | (Excluding          
|                                                           |  | Options, Warrants   |           | Warrants and      |  | Securities Reflected
|                                                           |  | and Rights          |           | Rights            |  | in Column (a))      
|Plan Category                                              |  | (a)                 |           | (b)               |  | (c)                 
|                                                           |  |                     |           |                   |  |                     
|Equity compensation plans approved by stockholders         |  |                     | 3,501,781 |                   |  | $                    | 9.70 |  |  |  | 1,381,089 | (1)
|Equity compensation plans not approved by
    stockholders |  |                     | 450,506   | (2)               |  | $                    | 5.12 |  |  |  |          |    
|                                                           |  |                     |           |                   |  |                      |      |  |  |  |           |    
|Total                                                      |  |                     | 3,952,287 |                   |  | $                    | 9.18 |  |  |  | 1,381,089 |    
|                                                           |  |                     |           |                   |  |                      |      |  |  |  |           |    



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes up to 5,928 shares that may be granted
    as awards of restricted stock, performance shares or
    unrestricted stock under the 2002 Long-Term Incentive Plan.                                                                                                                                                                                                                                                                           
|   
|(2) | Includes warrants to acquire 76,000 shares issued
    in connection with the execution of a consulting agreement and
    374,506 options issued outside of our 1998 Amended and Restated
    Incentive Stock Option Plan to certain non-employee advisors and
    consultants. See Stock Options, Warrants and Restricted
    Stock in note 9 of the notes to our consolidated financial
    statements appearing elsewhere in this annual report

Sales of Unregistered Securities

During the year ended September 30, 2003, we
had no sales of unregistered securities.

Use of Offering Proceeds

The Registration Statement on Form S-1 (SEC
File No. 333-85714) for our initial public offering was
declared effective on June 20, 2002, and on June 26, 2002
we closed the initial public offering of our common stock. The
net offering proceeds received by us, after deducting
underwriting discounts and commissions and estimated offering
expenses of approximately $16.0 million was approximately
$171.4 million. As of September 30, 2003,
$10.2 million of the net offering proceeds had been used to
redeem all of our Series A Redeemable Preferred Stock,
including all accrued dividends, $0.3 million of the net
offering proceeds had been used to redeem 1,191,165 shares of
our common stock, approximately $62.0 million of the net
offering proceeds had been used to decrease our outstanding
balance under our credit facility, approximately $14.5 million
had been used to extinguish capital lease obligations, and
$11.4 million was used to repay our construction loan and
our mortgage loan agreement. In addition, approximately
$19.6 million was used for the acquisition of our
subsidiary Mirada Solutions Limited in August 2003. The balance
of the net offering proceeds have been invested in highly liquid
instruments, such as commercial paper and U.S. government
obligations, with an average maturity of twelve months or less.

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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

You should read the following selected
consolidated financial data in conjunction with
Item 7: Managements Discussion and Analysis of
Financial Condition and Results of Operations and
Item 8: Financial Statements and Supplementary
Data. We have derived the selected financial data set
forth below from our audited financial statements and related
notes.

|                                               |                                                  |                                          |         |            |  |      |         |            |   |      |         |            |  |   |         |            |  |   |        |            | 
|---------------------------------------------- | ------------------------------------------------ | ---------------------------------------- | ------- | ---------- |  | ---- | ------- | ---------- | - | ---- | ------- | ---------- |  | - | ------- | ---------- |  | - | ------ | ---------- | 
|                                               |                                                  |                                         
|                                               |                                                  | For The Year Ended September 30,        
|                                               |                                                  |                                         
|                                               |                                                  | 2003                                     |         | 2002       |  | 2001 |         | 2000       |   | 1999
|                                               |                                                  |                                          |         |            |  |      |         |            |   |     
|                                               |                                                  |                                         
|                                               |                                                  | (In thousands, except per share amounts)
|Consolidated Statement of Operations
    Data: |                                                  |                                          |         |            |  |      |         |            |   |      |         |            |  |   |         |            |  |   |        |           
|Net revenue                                    |                                                  | $                                        | 362,289 |            |  | $    | 258,395 |            |   | $    | 188,877 |            |  | $ | 124,026 |            |  | $ | 88,247 |           
|Costs and expenses                             |                                                  |                                          |         |            |  |      |         |            |   |      |         |            |  |   |         |            |  |   |        |           
|                                               | Cost of revenues                                 |                                          |         | 219,127    |  |      |         | 150,654    |   |      |         | 110,249    |  |   |         | 68,372     |  |   |        | 52,711     | 
|                                               | Selling, general and administrative expenses     |                                          |         | 52,221     |  |      |         | 37,069     |   |      |         | 29,433     |  |   |         | 21,751     |  |   |        | 15,430     | 
|                                               | Research and development expenses                |                                          |         | 29,931     |  |      |         | 21,658     |   |      |         | 18,985     |  |   |         | 14,845     |  |   |        | 10,605     | 
|                                               | Write-off of in process research and development |                                          |         | 1,380      |  |      |         |           |   |      |         |           |  |   |         |           |  |   |        |           | 
|                                               | Stock-based compensation expenses                |                                          |         | 1,909      |  |      |         | 12,250     |   |      |         | 538        |  |   |         | 503        |  |   |        |           | 
|Income from operations                         |                                                  |                                          | 57,721  |            |  |      | 36,764  |            |   |      | 29,672  |            |  |   | 18,555  |            |  |   | 9,501  |           
|Warrant liability mark to market expense       |                                                  |                                          |        |            |  |      | 8,902   |            |   |      | 3,921   |            |  |   | 3,174   |            |  |   |       |           
|Interest expense, net                          |                                                  |                                          | 804     |            |  |      | 4,148   |            |   |      | 3,767   |            |  |   | 2,300   |            |  |   | 1,029  |           
|Provision for income taxes                     |                                                  |                                          | 22,935  |            |  |      | 14,590  |            |   |      | 9,930   |            |  |   | 3,875   |            |  |   | 1,465  |           
|Minority interest expense                      |                                                  |                                          | 15,387  |            |  |      | 12,969  |            |   |      | 6,366   |            |  |   | 4,453   |            |  |   | 3,035  |           
|Net income (loss)                              |                                                  |                                          | 20,563  |            |  |      | (3,419  | )          |   |      | 6,116   |            |  |   | 4,378   |            |  |   | 3,482  |           
|Earnings (loss) per common share:              |                                                  |                                          |         |            |  |      |         |            |   |      |         |            |  |   |         |            |  |   |        |           
|                                               | Basic                                            |                                          | $       | 0.47       |  |      | $       | (0.25      | ) |      | $       | 0.15       |  |   |         | 0.10       |  |   | $      | 0.13       | 
|                                               | Diluted                                          |                                          | $       | 0.44       |  |      | $       | (0.25      | ) |      | $       | 0.13       |  |   |         | 0.09       |  |   | $      | 0.11       | 
|Weighted average shares outstanding:           |                                                  |                                          |         |            |  |      |         |            |   |      |         |            |  |   |         |            |  |   |        |           
|                                               | Basic                                            |                                          |         | 43,351,390 |  |      |         | 32,497,070 |   |      |         | 27,860,086 |  |   |         | 25,243,051 |  |   |        | 27,269,253 | 
|                                               | Diluted                                          |                                          |         | 46,457,355 |  |      |         | 32,497,070 |   |      |         | 31,340,041 |  |   |         | 28,440,078 |  |   |        | 30,309,014 | 

|                                       |  |                     |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |        | 
|-------------------------------------- |  | ------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------ | 
|                                       |  |                    
|                                       |  | As of September 30,
|                                       |  |                    
|                                       |  | 2003                |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                       |  |                     |         |      |  |      |         |      |  |     
|Balance Sheet Data:                    |  |                     |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |        | 
|Total assets                           |  | $                   | 425,048 |      |  | $    | 351,709 |      |  | $    | 207,781 |  |  | $ | 143,041 |  |  | $ | 92,345 | 
|Long-term debt and capital leases      |  |                     | 18,688  |      |  |      | 26,730  |      |  |      | 73,122  |  |  |   | 36,878  |  |  |   | 3,102  | 
|Redeemable preferred stock             |  |                     |        |      |  |      |        |      |  |      | 7,740   |  |  |   | 7,397   |  |  |   | 7,084  | 
|Convertible redeemable preferred stock |  |                     |        |      |  |      |        |      |  |      | 5,040   |  |  |   | 4,230   |  |  |   | 3,542  | 
|Stockholders equity                   |  |                     | 259,853 |      |  |      | 219,489 |      |  |      | 24,157  |  |  |   | 8,110   |  |  |   | 11,217 | 






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion and analysis contains
forward-looking statements about our plans and expectations of
what may happen in the future. Forward-looking statements are
based on a number of assumptions and estimates that are
inherently subject to significant risks and uncertainties, and
our results

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could differ materially from the results
anticipated by our forward-looking statements as a result of
many known or unknown factors, including, but not limited to,
those factors discussed below in this Item under the sub-heading
Risk Factors. See also the Cautionary Notice
Regarding Forward-Looking Statements set forth at the
beginning of this report.


You should read the following discussion and
analysis in conjunction with Item 6 
Selected Financial Data and Item 8 
Financial Statements and Supplementary Data appearing
elsewhere in this report.

Overview

We are a leading manufacturer of positron
emission tomography imaging equipment and related products used
in the detection and treatment of cancer, cardiac disease and
neurological disorders. Positron emission tomography, or PET, is
a medical imaging technology that offers the distinct advantage
of imaging at the molecular level thereby allowing physicians to
diagnose and treat a broad range of diseases earlier and more
accurately than other medical imaging technologies. We also
provide a comprehensive array of services that facilitate entry
by health care providers into the business of PET imaging. Our
line of PET products and services includes scanners, cyclotrons,
detector materials, production and distribution of
radiopharmaceuticals, and distribution and related support
services.

Historically, the majority of our consolidated
revenues, gross margin and net income have been attributable to
our CPS segment. Our strategy includes plans for growing our
other segments over time with a goal of having greater than 50%
of our gross revenues and net income being derived from such
other segments by 2006, the expected year that Siemens
could first close on the exercise of its option to purchase CPS.
This strategy contemplates the following initiatives:
(1) expansion of our PETNET radiopharmaceutical
distribution network to meet market needs; (2) direct
distribution of PET scanners by CTI; (3) development of new
proprietary radiopharmaceuticals; (4) growing our service
contract business; and (5) adding additional products and
services, such as Mirada workstations.



| |         
| | --------
| | Segments

We operate in four segments for financial
reporting purposes: CPS; PETNET; Detector Materials, and CTI
Services. In addition, we have other business operations that
are not classified as separate segments for financial reporting
purposes, including general corporate activities. Effective
October 1, 2003, the PETNET and CTI Services segments have been
combined to reflect organizational changes. In future fiscal
reporting periods these two segments will be reported as one
segment, CTI Solutions.



| |    
| | ---
| | CPS

Our CPS segment includes the development,
production and sale of PET and PET/CT scanners. We conduct this
business through our subsidiary, CTI PET Systems, Inc. which
does business as CPS Innovations (CPS) and which was formed
in 1987 as a joint venture with Siemens Medical Solutions USA,
Inc., a wholly owned subsidiary of Siemens, AG. We own 50.1% of
CPS and Siemens owns the remaining 49.9%.

From 1987 until April 2001, the products of CPS
were distributed exclusively by Siemens. Under this distribution
agreement, CPS received and recognized revenue in an amount
equal to the price to the customer and we paid Siemens a fee to
cover its selling, marketing, and distribution costs. These fees
were reported as costs of revenues and selling expenses in our
consolidated statements of operations. Under this agreement, we
set the price to the end customer, had ultimate liability to the
end customer for product performance, and retained credit risk
associated with sales to end customers.

In April 2001 we implemented a multiple
distributor strategy for CPS by commencing direct distribution
and by pursuing additional third-party distributor agreements.
In November 2001 we added Hitachi Medical Systems America, Inc.
as a third-party distributor of CPS products, and in
October 2003 we added Toshiba Medical Systems Corporation as a
third-party distributor of CPS products in Japan.

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Following our implementation of the multiple
distributor strategy, we began receiving and recording revenue
from sales made through third-party distributors in an amount
equal to the price to the distributor and ceased paying fees to
distributors to cover their selling, marketing and distribution
costs. Under these agreements, we set the price to distributors
who set their own price to the end customer. We do not bear
credit risk associated with sales made by the distributor to end
customers.


The scanners manufactured by CPS have
historically ranged in customer price from $800,000 to
$2.4 million and offer customers a broad range of
throughput times, resolution and image quality.



| |       
| | ------
| | PETNET

Our PETNET segment consists of our business of
developing, producing and distributing radiopharmaceuticals and
providing certain PET related services such as reimbursement
education, radiation safety consulting, licensure assistance and
marketing assistance. We conduct this business through our
subsidiary, PETNET Pharmaceuticals, Inc.

We currently operate 39 PETNET radiopharmacies in
the U.S. and 1 radiopharmacy in the United Kingdom. Thirteen of
these radiopharmacies operate cyclotrons owned by other parties,
or hosts, pursuant to contracts. These host contracts vary but
typically require us to provide radiopharmaceuticals to the host
at below market prices while also allowing us to use the
hosts facility to manufacture and distribute
radiopharmaceuticals commercially to third parties. In addition,
we typically compensate the host for the use of the cyclotron.
The 40 radiopharmacies PETNET operates also include three
radiopharmacies we do not consolidate. While PETNET owns 50.1%
of these radiopharmacies, we do not exert significant influence
to control the activities of these three radiopharmaceutical
production and distribution facilities.



| |                   
| | ------------------
| | Detector Materials

Our Detector Materials segment includes our
business of developing, manufacturing and selling detector
materials for use in PET scanners. We conduct this business
through an unincorporated division of CTI called CTI Detector
Materials, and a wholly owned subsidiary named Advanced Crystal
Technology, LLC (ACT), acquired in July 1999.

Our Detector Materials division has certain
exclusive rights to the development and manufacturing of our
current generation detector material called lutetium
oxyorthosilicate, or LSO. We obtained an exclusive license from
Schlumberger Technology Corporation with respect to LSO in
February 1995. The rights terminate upon the expiration of
Schlumbergers patents for LSO, which are expected to
expire in October 2008. We have invested significant capital in
our Detector Materials segment in order to meet expected
increased demand for detector materials as the PET market
continues to grow. ACT previously manufactured bismuth
germanate, or BGO, the primary detector material used in PET
scanners manufactured by CPS prior to the introduction of LSO.



| |             
| | ------------
| | CTI Services

Our CTI Services segment includes CTIs
division that distributes and installs PET scanners manufactured
by CPS; CTIs division that manufactures, sells and
installs cyclotrons; CTIs subsidiary that manufactures and
sells calibration sources; CTIs domestic product service
division; CTIs subsidiaries in Germany, Spain, Italy and
the United Kingdom that distribute and service our products in
Europe; our subsidiary in South Korea that distributes our
services and products in South Korea; and Mirada Solutions
Limited which develops and sells imaging workstations and which
we acquired in August 2003.



| |                                        
| | ---------------------------------------
| | Components of Revenues and
    Expenses



| |         
| | --------
| | Revenues

Our revenue is derived primarily from sales of
PET products and services. Revenue for scanners, detector
materials, radiopharmaceuticals, calibration sources and spare
parts is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed and
determinable, and

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collectibility is probable. Delivery is
considered to have occurred upon either shipment or arrival at
destination depending on shipping terms. Amounts attributable to
the installation of scanners are deferred and recognized upon
completion of installation. Most of the revenue for detector
materials is from sales to CPS and, therefore, is eliminated in
consolidation for financial reporting purposes. Effective
July 1, 2003, in conjunction with the implementation of
EITF 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables,revenue for cyclotron systems is recognized
upon shipment of the equipment with amounts attributable to
installation of the systems deferred until completion of
installation. Revenue for service contracts is recognized
ratably over the period the service is provided.




| |                 
| | ----------------
| | Cost of Revenues

Our scanners, cyclotrons, detector materials,
calibration sources and spare parts are manufactured at our
facilities in Knoxville and Rockford, Tennessee. Our
radiopharmaceuticals are manufactured at 40 PETNET
radiopharmacies. We employ a network of PET field service
engineers to service our installed base of scanners and
cyclotrons.

Cost of revenues consists primarily of purchase
cost of materials; expenses related to internal operations of
the manufacturing and service organizations; expenses related to
technical support and maintenance; expenses related to shipping,
installation, acceptance, and warranty of our products;
royalties payable under technology licenses; and fixed asset
depreciation, primarily for our detector materials and
radiopharmacies.



| |                   
| | ------------------
| | Operating Expenses

Selling, General and
Administrative.Selling, general and
administrative expenses consist primarily of salaries,
commissions and related expenses for personnel engaged in sales,
general and administrative activities; costs associated with
advertising, trade shows, promotional and other marketing
activities; and legal and accounting fees for professional
services.

Research and
Development.Significant investment in
research and development has been made, and we believe will
continue to be required, to develop new products and enhance
existing products to allow us to further penetrate the PET
market. These expenses consist primarily of salaries and related
personnel expenses; expenditures for prototype materials and
supplies; overhead invested in product development; legal costs
associated with filing of patents and regulatory matters; and
research grants and consulting fees to various third parties.

Results of Operations

The following table shows revenues, cost of
revenues, selling, general and administrative expenses, research
and development expenses, stock-based compensation and income
(loss) from operations for all segments, expressed in
millions of dollars.

|          |                           |                          |   |        |       |      |   |       |       |  |   |       |       | 
|--------- | ------------------------- | ------------------------ | - | ------ | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|          |                           |                         
|          |                           | Year Ended September 30,
|          |                           |                         
|          |                           | 2003                     |   | 2002   |       | 2001
|          |                           |                          |   |        |       |     
|Revenues: |                           |                          |   |        |       |      |   |       |       |  |   |      
|          | CPS                       |                          | $ | 247.7  |       |      | $ | 189.0 |       |  | $ | 133.6 |      
|          | PETNET                    |                          |   | 74.9   |       |      |   | 55.6  |       |  |   | 35.6  |      
|          | Detector materials        |                          |   | 55.2   |       |      |   | 29.2  |       |  |   | 18.4  |      
|          | CTI Services              |                          |   | 125.8  |       |      |   | 65.6  |       |  |   | 41.7  |      
|          | Intercompany eliminations |                          |   | (141.3 | )     |      |   | (81.0 | )     |  |   | (40.4 | )    
|          |                           |                          |   |        |       |      |   |       |       |  |   |      
|          |                           | Total                    |   |        | 362.3 |      |   |       | 258.4 |  |   |       | 188.9 | 
|          |                           |                          |   |        |       |      |   |       |       |  |   |      

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|                                                      |                           |                          |  |        |       |      |  |       |       |  |  |       |       | 
|----------------------------------------------------- | ------------------------- | ------------------------ |  | ------ | ----- | ---- |  | ----- | ----- |  |  | ----- | ----- | 
|                                                      |                           |                         
|                                                      |                           | Year Ended September 30,
|                                                      |                           |                         
|                                                      |                           | 2003                     |  | 2002   |       | 2001
|                                                      |                           |                          |  |        |       |     
|Cost of revenues:                                     |                           |                          |  |        |       |      |  |       |       |  |  |      
|                                                      | CPS                       |                          |  | 167.9  |       |      |  | 118.8 |       |  |  | 79.2  |      
|                                                      | PETNET                    |                          |  | 51.9   |       |      |  | 40.3  |       |  |  | 27.0  |      
|                                                      | Detector materials        |                          |  | 26.1   |       |      |  | 18.4  |       |  |  | 11.5  |      
|                                                      | CTI Services              |                          |  | 110.2  |       |      |  | 48.2  |       |  |  | 30.4  |      
|                                                      | Intercompany eliminations |                          |  | (137.0 | )     |      |  | (75.1 | )     |  |  | (37.8 | )    
|                                                      |                           |                          |  |        |       |      |  |       |       |  |  |      
|                                                      |                           | Total                    |  |        | 219.1 |      |  |       | 150.6 |  |  |       | 110.3 | 
|                                                      |                           |                          |  |        |       |      |  |       |       |  |  |      
|Selling, general and
    administrativeexpenses:      |                           |                          |  |        |       |      |  |       |       |  |  |      
|                                                      | CPS                       |                          |  | 11.8   |       |      |  | 10.8  |       |  |  | 18.6  |      
|                                                      | PETNET                    |                          |  | 13.9   |       |      |  | 11.2  |       |  |  | 5.0   |      
|                                                      | Detector materials        |                          |  | 2.3    |       |      |  | 1.2   |       |  |  | 0.8   |      
|                                                      | CTI Services              |                          |  | 23.1   |       |      |  | 12.8  |       |  |  | 4.9   |      
|                                                      | Corporate and other       |                          |  | 1.1    |       |      |  | 1.1   |       |  |  | 0.1   |      
|                                                      |                           |                          |  |        |       |      |  |       |       |  |  |      
|                                                      |                           | Total                    |  |        | 52.2  |      |  |       | 37.1  |  |  |       | 29.4  | 
|                                                      |                           |                          |  |        |       |      |  |       |       |  |  |      
|Research and development expenses:                    |                           |                          |  |        |       |      |  |       |       |  |  |      
|                                                      | CPS                       |                          |  | 19.7   |       |      |  | 15.7  |       |  |  | 14.6  |      
|                                                      | PETNET                    |                          |  | 5.2    |       |      |  | 3.2   |       |  |  | 1.7   |      
|                                                      | Detector materials        |                          |  | 0.9    |       |      |  | 1.0   |       |  |  | 0.5   |      
|                                                      | CTI Services              |                          |  | 3.9    |       |      |  | 1.8   |       |  |  | 2.2   |      
|                                                      | Corporate and other       |                          |  | 0.2    |       |      |  |      |       |  |  |      |      
|                                                      |                           |                          |  |        |       |      |  |       |       |  |  |      
|                                                      |                           | Total                    |  |        | 29.9  |      |  |       | 21.7  |  |  |       | 19.0  | 
|                                                      |                           |                          |  |        |       |      |  |       |       |  |  |      
|Write-off of in process research and
    development: |                           |                          |  |        |       |      |  |       |       |  |  |      
|                                                      | Corporate and other       |                          |  | 1.4    |       |      |  |      |       |  |  |      |      
|Stock-based compensation:                             |                           |                          |  |        |       |      |  |       |       |  |  |      
|                                                      | CPS                       |                          |  | 0.3    |       |      |  | 3.9   |       |  |  | 0.4   |      
|                                                      | PETNET                    |                          |  | 0.3    |       |      |  | 1.4   |       |  |  |      |      
|                                                      | Detector materials        |                          |  |       |       |      |  | 1.6   |       |  |  |      |      
|                                                      | CTI Services              |                          |  | 0.6    |       |      |  | 2.3   |       |  |  | 0.1   |      
|                                                      | Corporate and other       |                          |  | 0.7    |       |      |  | 3.0   |       |  |  |      |      
|                                                      |                           |                          |  |        |       |      |  |       |       |  |  |      
|                                                      |                           | Total                    |  |        | 1.9   |      |  |       | 12.2  |  |  |       | 0.5   | 
|                                                      |                           |                          |  |        |       |      |  |       |       |  |  |      
|Income (loss) from operations:                        |                           |                          |  |        |       |      |  |       |       |  |  |      
|                                                      | CPS                       |                          |  | 48.0   |       |      |  | 39.8  |       |  |  | 20.8  |      
|                                                      | PETNET                    |                          |  | 3.6    |       |      |  | (0.5  | )     |  |  | 1.9   |      
|                                                      | Detector materials        |                          |  | 25.9   |       |      |  | 7.0   |       |  |  | 5.6   |      
|                                                      | CTI Services              |                          |  | (12.0  | )     |      |  | 0.5   |       |  |  | 4.1   |      
|                                                      | Corporate and other       |                          |  | (7.7   | )     |      |  | (10.0 | )     |  |  | (2.7  | )    
|                                                      |                           |                          |  |        |       |      |  |       |       |  |  |      
|                                                      |                           | Total                    |  | $      | 57.8  |      |  | $     | 36.8  |  |  | $     | 29.7  | 
|                                                      |                           |                          |  |        |       |      |  |       |       |  |  |      

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The following table shows revenues and income
(loss) from operations for all segments, expressed as a
percentage of consolidated revenues and consolidated income
(loss) from operations, respectively.

|                               |                           |                          |  |       |       |      |  |       |       |   |  |       |       |  
|------------------------------ | ------------------------- | ------------------------ |  | ----- | ----- | ---- |  | ----- | ----- | - |  | ----- | ----- | -
|                               |                           |                         
|                               |                           | Year Ended September 30,
|                               |                           | 2003                    
|                               |                           |                         
|                               |                           | 2003                     |  | 2002  |       | 2001
|                               |                           |                          |  |       |       |     
|Revenues:                      |                           |                          |  |       |       |      |  |       |       |   |  |      
|                               | CPS                       |                          |  | 68.4  | %     |      |  | 73.1  | %     |   |  | 70.7  | %    
|                               | PETNET                    |                          |  | 20.7  |       |      |  | 21.5  |       |   |  | 18.9  |      
|                               | Detector materials        |                          |  | 15.2  |       |      |  | 11.3  |       |   |  | 9.7   |      
|                               | CTI Services              |                          |  | 34.7  |       |      |  | 25.4  |       |   |  | 22.1  |      
|                               | Intercompany eliminations |                          |  | (39.0 | )     |      |  | (31.3 | )     |   |  | (21.4 | )    
|                               |                           |                          |  |       |       |      |  |       |       |   |  |      
|                               |                           | Total                    |  |       | 100.0 | %    |  |       | 100.0 | % |  |       | 100.0 | %
|                               |                           |                          |  |       |       |      |  |       |       |   |  |      
|Income (loss) from operations: |                           |                          |  |       |       |      |  |       |       |   |  |      
|                               | CPS                       |                          |  | 83.0  | %     |      |  | 108.1 | %     |   |  | 70.0  | %    
|                               | PETNET                    |                          |  | 6.2   |       |      |  | (1.4  | )     |   |  | 6.4   |      
|                               | Detector materials        |                          |  | 44.8  |       |      |  | 19.0  |       |   |  | 18.9  |      
|                               | CTI Services              |                          |  | (20.7 | )     |      |  | 1.4   |       |   |  | 13.8  |      
|                               | Intercompany eliminations |                          |  | (13.3 | )     |      |  | (27.1 | )     |   |  | (9.1  | )    
|                               |                           |                          |  |       |       |      |  |       |       |   |  |      
|                               |                           | Total                    |  |       | 100.0 | %    |  |       | 100.0 | % |  |       | 100.0 | %
|                               |                           |                          |  |       |       |      |  |       |       |   |  |      

The following table shows revenues, cost of
revenues, selling, general and administrative expenses, research
and development expenses, stock-based compensation expenses and
income from operations for all segments, expressed as a
percentage of segment revenues.

|        |                                     |                          |  |       |   |      |  |       |   |  |  |       |  
|------- | ----------------------------------- | ------------------------ |  | ----- | - | ---- |  | ----- | - |  |  | ----- | -
|        |                                     |                         
|        |                                     | Year Ended September 30,
|        |                                     | 2003                    
|        |                                     |                         
|        |                                     | 2003                     |  | 2002  |   | 2001
|        |                                     |                          |  |       |   |     
|CPS:    |                                     |                          |  |       |   |      |  |       |   |  |  |      
|        | Revenues                            |                          |  | 100.0 | % |      |  | 100.0 | % |  |  | 100.0 | %
|        | Cost of revenues                    |                          |  | 67.8  |   |      |  | 62.8  |   |  |  | 59.3  |  
|        | Selling, general and administrative |                          |  | 4.8   |   |      |  | 5.7   |   |  |  | 13.9  |  
|        | Research and development            |                          |  | 8.0   |   |      |  | 8.3   |   |  |  | 10.9  |  
|        | Stock-based compensation            |                          |  | 0.1   |   |      |  | 2.1   |   |  |  | 0.3   |  
|        |                                     |                          |  |       |   |      |  |       |   |  |  |      
|        | Income (loss) from operations       |                          |  | 19.3  |   |      |  | 21.1  |   |  |  | 15.6  |  
|        |                                     |                          |  |       |   |      |  |       |   |  |  |      
|PETNET: |                                     |                          |  |       |   |      |  |       |   |  |  |      
|        | Revenues                            |                          |  | 100.0 |   |      |  | 100.0 |   |  |  | 100.0 |  
|        | Cost of revenues                    |                          |  | 69.3  |   |      |  | 72.5  |   |  |  | 75.8  |  
|        | Selling, general and administrative |                          |  | 18.6  |   |      |  | 20.1  |   |  |  | 14.1  |  
|        | Research and development            |                          |  | 6.9   |   |      |  | 5.8   |   |  |  | 4.8   |  
|        | Stock-based compensation            |                          |  | 0.4   |   |      |  | 2.5   |   |  |  |      |  
|        |                                     |                          |  |       |   |      |  |       |   |  |  |      
|        | Income (loss) from operations       |                          |  | 4.8   |   |      |  | (0.9  | ) |  |  | 5.3   |  
|        |                                     |                          |  |       |   |      |  |       |   |  |  |      

36



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|                    |                                     |                          |  |       |   |      |  |       |  |  |  |       | 
|------------------- | ----------------------------------- | ------------------------ |  | ----- | - | ---- |  | ----- |  |  |  | ----- | 
|                    |                                     |                         
|                    |                                     | Year Ended September 30,
|                    |                                     | 2003                    
|                    |                                     |                         
|                    |                                     | 2003                     |  | 2002  |   | 2001
|                    |                                     |                          |  |       |   |     
|Detector materials: |                                     |                          |  |       |   |      |  |       |  |  |  |      
|                    | Revenues                            |                          |  | 100.0 |   |      |  | 100.0 |  |  |  | 100.0 | 
|                    | Cost of revenues                    |                          |  | 47.3  |   |      |  | 63.0  |  |  |  | 62.5  | 
|                    | Selling, general and administrative |                          |  | 4.2   |   |      |  | 4.1   |  |  |  | 4.3   | 
|                    | Research and development            |                          |  | 1.6   |   |      |  | 3.4   |  |  |  | 2.7   | 
|                    | Stock-based compensation            |                          |  |      |   |      |  | 5.5   |  |  |  |      | 
|                    |                                     |                          |  |       |   |      |  |       |  |  |  |      
|                    | Income (loss) from operations       |                          |  | 46.9  |   |      |  | 24.0  |  |  |  | 30.5  | 
|                    |                                     |                          |  |       |   |      |  |       |  |  |  |      
|CTI Services:       |                                     |                          |  |       |   |      |  |       |  |  |  |      
|                    | Revenues                            |                          |  | 100.0 |   |      |  | 100.0 |  |  |  | 100.0 | 
|                    | Cost of revenues                    |                          |  | 87.6  |   |      |  | 73.5  |  |  |  | 72.9  | 
|                    | Selling, general and administrative |                          |  | 18.3  |   |      |  | 19.5  |  |  |  | 11.8  | 
|                    | Research and development            |                          |  | 3.1   |   |      |  | 2.7   |  |  |  | 5.3   | 
|                    | Stock-based compensation            |                          |  | 0.5   |   |      |  | 3.5   |  |  |  | 0.2   | 
|                    |                                     |                          |  |       |   |      |  |       |  |  |  |      
|                    | Income (loss) from operations       |                          |  | (9.5  | ) |      |  | 0.8   |  |  |  | 9.8   | 
|                    |                                     |                          |  |       |   |      |  |       |  |  |  |      



| |                                                                            
| | ---------------------------------------------------------------------------
| | Year Ended September 30, 2003 Compared
    to Year Ended September 30, 2002



| |         
| | --------
| | Revenues

Revenues for the year ended September 30,
2003 were $362.3 million, an increase of
$103.9 million, or 40.2%, from $258.4 million in 2002.

CPS.Revenues for
the year ended September 30, 2003 were $247.7 million,
an increase of $58.7 million, or 31.1%, from
$189.0 million in 2002. The increase in revenues was driven
primarily by an increase in unit sales of scanners from
146 units in 2002 to 179 units in 2003 and, to a
lesser extent, by an increase in sales of parts and services. In
addition to the increase in units sold, average scanner sales
price also increased from 2002 due to a shift in sales mix from
PET to PET/CT units. Intersegment revenues accounted for 30.6%
and 20.0% of total CPS revenues for the years ended
September 30, 2003 and 2002, respectively. Intersegment
revenues increased as a percentage of revenues as a result of
sales to CTI Services under the new multiple distributor
arrangement.

PETNET.Revenues for
the year ended September 30, 2003 were $74.9 million, an
increase of $19.3 million, or 34.7%, from
$55.6 million in 2002. The increase in revenue was
primarily due to the growth of dose shipments driven by
continued increase in PET utilization as well as opening new
PETNET radiopharmacies. To a lesser extent increases were also
attributable to approximately $5.4 million in sales of the
MicroPET animal scanners. PETNET delivered approximately 58.4%
more doses, excluding doses sold to hosts and doses sold by
unconsolidated radiopharmacies, during the year ended September
30, 2003 compared to the year ended September 30, 2002. The
increase in doses delivered was partially offset by a decrease
in average revenue per dose. PETNET had no intersegment revenues
for the years ended September 30, 2003 and 2002.

Detector Materials.Revenues for the year ended
September 30, 2003 were $55.2 million, an increase of
$26.0 million, or 89.0%, from $29.2 million in 2002.
Intersegment revenues accounted for 94.8% and 96.4% of total
detector material revenues for the years ended
September 30, 2003 and 2002, respectively. The growth in
revenues was primarily due to growth in unit shipment volume of
LSO-based scanners.

CTI Services.Revenues for the year ended
September 30, 2003 were $125.8 million, an increase of
$60.2 million, or 91.8%, from $65.6 million in 2002.
The increase in revenues was primarily due to an increase in
direct distribution sales of PET and PET/CT scanners by CTI
Services, purchased from CPS. Intersegment revenues accounted
for 10.6% and 22.7% of total CTI Services revenues for the years
ended

37



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##### Table of Contents



September 30, 2003 and 2002, respectively.
Intersegment revenues decreased as a percentage of revenues due
to an increase in third-party sales of PET and PET/CT scanners
through CTI Services direct distribution efforts and fewer
intersegment sales of cyclotrons to PETNET. As described in note
2 to the financial statements, effective July 1, 2003 the
Company implemented Emerging Issues Task Force Issue 00-21 (the
Issue), Accounting for Revenue Arrangements with Multiple
Deliverables,and recognized $2.5 million of revenue on
cyclotron sales that would have been deferred under previous
accounting guidance.


Intercompany Eliminations.Intercompany revenues that were
eliminated in consolidation for the year ended
September 30, 2003 were $141.3 million, an increase of
$60.3 million, or 74.4%, from $81.0 million in 2002.
The increase in revenue eliminations was primarily due to
increased sales of detector materials to CPS, as well as
increased sales of PET and PET/CT scanners to CTI Services from
CPS.



| |                 
| | ----------------
| | Cost of Revenues

Cost of revenues for the year ended
September 30, 2003 was $219.1 million, an increase of
$68.5 million, or 45.5%, from $150.6 million for 2002.
Cost of revenues for the year ended September 30, 2003 was
60.5% of revenues compared to 58.3% for 2002.

CPS.Cost of
revenues for the year ended September 30, 2003 was
$167.9 million, an increase of $49.1 million, or
41.3%, from $118.8 million for 2002. Cost of revenues for
the year ended September 30, 2003 increased to 67.8% of
revenues compared to 62.8% of revenues for 2002. The increase in
cost of revenues as a percentage of revenues is primarily due to
two factors. First, a larger percentage of units were sold under
the terms of the multiple distributor agreements which reflect
transfer prices from CPS and thus have lower gross margins. In
2002, many sales carried retail sales prices and higher gross
margins under the previous distribution agreement with Siemens.
Second, a change in sales mix from PET to PET/CT units which
generally carry higher manufacturing costs also contributed to
the increase in cost of revenues as a percentage of revenues.

PETNET.Cost of
revenues for the year ended September 30, 2003 was
$51.9 million, an increase of $11.6 million, or 28.8%,
from $40.3 million in 2002. The increase in cost of
revenues was due primarily to an increase in current year sales
of MicroPET scanners. Cost of revenues for the year ended
September 30, 2003 decreased to 69.3% of revenues from 72.5% of
revenues for 2002. The decrease in cost of revenues as a
percentage of revenues was due to higher utilization of
production and distribution resources to support the increase in
the volume of doses delivered.

Detector Materials.Cost of revenues for the year ended
September 30, 2003 was $26.1 million, an increase of
$7.7 million, or 41.8%, from $18.4 million for 2002. The
increase in cost of revenues was due primarily to the similar
increase in revenues. Cost of revenues for the year ended
September 30, 2003 decreased to 47.3% of revenues compared
to 63.0% of revenues for 2002. The decrease in cost of revenues
as a percentage of revenues was due to the shift in sales mix
from BGO to LSO detector materials as well as increasing
efficiency and production improvements concurrent with the ramp
up of manufacturing operations to meet the growing demand for
LSO-based detector materials.

CTI Services.Cost
of revenues for the year ended September 30, 2003 was
$110.2 million, an increase of $62.0 million, or
128.6%, from $48.2 million for 2002. The increase in cost
of revenues was due primarily to an increase in scanner units
sold. Cost of revenues for the year ended September 30,
2003 increased to 87.6% of revenues compared to 73.5% of
revenues for 2002. The increase in cost of revenues as a
percentage of revenues results from a shift in sales mix to
direct distribution of PET scanners purchased from CPS. The
percentage of CTI Services sales coming from the direct
distribution of scanners purchased from CPS, which business
carries a lower gross margin than sales of cyclotrons or service
contracts, more than doubled in 2003 over 2002. In addition to
the shift in sales mix to more direct sales, competitive pricing
pressure drove a decrease in the average scanner sales price,
collectively resulting in the increased cost of revenues as a
percentage of revenues. We believe the increased competitive
pricing is expected to continue through at least the first half
of fiscal 2004.

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##### Table of Contents



Intercompany Eliminations.Intercompany cost of revenues that
were eliminated in consolidation for the year ended
September 30, 2003 were $137.0 million, an increase of
$61.9 million, or 82.4%, from $75.1 million in 2002.
Cost of revenues eliminated for the year ended
September 30, 2003 increased to 37.8% of revenues compared
to 29.1% of revenues for 2002. The increase in revenue
eliminations was primarily due to increased sales of detector
materials to CPS, as well as increased sales of PET and PET/CT
scanners to CTI Services from CPS.



| |                                                 
| | ------------------------------------------------
| | Selling, General and Administrative
    Expenses

Selling, general and administrative expenses for
the year ended September 30, 2003 were $52.2 million,
an increase of $15.1 million, or 40.7%, from
$37.1 million for 2002. Selling, general and administrative
expenses for the year ended September 30, 2003 and 2002
were 14.4% of revenues.

CPS.Selling,
general and administrative expenses for the year ended
September 30, 2003 were $11.8 million, an increase of
$1.0 million, or 9.3%, from $10.8 million in 2002.
Selling, general and administrative expenses for 2003 were 4.8%
of revenues compared to 5.7% in 2002. The decrease was due to
the impact of the new distribution arrangements implemented in
connection with the new multiple distributor strategy, pursuant
to which all of the selling costs and a substantial part of the
marketing costs shifted from CPS to its distributors.

PETNET.Selling,
general and administrative expenses for the year ended
September 30, 2003 were $13.9 million, an increase of
$2.7 million, or 24.1%, from $11.2 million for 2002.
The increase was primarily due to additional personnel and
increased marketing expenses to support a PET education program
for referring physicians. Selling, general and administrative
expenses for 2003 were 18.6% of revenues compared to 20.1% in
2002.

Detector Materials.Selling, general and administrative expenses for the year ended
September 30, 2003 were $2.3 million, an increase of
$1.1 million, or 91.7%, from $1.2 million for 2002. As
a percentage of revenues, selling, general and administrative
expenses were 4.2% and 4.1% for 2003 and 2002, respectively. The
increases were primarily related to increased administrative
expenses to support significant sales growth.

CTI Services.Selling, general and administrative
expenses were $23.1 million for the year ended
September 30, 2003, an increase of $10.3 million, or
80.5%, from $12.8 million for 2002. A portion of this
increase was due to the Company recording $0.5 million of
bad debt expense to reserve for the outstanding accounts
receivable balances for two scanner sales that were only
partially funded by the sales financing company, DVI Financial
Services, Inc., prior to its entering into bankruptcy.

Selling, general and administrative expenses for
the year ended September 30, 2003 were 18.3% of revenues
compared to 19.5% of revenues for 2002. A significant portion of
this relative percentage decrease was related to an increase in
revenues from the direct distribution of PET and PET/CT scanners
purchased from CPS.

Corporate and Other.Selling, general and administrative
expenses not allocated to a financial reporting segment for the
year ended September 30, 2003 and 2002 were
$1.1 million.



| |                                  
| | ---------------------------------
| | Research and Development Expenses

Research and development expenses for the year
ended September 30, 2003 were $29.9 million, an
increase of $8.2 million, or 37.8%, from $21.7 million
for 2002. Research and development expenses for the year ended
September 30, 2003 were 8.3% of revenues compared to 8.4%
for 2002.

CPS.Research and
development expenses for the year ended September 30, 2003
were $19.7 million, an increase of $4.0 million, or
25.5%, from $15.7 million in 2002. CPS continued to invest
in new scanner technology, with the increases in 2003 primarily
devoted to PET/CT and LSO scanner developments. Research and
development expenses for 2003 were 8.0% of revenues compared to
8.3% in 2002.

39



---



##### Table of Contents



PETNET.Research and
development expenses for the year ended September 30, 2003
were $5.2 million, an increase of $2.0 million, or
62.5%, from $3.2 million for 2002. Research and development
expenses for 2003 were 6.9% of revenues compared to 5.8% in
2002. The increases were due to increased investment in
radiopharmaceutical research and development, which resulted in
the addition of personnel and consulting expenses. We expect
research and development expenses in our PETNET segment to
continue to increase as a percentage of revenues as we continue
to pursue the development of new radiopharmaceuticals.

Detector Materials.Research and development expenses for
the year ended September 30, 2003 were $0.9 million,
representing a decrease of $0.1 million, or 10.0%, from
$1.0 million for 2002. As a percentage of total revenues,
research and development expenses for the year ended
September 30, 2003 decreased to 1.6% from 3.4% for 2002.
The relative percentage decrease resulted from the significant
increase in revenues.

CTI Services.Research and development expenses for
the year ended September 30, 2003 were $3.9 million,
an increase of $2.1 million, or 116.7%, from
$1.8 million for 2002. Research and development expenses
for the year ended September 30, 2003 were 3.1% of revenues
compared to 2.7% for 2002. The increases were due to the
continued development of our Reveal Network Solutions and Mirada
workstations.



| |                                                     
| | ----------------------------------------------------
| | Write-off of in process research and
    development

In connection with the acquisition of Mirada
Solutions Limited in August 2003 we recorded a $1.4 million
one time, non-cash write-off of in-process research and
development.



| |                                 
| | --------------------------------
| | Stock-based Compensation Expense

Stock-based compensation expense for the year
ended September 30, 2003 was $1.9 million, a decrease
of $10.3 million, or 84.4%, from $12.2 million for
2002. Stock-based compensation expense for the year ended
September 30, 2003 was 0.5% of revenues compared to 4.7% in
2002. In 2002, stock-based compensation expense primarily
included charges for vested options granted with exercise prices
below the fair market value of our stock, no similar grants were
issued in 2003. During the fourth quarter of the year ended
September 30, 2002, our subsidiary companies agreed to
reimburse our parent company for the respective amounts of
stock-based compensation expense attributable to such companies.

CPS.Stock-based
compensation expense for the year ended September 30, 2003
was $0.3 million, a decrease of $3.6 million, or
92.3%, from $3.9 million in 2002. Stock-based compensation
expense for the year ended September 30, 2003 was 0.1% of
revenues compared to 2.1% in 2002.

PETNET.Stock-based
compensation expense for the year ended September 30, 2003
was $0.3 million, a decrease of $1.1 million, or
78.6%, from to $1.4 million in 2002. Stock-based
compensation expense for the year ended September 30, 2003 was
0.4% of revenues compared to 2.5% in 2002.

Detector Materials.No stock-based compensation expense was incurred for the year
ended September 30, 2003 compared to $1.6 in 2002.
Stock-based compensation expense for the year ended
September 30, 2002 was 5.5% of revenues.

CTI Services.Stock-based compensation expense for the year ended
September 30, 2003 was $0.6 million, a decrease of
$1.7 million, or 73.9%, from $2.3 million for 2002.
Stock-based compensation expense for the year ended
September 30, 2003 was 0.5% of revenues compared to 3.5% in
2002.

Corporate and Other.Stock-based compensation expense not allocated to a financial
reporting segment for the year ended September 30, 2003 was
$0.7 million, compared to $3.0 million in 2002.

40



---



##### Table of Contents





| |                              
| | -----------------------------
| | Income (Loss) from Operations

Income from operations for the year ended
September 30, 2003 was $57.8 million, an increase of
$21.0 million, or 57.1%, from $36.8 million for 2002.
Income from operations for the year ended September 30,
2003 was 16.0% of revenues compared to 14.2% for 2002.

CPS.Income from
operations for the year ended September 30, 2003 was
$48.0 million, an increase of $8.2 million, or 20.6%,
from $39.8 million for 2002. Income from operations for the
year ended September 30, 2003 was 19.3% of revenues
compared to 21.1% for 2002. This decrease in operating profit
margins is primarily due to the lower transfer prices on units
sold under the new multiple distribution agreements and higher
manufacturing costs of PET/CT scanners.

PETNET.Income from
operations for the year ended September 30, 2003 was
$3.6 million, an increase of $4.1 million, from
($0.5) million for 2002. Income from operations for the
year ended September 30, 2003 was 4.8% of revenues compared
to (0.9)% for 2002. These increases were caused in part by 2002
including $1.3 million in non-recurring losses related to
the early extinguishment of debt. The remaining increase in
operating margins is primarily the result of an increase in
gross profit margins.

Detector Materials.Income from operations for the year ended September 30, 2003 was
$25.9 million, an increase of $18.9 million, from
$7.0 million for 2002. Income from operations for the year
ended September 30, 2003 was 46.9% of revenues compared to
24.0% for 2002. The increase resulted primarily from decreased
stock-based compensation expense in 2003 and increases in gross
profit margins.

CTI Services.Income
(loss) from operations for the year ended September 30,
2003 was $(12.0) million, a decrease of $12.5 million,
from $0.5 million for 2002. Income (loss) from
operations for the year ended September 30, 2003 was (9.5)%
of revenues compared to 0.8% for 2002. The loss from operations
for the year ended September 30, 2003 was partially due to
the costs associated with developing our business as a direct
distributor of PET and PET/CT scanners. Additionally,
competitive pricing pressure drove a decrease in the average
scanner sales price, which resulted in lower gross margins.

Corporate and Other.The loss from operations for the year ended September 30,
2003 was $7.7 million, a decrease of $2.3 million from
a loss of $10.0 million for 2002. The decrease in loss from
operations resulted from decreased stock-based compensation
expense in 2003.



| |                                 
| | --------------------------------
| | Warrant Liability Mark to Market

Warrants with put rights were marked to market
for changes in the fair market value of our common stock. The
warrant liability mark to market expense for the year ended
September 30, 2002 was $8.9 million. These warrants
were exercised on March 29, 2002.



| |                      
| | ---------------------
| | Interest Expense, Net

Interest expense, net for the year ended
September 30, 2003 was $0.8 million, a decrease of
$3.3 million, or 80.5%, from $4.1 million for 2002.
The decrease resulted from lower interest expense due to
substantial long-term debt repayments and an increase in
interest income due to an increase in cash equivalents and
marketable securities investments after our initial public
offering in June 2002.



| |                           
| | --------------------------
| | Provision for Income Taxes

The effective tax rate for the years ended
September 30, 2003 and 2002 was 38.9% and 60.4%,
respectively. The effective rate was higher in 2002 because the
warrant liability mark to market expense of $8.9 million
and $8.8 million of the $12.2 million of stock-based
compensation expense were not tax deductible.



| |                          
| | -------------------------
| | Minority Interest Expense

The minority interest expense for the year ended
September 30, 2003 was $15.4 million, an increase of
$2.4 million, or 18.5%, from $13.0 million for 2002.
The increase was due to the increase in the net

41



---



##### Table of Contents



income of CPS. Pursuant to the CPS board of
directors approval to repay CTI $3.9 million in
stock-based compensation expense, minority interest expense for
the year ended September 30, 2002 was reduced by
approximately $1.0 million, net of income taxes, in the
fourth quarter.




| |                                                                            
| | ---------------------------------------------------------------------------
| | Year Ended September 30, 2002 Compared
    to Year Ended September 30, 2001



| |         
| | --------
| | Revenues

Revenues for the year ended September 30,
2002 were $258.4 million, an increase of
$69.5 million, or 36.8%, from $188.9 million in 2001.

CPS.Revenues for
the year ended September 30, 2002 were $189.0 million,
an increase of $55.4 million, or 41.5%, from
$133.6 million in 2001. The increase in revenues was driven
primarily by an increase in unit sales of scanners from
88 units in 2001 to 146 units in 2002 and, to a lesser
extent, by an increase in sales of parts and services. The
increase in unit sales was partially offset by a decline in
average unit prices, primarily due to the sale of a majority of
the units to third-party distributors under the new multiple
distributor arrangement. Intersegment revenues accounted for
20.0% and 5.0% of total CPS revenues for the years ended
September 30, 2002 and 2001, respectively. Intersegment
revenues increased as a percentage of revenues as a result of
sales to CTI Services under the new multiple distributor
arrangement.

PETNET.Revenues for
the year ended September 30, 2002 were $55.6 million, an
increase of $20.0 million, or 56.2%, from
$35.6 million in 2001. The increase in revenue was due to
the growth of dose shipments driven by the opening of several
new PETNET radiopharmacies as well as the continued increase in
PET utilization. PETNET delivered approximately 88.5% more
doses, excluding doses sold to hosts and doses sold by
unconsolidated radiopharmacies, during the year ended
September 30, 2002 compared to the year ended
September 30, 2001. The increase in doses delivered was
partially offset by a decrease in average revenue per dose.
Intersegment revenues accounted for none of total PETNET
revenues for the years ended September 30, 2002 and 2001.

Detector Materials.Revenues for the year ended September 30, 2002 were
$29.2 million, an increase of $10.8 million, or 58.7%,
from $18.4 million in 2001. Intersegment revenues accounted
for 96.4% and 90.2% of total detector material revenues for the
years ended September 30, 2002 and 2001, respectively. The
growth in revenues, and the increase in intersegment revenues as
a percentage of revenues, was primarily due to intersegment
sales of LSO-based detector material to CPS to support the
increased sales of LSO-based scanners.

CTI Services.Revenues for the year ended September 30, 2002 were $65.6
million, an increase of $23.9 million, or 57.3%, from
$41.7 million in 2001. The increase was primarily due to
direct distribution sales of scanners, an increase in cyclotrons
sold to PETNET and, to a lesser extent, an increase in service
revenues. Intersegment revenues accounted for 22.7% and 41.1% of
total CTI Services revenues for the years ended
September 30, 2002 and 2001, respectively. Intersegment
revenues decreased as a percentage of revenues due to an
increase in third party sales of PET scanners under the new
multiple distributor arrangement and higher initial costs of our
PET/CT scanners.

Intercompany
Eliminations.Intercompany revenues
that were eliminated in consolidation for the year ended
September 30, 2002 were $81.0 million, an increase of
$40.6 million, or 100.5%, from $40.4 million in 2001.
The increase in revenue eliminations was primarily due to the
increase in the number of scanners sold to CTI Services,
cyclotrons sold to PETNET, and detector materials sold to CPS.



| |                 
| | ----------------
| | Cost of Revenues

Cost of revenues for the year ended
September 30, 2002 was $150.6 million, an increase of
$40.3 million, or 36.5%, from $110.3 million for 2001.
Cost of revenues for the year ended September 30, 2002 was
58.3% of revenues compared to 58.4% for 2001.

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CPS.Cost of
revenues for the year ended September 30, 2002 was
$118.8 million, an increase of $39.6 million, or
50.0%, from $79.2 million for 2001. The increase in cost of
revenues was due primarily to an increase in revenues. Cost of
revenues for the year ended September 30, 2002 increased to
62.8% of revenues compared to 59.3% of revenues for 2001. Cost
of revenues increased as a percentage of revenues primarily due
to the lower margins on units sold to third-party distributors
under our new multiple distributor arrangement.

PETNET.Cost of
revenues for the year ended September 30, 2002 was
$40.3 million, an increase of $13.3 million, or 49.3%,
from $27.0 million in 2001. The increase in cost of
revenues was due primarily to an increase in revenues. Cost of
revenues for the year ended September 30, 2002 decreased to
72.5% of revenues from 75.8% of revenues for 2001. The decrease
in cost of revenues as a percentage of revenues was due to
higher utilization of production and distribution resources to
support the increase in the volume of doses delivered.

Detector Materials.Cost of revenues for the year ended September 30, 2002 was
$18.4 million, an increase of $6.9 million, or 60.0%,
from $11.5 million for 2001. The increase in cost of
revenues was due primarily to the similar increase in revenues.
Cost of revenues for the year ended September 30, 2002
increased slightly to 63.0% of revenues compared to 62.5% of
revenues for 2001.

CTI Services.Cost
of revenues for the year ended September 30, 2002 was
$48.2 million, an increase of $17.8 million, or 58.6%,
from $30.4 million for 2001. The increase in cost of
revenues was due primarily to an increase in revenues. Cost of
revenues for the year ended September 30, 2002 increased to
73.5% of revenues compared to 72.9% of revenues for 2001. The
increase in cost of revenues as a percentage of revenues in 2002
resulted primarily from increasing direct distribution sales of
scanners, which sales have lower margins than cyclotron sales
and service contracts.

Intercompany
Eliminations.Intercompany cost of
revenues that were eliminated in consolidation for the year
ended September 30, 2002 were $75.1 million, an
increase of $37.3 million, or 98.7%, from
$37.8 million in 2001. Cost of revenues eliminated for the
year ended September 30, 2002 decreased to 92.7% of
revenues eliminated compared to 93.6% of revenues eliminated for
2001. The decrease in cost of revenues eliminated as a
percentage of revenues eliminated was primarily due to the
improvement in gross profit margins in 2002.



| |                                                 
| | ------------------------------------------------
| | Selling, General and Administrative
    Expenses

Selling, general and administrative expenses for
the year ended September 30, 2002 were $37.1 million, an
increase of $7.7 million, or 26.2%, from $29.4 million
for 2001. Selling, general and administrative expenses for the
year ended September 30, 2002 were 14.4% of revenues
compared to 15.6% for 2001.

CPS.Selling,
general and administrative expenses for the year ended
September 30, 2002 were $10.8 million, a decrease of
$7.8 million, or 41.9%, from $18.6 million in 2001.
The decrease was due to the impact of the new distribution
arrangements implemented in connection with the multiple
distributor strategy, pursuant to which all of the selling costs
and a substantial part of the marketing costs was shifted from
CPS to its distributors. Selling, general and administrative
expenses for 2002 were 5.7% of revenues compared to 13.9% in
2001.

PETNET.Selling,
general and administrative expenses for the year ended
September 30, 2002 were $11.2 million, an increase of
$6.2 million, or 124.0%, from $5.0 million for 2001.
Selling, general and administrative expenses for 2002 were 20.1%
of revenues compared to 14.1% in 2001. The increase was
primarily due to additional sales, general and administrative
personnel and increased marketing expenses to support a PET
education program for referring physicians. PETNET also incurred
$1.3 million in losses related to the early extinguishments
of certain capital lease obligations.

Detector Materials.Selling, general and administrative expenses for the year ended
September 30, 2002 were $1.2 million, an increase of
$0.4 million, or 50.0%, from $0.8 million for 2001. As
a percentage of revenues, selling, general and administrative
expenses were 4.1% and 4.3% for 2002 and 2001,

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respectively. The increase in expenses resulted
from additional corporate and other resources to support growth
in revenues.


CTI Services.Selling, general and administrative expenses were $12.8 million
for the year ended September 30, 2002, an increase of
$7.9 million, or 161.2%, from $4.9 million for 2001.
Selling, general and administrative expenses for the year ended
September 30, 2002 were 19.5% of revenues compared to 11.8%
of revenues for 2001. The increase in selling, general and
administrative expenses in 2002 resulted from establishing a
direct distribution sales and marketing organization which began
to participate actively in the diagnostic imaging industry.

Corporate and Other.Selling, general and administrative expenses not allocated to a
financial reporting segment for the year ended
September 30, 2002 were $1.1 million, an increase of
$1.0 million from $0.1 million for 2001. The increase
is primarily due to expenses incurred in connection with our
June 2002 initial public offering, which costs are not accounted
for as part of common stock issuance costs.



| |                                  
| | ---------------------------------
| | Research and Development Expenses

Research and development expenses for the year
ended September 30, 2002 were $21.7 million, an
increase of $2.7 million, or 14.2%, from $19.0 million
for 2001. Research and development expenses for the year ended
September 30, 2002 were 8.4% of revenues compared to 10.1%
for 2001.

CPS.Research and
development expenses for the year ended September 30, 2002
were $15.7 million, an increase of $1.1 million, or
7.5%, from $14.6 million in 2001. CPS continued to invest
in new scanner technology, with the increases in 2002 primarily
devoted to PET/CT and LSO scanner developments. Research and
development expenses for 2002 were 8.3% of revenues compared to
10.9% in 2001.

PETNET.Research and
development expenses for the year ended September 30, 2002 were
$3.2 million, an increase of $1.5 million, or 88.2%,
from $1.7 million for 2001. PETNET began to increase its
investment in radiopharmaceutical research and development in
2002, resulting in the addition of regulatory research and
development personnel and related consulting expenses in 2002.
Research and development expenses for 2002 were 5.8% of revenues
compared to 4.8% in 2001.

Detector Materials.Research and development expenses for the year ended
September 30, 2002 were $1.0 million, representing a
increase of $0.5 million, or 100.0%, from $0.5 million
for 2001. As a percentage of total revenues, research and
development expenses for the year ended September 30, 2002
increased to 3.4% from 2.7% for 2001. The increase in expenses
as a percentage of revenues was primarily due to research and
development activities to support the launch of CPS new
PET/CT product.

CTI Services.Research and development expenses for the year ended
September 30, 2002 were $1.8 million, a decrease of
$0.4 million, or 18.2%, from $2.2 million for 2001.
Research and development expenses for the year ended
September 30, 2002 were 2.7% of revenues compared to 5.3%
for 2001. The decrease in expenses arose from an increase in
research grant funding in 2002, which was deducted from research
and development expenses.



| |                                 
| | --------------------------------
| | Stock-based Compensation Expense

Stock-based compensation expense for the year
ended September 30, 2002 was $12.2 million, an
increase of $11.7 million from $0.5 million for 2001,
and resulted from the issuance of stock options with exercise
prices below the fair market value of our common stock on the
grant dates. Stock-based compensation expense for the year ended
September 30, 2002 was 4.7% of revenues compared to 0.3% in
2001. During the fourth quarter of the year ended
September 30, 2002, our subsidiary companies agreed to
reimburse our parent company for the respective amounts of
stock-based compensation expense attributable to such companies.
Consequently, these charges, which had been previously reported
as costs of our Corporate and Other category have
been allocated to each of our reportable segments and are
reflected accordingly. In addition, for consistency, all prior
years have been restated to reflect stock-based compensation
expense in the respective segments where the personnel were
employed.

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CPS.Stock-based
compensation expense for the year ended September 30, 2002
was $3.9 million, an increase of $3.5 million from
$0.4 million in 2001. Stock-based compensation expense for
the year ended September 30, 2002 was 2.1% of revenues
compared to 0.3% in 2001.

PETNET.Stock-based
compensation expense for the year ended September 30, 2002
was $1.4 million, compared to none in 2001. Stock-based
compensation expense for the year ended September 30, 2002
was 2.5% of revenues.

Detector Materials.Stock-based compensation expense for the year ended
September 30, 2002 was $1.6 million, compared to none
in 2001. Stock-based compensation expense for the year ended
September 30, 2002 was 5.5% of revenues.

CTI Services.Stock-based compensation expense for the year ended
September 30, 2002 was $2.3 million, an increase of
$2.2 million from $0.1 million for 2001. Stock-based
compensation expense for the year ended September 30, 2002
was 3.5% of revenues compared to none in 2001.

Corporate and Other.Stock-based compensation expense not allocated to a financial
reporting segment for the year ended September 30, 2002 was
$3.0 million, compared to none in 2001.



| |                              
| | -----------------------------
| | Income (Loss) from Operations

Income from operations for the year ended
September 30, 2002 was $36.8 million, an increase of
$7.1 million, or 23.9%, from $29.7 million for 2001.
Income from operations for the year ended September 30,
2002 was 14.2% of revenues compared to 15.7% for 2001. The
increase, which resulted primarily from growth in revenues, was
reduced by increased stock-based compensation expense and losses
on the early extinguishment of debt in 2002.

CPS.Income from
operations for the year ended September 30, 2002 was
$39.8 million, an increase of $19.0 million, or 91.3%,
from $20.8 million for 2001. Income from operations for the
year ended September 30, 2002 was 21.1% of revenues
compared to 15.6% for 2001. The increase in income from
operations resulted from higher revenues and reduced selling
costs under the new multiple distributor arrangements, partially
offset by higher stock-based compensation expense in 2002.

PETNET.Income
(loss) from operations for the year ended
September 30, 2002 was $(0.5) million, a decrease of
$2.4 million, or 126.3%, from $1.9 million for 2001.
Income from operations for the year ended September 30,
2002 was (0.9)% of revenues compared to 5.3% for 2001. These
decreases were caused primarily by increased stock-based
compensation expense and losses related to the early
extinguishment of certain capital lease obligations in 2002.

Detector Materials.Income from operations for the year ended September 30, 2002 was
$7.0 million, an increase of $1.4 million, or 25.0%,
from $5.6 million for 2001. The increase, which resulted
from growth in revenues, was reduced by an increase in
stock-based compensation expense. Income from operations for the
year ended September 30, 2002 was 24.0% of revenues
compared to 30.5% for 2001. The decrease resulted primarily from
increased stock-based compensation expense in 2002.

CTI Services.Income
from operations for the year ended September 30, 2002 was
$0.5 million, a decrease of $3.6 million, or 87.8%,
from $4.1 million for 2001. Income from operations for the
year ended September 30, 2002 was 0.8% of revenues compared
to 9.8% for 2001. These declines resulted from increased
stock-based compensation expense and costs associated with
establishing CTI as a direct distributor of CPS scanners.

Corporate and Other.The loss from operations for the year ended September 30,
2002 was $10.0 million, a decrease of $7.3 million
from a loss of $2.7 million for 2001. The decrease in loss
from operations resulted from increased stock-based compensation
expense and increased intercompany eliminations.

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| |                                 
| | --------------------------------
| | Warrant Liability Mark to Market

Warrants with put rights are marked to market for
changes in the fair market value of our common stock. The
warrant liability mark to market expense for the year ended
September 30, 2002 was $8.9 million, an increase of
$5.0 million, or 128.2%, from $3.9 million for 2001.



| |                      
| | ---------------------
| | Interest Expense, Net

Interest expense for the year ended
September 30, 2002 was $4.1 million, an increase of
$0.3 million, or 7.9%, from $3.8 million for 2001. The
increase was primarily due to additional capital leases incurred
to finance the PETNET expansion, construction loan advances to
fund our corporate facility addition, and growth in working
capital needs that were funded by borrowings under our credit
facility.



| |                           
| | --------------------------
| | Provision for Income Taxes

The effective tax rate for the years ended
September 30, 2002 and 2001 was 60.4% and 44.3%,
respectively. The effective rate was higher in 2002 because the
warrant liability mark to market expense of $8.9 million
and $8.8 million of the $12.2 million of stock-based
compensation expense was not tax deductible.



| |                          
| | -------------------------
| | Minority Interest Expense

The minority interest expense for the year ended
September 30, 2002 was $13.0 million, an increase of
$6.6 million, or 103.1%, from $6.4 million for 2001.
The increase was due to the increase in the net income of CPS.
Pursuant to the CPS board of directors approval to repay
CTI $3.9 million in stock-based compensation expense,
minority interest expense for the year ended September 30,
2002 was reduced by approximately $1.0 million, net of
income taxes, in the fourth quarter.



| |                                
| | -------------------------------
| | Quarterly Results of Operations

Our business is seasonal in nature. The following
table presents our operating results by quarter for each of the
last three fiscal years ended September 30, 2003. The
information for each of these quarters is unaudited and has been
prepared on the same basis as the audited consolidated financial
statements included in this annual report. In our opinion, all
adjustments (consisting of normal recurring accruals)

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considered necessary for a fair presentation have
been included. This data should be read together with our
consolidated financial statements and the notes to such
statements included in this annual report.


|                                                |                        |                                                               |                          |          |      |          |       |           |      |          |      |          |      |          |      |           |      |          |       |          |      |          |       |           |      |      |       |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |       |      |      | 
|----------------------------------------------- | ---------------------- | ------------------------------------------------------------- | ------------------------ | -------- | ---- | -------- | ----- | --------- | ---- | -------- | ---- | -------- | ---- | -------- | ---- | --------- | ---- | -------- | ----- | -------- | ---- | -------- | ----- | --------- | ---- | ---- | ----- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | ----- | ---- | ---- | 
|                                                |                        |                                                              
|                                                |                        | Three Months Ended                                           
|                                                |                        |                                                              
|                                                |                        | Dec. 31,                                                      |                          | Mar. 31, |      | June 30, |       | Sept. 30, |      | Dec. 31, |      | Mar. 31, |      | June 30, |      | Sept. 30, |      | Dec. 31, |       | Mar. 31, |      | June 30, |       | Sept. 30,
|                                                |                        | 2000                                                          |                          | 2001     |      | 2001     |       | 2001      |      | 2001     |      | 2002     |      | 2002     |      | 2002      |      | 2002     |       | 2003     |      | 2003     |       | 2003     
|                                                |                        |                                                               |                          |          |      |          |       |           |      |          |      |          |      |          |      |           |      |          |       |          |      |          |       |          
|                                                |                        |                                                              
|                                                |                        | (In millions, except per share data)                         
|Consolidated Statements of Operations
    Data: |                        |                                                               |                          |          |      |          |       |           |      |          |      |          |      |          |      |           |      |          |       |          |      |          |       |           |      |      |       |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      
|                                                | Revenues               |                                                               | $                        | 34.9     |      |          | $     | 40.4      |      |          | $    | 38.1     |      |          | $    | 75.5      |      |          | $     | 47.6     |      |          | $     | 55.2      |      |      | $     | 69.0 |      |      | $    | 86.6 |      |      | $    | 60.6 |      |      | $    | 81.9 |      |      | $    | 99.2 |      |      | $    | 120.6 |     
|Cost of Revenues                                |                        |                                                               | 20.5                     |          |      |          | 22.8  |           |      |          | 22.5 |          |      |          | 44.5 |           |      |          | 28.5  |          |      |          | 32.5  |           |      |      | 41.1  |      |      |      | 48.6 |      |      |      | 32.7 |      |      |      | 49.3 |      |      |      | 61.2 |      |      |      | 75.9 |      
|                                                |                        |                                                               |                          |          |      |          |       |           |      |          |      |          |      |          |      |           |      |          |       |          |      |          |       |           |      |      |       |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      
|                                                |                        | Gross Margin                                                  |                          |          | 14.4 |          |       |           | 17.6 |          |      |          | 15.6 |          |      |           | 31.0 |          |       |          | 19.1 |          |       |           | 22.7 |      |       |      | 27.9 |      |      |      | 38.0 |      |      |      | 27.9 |      |      |      | 32.6 |      |      |      | 38.0 |      |      |       | 44.7 |     
|Operating expenses:                             |                        |                                                               |                          |          |      |          |       |           |      |          |      |          |      |          |      |           |      |          |       |          |      |          |       |           |      |      |       |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      
|                                                |                        | Selling, general and administrative expenses                  |                          |          | 5.8  |          |       |           | 6.4  |          |      |          | 7.7  |          |      |           | 9.5  |          |       |          | 7.2  |          |       |           | 8.5  |      |       |      | 8.9  |      |      |      | 11.2 |      |      |      | 12.2 |      |      |      | 12.4 |      |      |      | 11.8 |      |      |       | 15.8 |     
|                                                |                        | Research and development expenses                             |                          |          | 4.0  |          |       |           | 3.7  |          |      |          | 4.8  |          |      |           | 6.5  |          |       |          | 4.6  |          |       |           | 4.8  |      |       |      | 5.9  |      |      |      | 6.3  |      |      |      | 6.6  |      |      |      | 7.5  |      |      |      | 7.3  |      |      |       | 8.5  |     
|                                                |                        | Write-off of in-process research and development
    expenses |                          |          |     |          |       |           |     |          |      |          |     |          |      |           |     |          |       |          |     |          |       |           |     |      |       |      |     |      |      |      |     |      |      |      |     |      |      |      |     |      |      |      |     |      |      |       | 1.4  |     
|                                                |                        | Stock-based compensation expense                              |                          |          | 0.4  |          |       |           |     |          |      |          |     |          |      |           | 0.1  |          |       |          | 0.1  |          |       |           | 8.1  |      |       |      | 3.5  |      |      |      | 0.5  |      |      |      | 0.6  |      |      |      | 0.3  |      |      |      | 0.5  |      |      |       | 0.5  |     
|                                                |                        |                                                               |                          |          |      |          |       |           |      |          |      |          |      |          |      |           |      |          |       |          |      |          |       |           |      |      |       |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      
|                                                |                        |                                                               | Total operating expenses |          |      | 10.2     |       |           |      | 10.1     |      |          |      | 12.5     |      |           |      | 16.1     |       |          |      | 11.9     |       |           |      | 21.4 |       |      |      | 18.3 |      |      |      | 18.0 |      |      |      | 19.4 |      |      |      | 20.2 |      |      |      | 19.6 |      |       |      | 26.2 | 
|                                                |                        |                                                               |                          |          |      |          |       |           |      |          |      |          |      |          |      |           |      |          |       |          |      |          |       |           |      |      |       |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      
|                                                | Income from operations |                                                               | $                        | 4.2      |      |          | $     | 7.5       |      |          | $    | 3.1      |      |          | $    | 14.9      |      |          | $     | 7.2      |      |          | $     | 1.3       |      |      | $     | 9.6  |      |      | $    | 20.0 |      |      | $    | 8.5  |      |      | $    | 12.4 |      |      | $    | 18.4 |      |      | $    | 18.5  |     
|                                                |                        |                                                               |                          |          |      |          |       |           |      |          |      |          |      |          |      |           |      |          |       |          |      |          |       |           |      |      |       |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      
|Net income (loss)                               |                        | $                                                             |                         |          |      | $        | (0.5  | )         |      | $        | 1.2  |          |      | $        | 5.5  |           |      | $        |      |          |      | $        | (11.8 | )         |      | $    | 0.8   |      |      | $    | 7.6  |      |      | $    | 3.4  |      |      | $    | 4.5  |      |      | $    | 7.5  |      |      | $    | 5.2  |      
|Basic earnings per share                        |                        | $                                                             | (0.02                    | )        |      | $        | (0.03 | )         |      | $        | 0.02 |          |      | $        | 0.17 |           |      | $        | (0.02 | )        |      | $        | (0.46 | )         |      | $    | (0.07 | )    |      | $    | 0.16 |      |      | $    | 0.08 |      |      | $    | 0.11 |      |      | $    | 0.17 |      |      | $    | 0.12 |      
|Diluted earnings per share                      |                        | $                                                             | (0.02                    | )        |      | $        | (0.03 | )         |      | $        | 0.02 |          |      | $        | 0.15 |           |      | $        | (0.02 | )        |      | $        | (0.46 | )         |      | $    | (0.07 | )    |      | $    | 0.17 |      |      | $    | 0.07 |      |      | $    | 0.10 |      |      | $    | 0.16 |      |      | $    | 0.11 |      

Liquidity and Capital Resources

In June 2002 we consummated our initial public
offering of common stock and we received net proceeds of
approximately $171.4 million. Historically, our principal
sources of liquidity have been borrowings under our credit
facilities, capital leases and the issuance of redeemable
preferred stock, as well as, more recently, cash generated by
operating activities. Our principal liquidity requirements are
to service our debt and meet our working capital and capital
expenditure needs.

Cash and cash equivalent and investments in
marketable securities decreased by $41.3 million as our
capital expenditure needs increased in order to support the
growth in our business. For example, from September 30,
2002 to September 30, 2003, our property and equipment
(net) increased from $77.7 million to
$107.3 million. In addition, we acquired our new
subsidiary, Mirada Solutions Limited with cash, and paid off
certain debts.

On September 30, 2002 we entered into an
amended and restated credit agreement with a syndicate of banks
agented by SunTrust Bank. Our subsidiaries guarantee all
obligations under the credit agreement, except that the
guarantee of CPS is limited to $55 million and does not
include any advances under the credit agreement that are loaned
(on an intercompany basis) to our PETNET subsidiary. Our
obligations and the obligations of our subsidiary guarantors
under the credit agreement are secured by a lien on
substantially all of our assets (including the capital stock or
other forms of ownership interests we hold in our subsidiaries)
and the assets of our subsidiary guarantors, except that the
lien securing the guarantee obligations of CPS is principally
limited to the accounts receivable and inventory of CPS.

The credit agreement makes available to us up to
$125 million in revolving loans, with a $10 million
sub-limit for letters of credit. Total availability under the
credit agreement may be limited from time to time based on the
value of certain of our assets and by our earnings before
interest, taxes, depreciation, amortization, and minority
interest (referred to as EBITDAM). As of September 30,
2003, no balance was outstanding under the credit agreement.

Interest on outstanding borrowings under the
credit agreement accrues at LIBOR for the applicable interest
period selected by us or, at our option, a variable base rate
(based on SunTrusts prime rate or the

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federal funds rate), plus in each case a
performance-based margin determined by our debt to EBITDAM
ratio. The credit agreement contains customary affirmative,
negative and financial covenants. For example, we are restricted
in incurring additional debt, disposing of assets, making
investments, allowing fundamental changes to our business or
organization, and making certain payments in respect of stock or
other ownership interests, such as dividends and stock
repurchases. Financial covenants include requirements that we
maintain a debt to EBITDAM ratio no greater than 2.5 to 1; a
fixed charge coverage ratio no less than 3 to 1; and a minimum
tangible net worth of $195.0 million plus 50% of positive
net income accrued since the end of the preceding fiscal quarter
plus 80% of the net proceeds of any equity offering. The credit
agreement also contains customary events of default. These
include cross-defaults to other debt agreements, a change in
control involving us or any subsidiary guarantor, and the
failure to comply with certain covenants.


In the past, we used capital leases to finance
PETNET cyclotrons and detector material equipment in the amounts
of $0.7 million and $8.5 million for the years ended
September 30, 2003 and 2002, respectively. During September
2002, PETNET repaid $14.5 million of outstanding capital
lease obligations, which had interest rates higher than our
current incremental borrowing rate, to reduce our cost of
capital.

We anticipate that our current cash and cash
equivalents balances and our operating cash flow, together with
borrowings under our credit facility, will be sufficient to meet
our currently anticipated future operating expenses, capital
expenditures and debt service obligations as they come due.

In August 2003 our primary financing source for
the sales of PET scanners, DVI Financial Services, Inc. (DVI),
entered into bankruptcy. As a result, in September 2003, we
entered into a new financing program with De Lage Landen
Financial Services, Inc. (DLL). During the period following DVI
entering into bankruptcy and execution of the DLL agreement, we
provided direct financing to four of our customers for a total
of $9.0 million. We have obtained commitment letters from
DLL to purchase these four receivables, and as of the date of
this filing we have sold and received full payment for one of
these receivables.



| |                                   
| | ----------------------------------
| | Off-Balance Sheet
    Arrangements

Other than as described above, we have no
off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or
capital resources.



| |            
| | -----------
| | Commitments

The following table discloses aggregate
information about our contractual obligations and the periods in
which payments are due as of September 30, 2003;

|                             |                                    |                        |        |           |  |           |        |           |  |       |       |        |  |   |       |        |  |   |       |       | 
|---------------------------- | ---------------------------------- | ---------------------- | ------ | --------- |  | --------- | ------ | --------- |  | ----- | ----- | ------ |  | - | ----- | ------ |  | - | ----- | ----- | 
|                             |                                    |                       
|                             |                                    | Payments Due by Period
|                             |                                    |                       
|                             |                                    |                        |        | Less Than |  |           |        | After 5  
|Contractual Cash Obligations |                                    | Total                  |        | 1 Year    |  | 2-3 Years |        | 4-5 Years |  | Years
|                             |                                    |                        |        |           |  |           |        |           |  |      
|                             |                                    |                       
|                             |                                    | (In thousands)        
|Long-term debt               |                                    | $                      | 10,174 |           |  | $         | 2,300  |           |  | $     | 3,516 |        |  | $ | 2,258 |        |  | $ | 2,100 |      
|Capital lease obligations    |                                    |                        | 17,302 |           |  |           | 4,528  |           |  |       | 6,663 |        |  |   | 4,826 |        |  |   | 1,285 |      
|Operating leases             |                                    |                        | 25,704 |           |  |           | 10,038 |           |  |       | 8,630 |        |  |   | 3,293 |        |  |   | 3,743 |      
|                             |                                    |                        |        |           |  |           |        |           |  |       |       |        |  |   |       |        |  |   |       |      
|                             | Total contractual cash obligations |                        | $      | 53,180    |  |           | $      | 16,866    |  |       | $     | 18,809 |  |   | $     | 10,377 |  |   | $     | 7,128 | 
|                             |                                    |                        |        |           |  |           |        |           |  |       |       |        |  |   |       |        |  |   |       |      

In addition to the cash obligations listed above,
we guarantee lease obligations on behalf of our unconsolidated
radiopharmacies of $0.9 million at September 30, 2003.
These lease obligations generally have a term of seven years and
commenced in 2000.

In August 2003, we also guaranteed a debt
obligation related to a cyclotron and radiopharmacy project for
an international distributor in the maximum aggregate amount of
approximately $6.1 million.

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The debt obligation and the guarantee expire in
July 2009. In the event a claim is made under this guarantee, we
have the right to acquire the facility and all related customer
contracts and would operate the facility as a PETNET
radiopharmacy. The Company has recorded a liability of
$0.2 million for this guarantee to reflect the estimated
fair value of the Companys obligation in accordance with
FASB Interpretation No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others.


In September 2003, we entered into a new
financing program arrangement with DLL. The new program provides
flexible lease financing for the full range of PET and PET/CT
scanners and other products and services sold by CTI. In
connection with this program a credit reserve pool was
established whereby we provided a loan loss guarantee to DLL for
9.9% on the first $25 million of transactions and 5.0% once
$50 million in transactions is achieved, of the principal
balance of leases DLL executes on our behalf. At
September 30, 2003, the Company had recorded a reserve of
$0.1 million for this guarantee to reflect the estimated
fair value of the Companys obligation after recovery and
resale of the underlying equipment in accordance with
FIN 45.



| |           
| | ----------
| | Cash Flows



| |                                                                            
| | ---------------------------------------------------------------------------
| | Year Ended September 30, 2003 Compared to
    Year Ended September 30, 2002

Net cash provided by operating activities for the
year ended September 30, 2003 was $16.5 million
compared to $31.0 million in 2002. The decrease in net cash
provided by operating activities was primarily due to a
$44.1 million increase in cash used for working capital
needs, offset by $24.0 million in cash provided by
increased net income.

Net cash used in investing activities during the
year ended September 30, 2003 was $54.7 million. In
2003, investing activities consisted primarily of the
acquisition of Mirada Solutions Limited, our continued facility
expansion, and PETNET radiopharmacy expansion. In 2002,
investing activities consisted primarily of our facility
expansion, and PETNET radiopharmacy expansion.

Net cash provided by financing activities during
the year ended September 30, 2003 was $3.4 million
compared to $92.0 million in 2002. The cash in 2002 came
principally from our initial public offering of common stock,
which was offset in part by retirements of common stock,
repaying outstanding balances on our credit facility, early
extinguishment of certain PETNET capital lease obligations, and
scheduled principal payments on our other debt. The 2003 cash
came primarily from funds received from the exercise of stock
options and participation in our employee stock purchase plan,
net of scheduled principal payments on outstanding debt.

Non-cash investing and financing activities for
equipment financed by capital leases was $0.7 million and
$8.5 million for the year ended September 30, 2003 and
2002, respectively.



| |                                                                            
| | ---------------------------------------------------------------------------
| | Year Ended September 30, 2002 Compared to
    Year Ended September 30, 2001

Net cash provided by operating activities for the
year ended September 30, 2002 was $31.0 million
compared to net cash used in the amount of $10.9 million in
2001. The increase in net cash provided by operating activities
was primarily due to an increase in operating income and
improvement in accounts receivable and accounts payable
management, offset by growth in new working capital deployed for
inventories.

Net cash used in investing activities during the
year ended September 30, 2002 and 2001 was
$40.3 million and $11.6 million, respectively. In
2002, investing activities consisted primarily of our facility
expansion and PETNET radiopharmacy expansion. In 2001, investing
activities consisted primarily of increases in detector material
equipment and increases in other assets used in the detector
material production process.

Net cash provided by financing activities during
the year ended September 30, 2002 was $92.0 million
compared to $22.8 million in 2001. The cash in 2002 came
principally from our initial public offering of

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common stock, which was offset in part by
retirements of common stock, repaying outstanding balances on
our credit facility, early extinguishment of certain PETNET
capital lease obligations, and scheduled principal payments on
our other debt.


Non-cash investing and financing activities for
equipment financed by capital leases was $8.5 million and
$14.5 million for the year ended September 30, 2002
and 2001, respectively.

Critical Accounting Policies

Our discussion and analysis of our financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
U.S. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. We
continuously evaluate our critical accounting policies and
estimates, including those related to revenue recognition,
valuation of goodwill and accounting for investees. We base our
estimates on historical experience and on various assumptions
that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

We believe the following critical accounting
policies require significant judgments and estimates in the
preparation of our consolidated financial statements.



| |                    
| | -------------------
| | Revenue Recognition

We record revenues and related cost of revenues
from sales of products and services when persuasive evidence of
an arrangement exists, delivery has occurred or services have
been rendered, contract price is fixed or determinable, and
collectibility is reasonably assured. We derive our revenues
primarily from sales of PET scanners, detector materials and
cyclotron systems, distribution of radiopharmaceuticals and
provision of services on equipment sold. Revenues derived from
sales of scanners and detector materials are recognized upon
shipment when all other revenue recognition criteria have been
met. Revenues derived from installing scanners and associated
training are deferred and recognized when installation and
training are complete. Prior to July 1, 2003 all revenues
from cyclotron systems sales were recognized upon installation
and acceptance. Installation is deemed essential to the
functionality of cyclotrons. In November 2002, the Financial
Accounting Standards Board reached a consensus on Emerging
Issues Task Force Issue 00-21 (EITF 00-21),
Accounting for Revenue Arrangements with Multiple
Deliverables. This guidance is effective for revenue
arrangements entered into in fiscal periods beginning after
June 15, 2003. Effective July 1, 2003, the Company
implemented EITF 00-21 and recognized revenue
$2.5 million of revenue on cyclotron sales that would have
been deferred under previous accounting guidance.

Revenues derived from distribution of
radiopharmaceuticals are recognized upon delivery of products.
Equipment maintenance service contracts are typically three or
more years in duration and related revenues are recognized
ratably over the respective contract periods as the services are
performed.



| |                      
| | ---------------------
| | Valuation of Goodwill

On October 1, 2001, we adopted Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets(SFAS 142) which required us to
perform an initial impairment review of our goodwill at that
date and also requires us to perform impairment reviews
thereafter, at least once annually. We conduct our impairment
test at the end of each fiscal year. The annual impairment test
was conducted and it did not result in any impairment charges.
While we no longer record monthly amortization expense for
goodwill, future events and changes in circumstances may require
us to record an impairment charge in any given period.
Significant judgment is involved in determining whether and to
what extent any impairment has occurred.

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| |                         
| | ------------------------
| | Accounting for Investees

We periodically enter into arrangements in which
we hold a majority of the equity ownership. In some instances,
we also have influence over a majority of the board of directors
or managers. We determine accounting for these investments under
Statement of Financial Accounting Standards No. 94 and
Accounting Principles Board Opinion No. 18 and, where
appropriate, evaluate our and the minority shareholders
participating rights in accordance with Emerging Issues Task
Force 96-16 to determine whether consolidation or equity
method accounting is appropriate in each case.

We own a majority interest in CPS. Decisions
deemed participating rights, including approval of operating
budgets and management compensation, are determined by majority
board vote. Under the terms of an agreement between us and
Siemens, the board of directors of CPS consists of two directors
selected by CTI, two directors selected by Siemens and a fifth
director selected by Siemens from a list of persons provided by
CTI. We believe that this provides us with the ability to
control board decisions regarding the daily operations of CPS.
Accordingly, CPS is consolidated in our financial statements. If
we did not consolidate CPS, our revenues would decrease by
$114.3 million, $154.5 million and $101.9 million
for 2003, 2002 and 2001, respectively. However, net income would
remain unchanged.

PETNET owns 90% and 51.0% interests in
radiopharmacies in Denver and Houston, respectively. Under the
terms of the Denver and Houston radiopharmacy operating
agreements, PETNET has control over all significant operating
decisions and these radiopharmacies are consolidated in our
financial statements. PETNET accounted for its Houston joint
venture under the equity method in the 2002 financial statements
in accordance with EITF 96-16. In March 2003, an amendment
to the joint venture agreement was adopted, which removed the
participating rights of the minority partner. PETNET is now
deemed to have control over the significant operating decisions
of the joint venture and the entity is consolidated in the
Companys financial statements effective March 1, 2003.

In cases where the minority stockholder is deemed
to have significant veto rights or has equal
representation on the board, we account for these investments
using the equity method as we do not have control over
significant operating decisions. We have invested in four
radiopharmacies, which are accounted for under the equity method.

Recent Accounting Pronouncements



| |                                                
| | -----------------------------------------------
| | Consolidation of Variable Interest
    Entities

On January 17, 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities,an interpretation of Accounting
Research Bulletin No. 51. FIN 46 expands upon and
strengthens existing accounting guidance that addresses when a
company should include in its financial statements the assets,
liabilities and activities of another entity. A variable
interest entity is any legal structure used for business
purposes that either does not have equity investors with voting
rights or has equity investors that do not provide sufficient
financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including
loans or receivables, real estate or other property. A variable
interest entity may be essentially passive or it may engage in
research and development or other activities on behalf of
another company. Previously, one company generally has included
another entity in its consolidated financial statements only if
it controlled the entity through voting interests. FIN 46
changes that by requiring a variable interest entity to be
consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest
entitys activities or entitled to receive a majority of
the entitys residual returns or both. As of
December 17, 2003 the effective date of FIN 46 has been
deferred until the end of the first interim or annual reporting
period ending after March 15, 2004. In addition, the FASB
expects to release additional guidance related to its
application. The Company will review the applicability of
additional guidance when it is available.

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| |                                            
| | -------------------------------------------
| | Accounting for Stock-Based
    Compensation

On December 31, 2002 the FASB issued SFAS
148, Accounting for Stock-Based
Compensation  Transition and Disclosure.
SFAS 148 amends SFAS 123 to provide alternative methods of
transition to SFAS 123s fair value method of
accounting for stock-based employee compensation. SFAS 148
also amends the disclosure provisions of SFAS 123 and APB
Opinion No. 28, Interim Financial Reporting, to
require the disclosure in the summary of significant accounting
policies of the effects of an entitys accounting policy
with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim
financial statements. The Statements amendments of
transition and annual disclosure requirements are effective for
fiscal years ending after December 15, 2002, with earlier
application permitted for entities with fiscal years ending
prior to December 15, 2002. In addition, SFAS 148s
amendment of interim disclosure requirements is effective for
interim periods beginning after December 15, 2002. As now
required by SFAS 148 additional information about stock options
has been presented in the stock-based compensation accounting
policy disclosure in the Companys financial statements.



| |                                                                                
| | -------------------------------------------------------------------------------
| | Amendment of Statement 133 on Derivative
    Instruments and Hedging Activities

In April 2003, the FASB issued SFAS 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and
for hedging activities under FASB Statement No. 133 (SFAS
133), Accounting for Derivative Instruments and Hedging
Activities. This Statement amends SFAS 133 for decisions
made as part of the Derivative Implementation Group process that
effectively required amendments to SFAS 133, in connection with
other FASB projects dealing with financial instruments, and in
connection with implementation issues raised in relation to the
application of the definition of a derivative. SFAS 149 is
effective for contracts entered into or modified after
June 30, 2003. Also, the provisions of SFAS 149 that relate
to SFAS 133 implementation issues that have been effective for
fiscal years that began prior to June 15, 2003, should
continue to be applied in accordance with their respective
effective dates. In addition provisions of this statement
related to forward purchases or sales of when-issued securities
or other securities that do not yet exist, should be applied to
both existing and new contracts entered into after June 30,
2003. The adoption of SFAS 149 did not have a significant impact
on the Companys financial statements. The Company does not
participate in any hedging activity.



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Accounting for Certain Financial
    Instruments with Characteristics of both Liabilities and
    Equity

In May 2003, the FASB issued SFAS 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS 150
requires issuers to classify as liabilities (or assets in some
circumstances) certain financial instruments that embody
obligations. Financial instruments within the scope of SFAS 150
shall be initially measured at fair value and subsequently
revalued with changes in value being reflected in interest cost.
SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after
June 15, 2003. Restatement is not permitted. The adoption
of SFAS 150 did not have a significant impact on the
Companys financial statements.



| |                                                        
| | -------------------------------------------------------
| | Determining Whether an Arrangement Contains
    a Lease

In May 2003, the FASB reached a consensus on EITF
Issue 01-8 (the Issue), Determining Whether an Arrangement
Contains a Lease.The guidance in this Issue is effective
for all arrangements agreed or committed to, or modified after
the beginning of the next fiscal quarter beginning after
May 28, 2003. The Issue addresses whether or not an
arrangement contains a lease that is within the scope of SFAS
13, Accounting for Leases. Depending on the facts and
circumstances and the classification of the lease, the seller or
supplier may be required to record rental income instead of
sales for a portion of the consideration received and the
purchaser may be required to record both an asset under capital
lease and a

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corresponding debt obligation. The adoption of
the issue did not have a significant impact on the
Companys financial statements.


Risk Factors



| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face intense competition, including
    competition from competitors with greater resources, which may
    place pressure on our pricing and otherwise make it difficult
    for us to compete effectively in the molecular imaging
    market.

The market for molecular imaging equipment and
related products and services is intensely competitive and is
affected significantly by new product introductions, aggressive
pricing strategies of competitors and other marketing activities
of industry participants. We compete directly with a number of
other companies in the molecular imaging equipment market
including GE Medical Systems and Philips Medical Systems. We
also compete with Siemens in connection with the sale and
distribution of the PET and PET/CT scanners manufactured by CPS,
as well as for service and support business. The intense and
increasing competition in the molecular imaging equipment market
has caused and may continue to cause downward pressure on the
pricing of our molecular imaging equipment. In our
radiopharmaceutical business, we compete with for-profit
corporations, such as Cardinal Health, Inc. (which acquired
Syncor International Corporation) and ION Beam Applications s.a.
(and its subsidiary, Eastern Isotopes), as well as regional
pharmacies and universities. The intense and increasing level of
competition in the market for radiopharmaceuticals and the
generic nature of the radiopharmaceuticals currently in
production has caused and may continue to cause downward
pressure on pricing. Many of our competitors are significantly
larger than us and enjoy competitive advantages over us,
including:



| |   |                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Significantly greater name recognition;                                                                                                                                               
|
| |  | Better established distribution networks and
    relationships with health care providers, group purchasing
    entities and third-party payors;                                      
|
| |  | Additional lines of products and the ability to
    offer rebates, provide upgrades to previously installed machines
    or bundle products in order to offer discounts or incentives;
|
| |  | Greater ability to finance capital equipment
    sales for their customers; and                                                                                                       
|
| |  | Greater resources for product development, sales
    and marketing and patent prosecution and litigation.                                                                             

Our competitors have developed and will continue
to develop new products that compete directly with our products.
In addition, our competitors spend significantly greater funds
for the research, development, promotion and sale of new and
existing products. These resources can allow them to respond
more quickly to new or emerging technologies and changes in
customer requirements. For the foregoing reasons, we may not be
able to compete successfully against our current and future
competitors.



| |                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If third-party payors do not provide
    adequate levels of coverage or reimbursement for procedures
    conducted with our products, health care providers may be
    reluctant to use and purchase our products.

Sales of some of our products indirectly depend
on whether coverage and adequate reimbursement is available for
procedures conducted with our products from third-party health
care payors, such as Medicare, Medicaid, private insurance
plans, health maintenance organizations and preferred provider
organizations. The availability of such reimbursement affects
our customers decisions to purchase capital equipment.
Third-party payors are increasingly challenging the pricing of
medical procedures or limiting or denying reimbursement for
specific services or devices, and we cannot assure you that
reimbursement levels will be sufficient to enable us to maintain
or increase sales and price levels for our products. Without
adequate coverage and reimbursement from third-party payors, the
market for our products may be limited.

Medicare reimbursement rates are established by
the U.S. Department for Health and Human Services Centers
for Medicare and Medicaid Services (CMS), the government agency
that administers

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Medicare and Medicaid. From time to time, CMS
adjusts the reimbursement rates for medical procedures to
reflect the costs incurred by health care providers to perform
the procedures. In connection with one of these routine
adjustments, CMS recently proposed to slightly increase the
reimbursement rates for the use of a PET scanners and the
administration of FDG. In the future, Medicare reimbursement
rates for these and other PET applications may be subject to
reevaluation by CMS and could be subject to further adjustments.


Today there is no standard reimbursement rate for
PET procedures among private third-party payors such as
indemnity insurers, health maintenance organizations and
preferred provider organizations. In our experience, private
payors typically reimburse health care providers for PET
procedures at approximately the same rate as Medicare. However,
the reimbursement rates offered by private payors are market
driven and are therefore subject to market conditions. For
example, in markets with significant competition among health
care providers, the reimbursement rates can be driven downward
due to competitive contracting between third-party payors and
health care providers. The reimbursement rates offered by
private payors for procedures conducted with our products could
be negatively impacted by market conditions or by a decrease in
Medicare reimbursement rates.

Moreover, we cannot assure you that additional
procedures using our products will qualify for reimbursement
from third-party payors in the U.S. or in foreign countries. If
additional PET procedures are not approved for reimbursement in
a manner consistent with our expectations and assumptions, our
business may not grow as much or as fast as we expect it to grow.



| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If Siemens exercises its option to purchase
    a majority interest in our subsidiary, CPS, Siemens will acquire
    a large portion of our revenues, operations and
    assets.

For the years ended September 30, 2003, 2002
and 2001, approximately 47.5%, 58.5% and 67.2%, respectively, of
our consolidated revenues were derived from the sale of PET
equipment manufactured by our 50.1% owned subsidiary, CPS.
Siemens owns the remaining 49.9% of CPS pursuant to a joint
venture agreement that we entered into with Siemens in 1987.
According to this joint venture agreement, Siemens has an option
to acquire from us for cash up to an 80% interest in CPS, if and
when CPS achieves specified unit sales volumes. Siemens
right to exercise this option is contingent upon CPS selling,
during the year preceding exercise, in excess of the cumulative
total number of units specified in the Siemens minima plus
20% plan attached to the joint venture agreement. The
Siemens minima plus 20% plan provides for annual
increases in the cumulative total number of units sold by CPS
beginning on December 9, 1987. As of September 30,
2003, the cumulative total number of units sold by CPS under
this agreement was 697, and at such date, CPS would need to have
sold a cumulative total of 981 units to achieve the required
cumulative sales level for the option to be exercisable. After
2003, the cumulative unit sales requirement will continue to
increase by 74 units each year thereafter. It is impossible to
state definitively when the option will become exercisable;
however, we currently believe that the specified sales volumes
are not likely to be met before 2005. Once these sales volumes
are achieved, we have the right to defer the exercise of the
option for one year. If Siemens exercises its option and
increases its ownership interest in CPS to 80%, Siemens could
use that controlling ownership interest to cause CPS to engage
in a transaction the effect of which would be a purchase by
Siemens of our remaining 20% ownership interest in CPS.
Accordingly, the Siemens option effectively gives Siemens the
ability to acquire 100% of CPS.

In the event Siemens acquires 100% of CPS, we
would continue to have a right to distribute PET and PET/CT
products manufactured by CPS until at least 2010 pursuant to the
terms of a distribution agreement between us and CPS. The joint
venture agreement also contains cross covenants not to compete,
which prohibit the parties to the joint venture agreement from
participating in or owning an interest in any business engaged
in the manufacture, development, or sale of products that
compete with the products offered by CPS currently, and for a
period of three years following the closing of the exercise of
the Siemens option.

The exercise of the Siemens option would
eliminate a large portion of our revenues, operations and
assets, including some valuable employees and intellectual
property assets relating to the manufacture and

54



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development of PET scanners. As of
September 30, 2003, approximately 33.7% of our total assets
were attributable to CPS. Accordingly, if we fail to further
diversify our business beyond that which is conducted by CPS, or
if we fail to deploy effectively the option exercise proceeds
received from Siemens, the exercise of the Siemens option could
have a material adverse effect on our business. In addition, the
existence of the Siemens option, even if not exercised, could
negatively impact the market price of our common stock and limit
our ability to enter into transactions or business relationships
with companies that have competitive PET products. Further, we
cannot assure you that the proceeds received upon exercise of
the option will adequately compensate us for the loss of control
of CPS.




| |                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Since we use distributors to sell our
    scanners, our future growth could suffer if our existing
    distributors do not continue to purchase scanners from us or if
    we are unable to expand our network of
    distributors.

Our ability to reach our overall sales goals for
scanners is dependent upon the sales and marketing efforts of
our existing and future third-party distributors, including
Siemens, and Hitachi Medical Systems America and Toshiba Medical
Systems Corporation. For example, for the years ended September
30, 2003, 2002 and 2001, sales through Siemens constituted 40%,
50% and 64%, respectively, of our consolidated revenues. If we
fail to sell a large volume of our scanners through
distributors, we could experience a decline in overall sales.
None of our current scanner distributors is obligated to
continue selling, or commit the necessary resources to
effectively market and sell, our scanner products. In our role
as a direct distributor of our scanner products, we have entered
into sub-distribution agreements with third parties to
distribute our scanners outside of the U.S. If these
sub-distributors fail to successfully distribute scanners
outside of the U.S., or if we are unable to expand our direct
distribution network, we may be unable to compete effectively in
foreign markets.



| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to develop new generations
    of products and enhancements to existing products, we may be
    unable to attract or retain customers.

Our success is dependent upon the successful
development, introduction and commercialization of new
generations of products and enhancements to existing products.
Our products are technologically complex and must keep pace with
technological change, comply with evolving industry standards
and compete effectively with new product introductions of our
competitors. Accordingly, many of our products require
significant planning, design, development and testing at the
technological, product and manufacturing process levels. These
activities require significant capital commitments and
investments on our part.

Our ability to successfully develop and introduce
new products and product enhancements, and the associated costs,
are also affected by our ability to:



| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Properly identify customer needs;                                                                                                                                                                              
|
| |  | Prove feasibility of new products;                                                                                                                                                                             
|
| |  | Limit the time required from proof of feasibility
    to routine products;                                                                                                                                     
|
| |  | Limit the timing and cost of regulatory approvals;                                                                                                                                                             
|
| |  | Price our products competitively;                                                                                                                                                                              
|
| |  | Manufacture and deliver our products in
    sufficient volumes on time, and accurately predict and control
    costs associated with manufacturing, installation, warranty and
    maintenance of the products;
|
| |  | Manage customer acceptance and payment for
    products;                                                                                                                                                       
|
| |  | Limit customer demands for retrofits of both new
    and old products; and                                                                                                                                     
|
| |  | Anticipate and complete successfully with
    competitors efforts.                                                                                                                                            

We cannot be sure that we will be able to
successfully develop, manufacture and phase in new products or
product enhancements. Without the successful introduction of new
products and product

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enhancements, we may be unable to attract and
retain customers and our revenue and operating results will
suffer. In addition, even if customers accept new products or
product enhancements, the revenues from such products may not be
sufficient to offset the significant costs associated with
making such products available to customers. Also, announcements
of new products or product enhancements may cause customers to
delay or cancel their purchasing decisions in anticipation of
such products.


If we fail
to protect our intellectual property rights, our competitors may
take advantage of our ideas and compete directly against
us.

We rely on patent protection, as well as a
combination of copyright, trade secret and trademark laws,
nondisclosure and confidentiality agreements, and other
contractual restrictions to protect our proprietary technology
and other intellectual property rights. However, these legal
means afford only limited protection and may not adequately
protect our rights or permit us to gain or keep any competitive
advantage based on our intellectual property. For example, our
patents may be challenged, invalidated or circumvented by third
parties. As of September 30, 2003 we have 30 issued U.S.
patents and 26 patent applications pending before the U.S.
Patent and Trademark Office. We also have patents issued and
pending in Europe, Canada and Japan, including through our
ownership of Mirada Solutions Limited. We have no assurance that
our patent applications will result in issued patents or that
they will be issued in a form that will be advantageous to us.
We may not be able to prevent the unauthorized disclosure or use
of our technical knowledge or other trade secrets by employees.
Furthermore, the laws of foreign countries may not protect our
intellectual property rights to the same extent as the laws of
the U.S. Litigation may be necessary to enforce our intellectual
property rights, which could result in substantial costs to us
and substantial diversion of management attention. If our
intellectual property is not adequately protected, our
competitors could use our intellectual property to enhance their
products. This could harm our competitive position, decrease our
market share or otherwise harm our business.

The prosecution and enforcement of copyrights and
patents relating to software and other technology licensed or
sold to us by third parties is not within our control, and
without this software and technology, we may be unable to
manufacture our products or maintain our technological
advantage. For example, we license Siemens syngo
software which is an important component of our PET/CT systems.
Also, we license the exclusive right to use lutetium
oxyorthosilicate, or LSO, technology from the owner of the LSO
patent until such time as the LSO patent expires in October
2008. If the third-party suppliers of this software and
technology fail to protect their patents or copyrights or if
this technology and software is found to infringe on the rights
of another party, the functionality of our products could suffer
and our ability to bring new and existing products to market
could be delayed. In the case of LSO, the expiration of, or the
failure to protect, the LSO patent could result in our
competitors gaining access to the LSO technology for use in
their molecular imaging products, thereby eliminating one of our
important competitive advantages.

Currently, 17 of our issued patents are held in
the name of CPS. If Siemens exercises its right to purchase a
majority interest in CPS, there is no guarantee that we will
have the right to license or otherwise use the technology
underlying these patents or other intellectual property that is
proprietary to CPS such as manufacturing know-how. Our inability
to access or use this technology could harm our business and
financial condition.

Our
operating results would suffer if we were subject to a
protracted infringement claim or a significant damage
award.

Substantial intellectual property litigation and
threats of litigation exist in our industry. We expect that
molecular imaging products may become increasingly subject to
third-party infringement claims as the number of competitors
grows and the functionality of products increases. Educational
institutions or other

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medical device companies may claim that we
infringe their intellectual property rights. Any claims, with or
without merit, could have the following negative consequences:




| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | Costly litigation and damage awards;                                                                                            
|
| |  | Diversion of management attention and resources;                                                                                
|
| |  | Product shipment delays or suspensions; and                                                                                     
|
| |  | The need to enter into royalty or licensing
    agreements, which may not be available on terms acceptable to
    us, if at all.

A successful claim of infringement against us
could result in a substantial damage award, and could materially
harm our financial condition. Our failure or inability to
license the infringed or similar technology could prevent us
from selling our products and adversely affect our business and
financial results.



| |                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to obtain or maintain necessary
    FDA clearances for our medical device products or similar
    clearances in non-U.S. markets, or if such clearances are
    delayed, we will be unable to commercially distribute and market
    our products.

Our scanner products are medical devices that are
subject to extensive regulation in the U.S. and in foreign
countries where we do business. Unless an exemption applies,
each medical device that we wish to market in the U.S. must
first receive clearance from the U.S. Food and Drug
Administration (FDA), which is referred to as 510(k) clearance,
which can be a lengthy and expensive process. The FDAs
510(k) clearance process for our devices usually takes four to
twelve months from the date the application is submitted, but
may take longer. Although we have obtained 510(k) clearance for
our current products, our 510(k) clearance can be revoked if
safety or effectiveness problems develop. We expect that our
scanner products currently under development will require 510(k)
clearance. We may not be able to obtain additional clearances in
a timely fashion, or at all. Delays in obtaining clearance or
the revocation of existing clearances could adversely affect our
revenues and profitability.

In addition to clearance requirements, our
medical device products are subject to other rigorous FDA
regulatory requirements, including Quality System Regulation
requirements, labeling and promotional requirements and medical
device adverse event reporting requirements. Our failure to
satisfy these requirements could result in, among other things,
warning letters, fines, injunctions, civil penalties, repairs,
replacements, refunds, recalls or seizures of products, total or
partial suspension of production, the FDAs refusal to
grant future clearances, withdrawals or suspensions of current
product applications, and criminal prosecution. Any of these
actions could have a material adverse effect on our business,
financial condition, and results of operations.

In many foreign countries in which we market our
scanner products, we are subject to regulations affecting, among
other things, product standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. Many of these regulations are
similar to those of the FDA. In addition, in many countries the
national health or social security organizations require our
products to be qualified before procedures performed using our
products become eligible for reimbursement. Failure to receive,
or delays in the receipt of, relevant foreign qualifications
could have a material adverse effect on our business, financial
condition and results of operations. Due to the movement towards
harmonization of standards in the European Union, we expect a
changing regulatory environment in Europe characterized by a
shift from a country-by-country regulatory system to a European
Union-wide single regulatory system. The timing of this
harmonization and its effect on us cannot currently be
predicted. Adapting our business to changing regulatory systems
could have a material adverse effect on our business, financial
condition and results of operations.

The FDA and similar governmental authorities in
other countries have the authority to require the recall or
related remedies of our scanner products in the event of
material deficiencies or defects in design or manufacture. A
government-mandated or voluntary recall by us could occur as a
result of component

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failures, manufacturing errors or design defects.
Any recall of product would divert management and financial
resources and harm our reputation with customers.


Any modification to an FDA-cleared device that
could significantly affect its safety or effectiveness, or that
would constitute a major change in its intended use, requires a
new FDA 510(k) clearance. The FDA requires every manufacturer to
make this determination, but the FDA can review any such
decision. We may make additional modifications to our products
after they have received clearance, and in appropriate
circumstances, determine that new clearance is unnecessary. The
FDA may not agree with our decision not to seek new clearance.
If the FDA requires that we seek 510(k) clearance for any
modifications to a previously cleared product, we may be
required to cease marketing or recall the modified device until
we obtain this clearance. Also, in some circumstances, such as
the FDAs disagreement with our decision not to seek new
clearance, we may be subject to significant regulatory fines or
penalties.

FDA
regulation of our radiopharmaceutical development and
manufacturing procedures could hinder our ability to manufacture
and distribute our PET products.

Our PET radiopharmaceuticals currently are
manufactured and sold through our PETNET radiopharmacies, each
of which operates under an applicable state pharmacy license and
compounds these products in response to the order of a licensed
physician. These activities are authorized under
Section 121 of the Food and Drug Administration
Modernization Act of 1997 (the 1997 Act). FDA in the
past generally has not subjected such compounded PET products to
new drug approval procedures and current good manufacturing
practice requirements.

The 1997 Act, however, amended the Federal Food,
Drug, and Cosmetic Act to provide a new framework for FDA
regulation of PET products. The 1997 Act states that FDA can
require new drug applications (NDAs) or abbreviated new drug
applications (ANDAs) and adherence to current good manufacturing
practice requirements for PET products two years after the
agency finalizes appropriate new approval procedures and current
good manufacturing practice requirements for PET. The submission
of a NDA or ANDA before this time period expires is voluntary.
FDA has issued a guidance document for the chemistry portion of
NDAs and ANDAs for PET products, including
F-18-fluorodeoxyglucose, or FDG, the product principally
produced and distributed by our PETNET radiopharmacies. Because
the 1997 Act prohibits FDA from requiring NDAs or ANDAs for PET
products until two years after the agency finalizes appropriate
approval procedures and current good manufacturing practice
requirements for PET products, the submissions and FDA approval
of such applications before these time periods expire is
voluntary. FDA has not yet addressed the procedures for approval
of other PET products and of new indications for existing PET
products. FDA has said, however, that it expects that the
standards for determining the safety and effectiveness set forth
in recently developed FDA regulations for in vivo diagnostic
radiopharmaceuticals may apply to PET.

Under the 1997 Act FDA cannot require NDAs or
ANDAs for any PET products that comply with the PET compounding
standards and the official monographs of the United States
Pharmacopoeia until two years after the issuance of final
current good manufacturing practice regulations and appropriate
procedures for the approval of the specific PET drug product,
whichever occurs later. In March 2002, the FDA issued
preliminary draft proposed regulations for the current good
manufacturing practice requirements. The public comment period
for the draft regulations closed on June 5, 2002, after
which FDA has said it intends to issue a proposed rule with an
additional period for public comment before issuing the final
current good manufacturing practice regulations for PET. It is
not possible to predict when FDA will finalize these
regulations, but we expect that this will take place before the
end of calendar year 2004. If so, FDA authority and the proposed
approval procedures and current good manufacturing practice
requirements would likely not take effect until calendar year
2006 at the earliest.

Once the requirements for FDA approval take
effect, we could incur significant costs, including certain
facilities upgrades, and spend considerable time obtaining FDA
approval for existing and newly developed radiopharmaceuticals
or for new indications for existing radiopharmaceuticals. Such
additional costs and time spent to obtain any required FDA
approval could have a material adverse effect on our

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business, financial condition, and results of
operations. With regard to FDAs proposed current good
manufacturing practice requirements for PET drug products, we
cannot predict with certainty the precise effects that these
requirements might have on our business, financial condition,
and results of operations.


Our PET products are subject to other rigorous
FDA regulatory requirements, including manufacturing standards,
labeling and promotional requirements. Our failure to satisfy
these requirements could result in, among other things, warning
letters, fines, injunctions, civil penalties, repairs,
replacements, refunds, recalls or seizures of products, total or
partial suspension of production, the FDAs refusal to
grant future clearances, withdrawals, or suspensions or current
product applications, and criminal prosecution. Any of these
actions could have a material effect on our business, financial
condition, and results of operations.



| |                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our scanners, cyclotrons and
    radiopharmaceutical business require the use of radioactive
    materials which subjects us to regulation, related costs and
    delays and potential liabilities for injuries or violations of
    laws related to radioactive materials.

Our scanners and radiopharmaceutical business
require the use of radioactive materials, and our cyclotrons are
utilized to produce radioactive materials. While the radioactive
materials utilized in our radiopharmaceuticals have relatively
short half-lives, meaning they quickly break down into inert, or
non-radioactive substances, the storage, use, and disposal of
these materials presents the radiation risk, for our employees
and the risk of accidental environmental releases. We are
subject to federal, state and local regulations governing
storage, handling and disposal of these materials and waste
products. Outside of the U.S. we are also subject to radiation
regulations that vary from country to country and sometimes vary
within a given country. Although we believe that our safety
procedures for storing, handling and disposing of these
radioactive materials comply in all material respects with the
standards prescribed by law and regulation, we cannot completely
eliminate the radiological risk from those hazardous materials.



| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Product liability suits against us could
    result in expensive and time-consuming litigation, payment of
    substantial damages, increases in our insurance rates and
    decreased market acceptance of our products.

The sale and use of our products could lead to
the filing of product liability claims if someone were to allege
injury from the use of one of our devices or
radiopharmaceuticals or allege that one of our devices or
radiopharmaceuticals failed to detect a targeted disorder. A
product liability claim could result in substantial damages and
be costly and time-consuming to defend. We cannot assure you
that our product liability insurance will be sufficient to
protect us from the financial impact of defending a product
liability claim. Any product liability claim brought against us,
with or without merit, could increase our product liability
insurance rates or prevent us from securing insurance coverage
in the future. Product liability claims could also adversely
affect the marketability of our products and our reputation.



| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to provide the significant
    education and training required for the health care market to
    accept our products, our business will suffer.

In order to achieve market acceptance for our
products, we are often required to educate physicians about the
use of a new procedure and convince health care payors that the
benefits of the product outweigh its costs. The timing of our
competitors introduction of products and the market
acceptance of their products may also make this process more
difficult. We cannot be sure that any future products we develop
will gain any significant market acceptance among physicians,
patients and health care payors.



| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We expect to incur substantial expenses in
    the future to develop new technology and to expand our business
    and, as a result, we may not be able to generate sufficient
    revenues to maintain profitability.

We anticipate that our expenses will increase
substantially in the foreseeable future as we:



| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | Continue to invest in research and development to
    enhance our products and develop new technologies;
|
| |  | Develop additional applications for our current
    technology;                                         

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| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | Increase our marketing and selling activities;                                                                                        
|
| |  | Continue to increase the size and number of
    locations of our customer support organization, including
    international expansion;
|
| |  | Continue to expand our network of PETNET
    radiopharmacies in the U.S. and internationally;                                         
|
| |  | Develop additional manufacturing capabilities and
    infrastructure; and                                                             
|
| |  | Hire additional management and other personnel to
    keep pace with our growth.                                                      

As a result of these increased expenses, we will
need to generate significantly higher revenues to maintain
profitability. We cannot be certain that we will maintain
profitability in the future. If we do not maintain
profitability, the market price of our common stock may decline
substantially.



| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | Our quarterly operating results may
    fluctuate, which could cause our stock price to
    decline.

Our revenues and operating results have varied
from quarter to quarter in the past and may continue to
fluctuate in the future. The following are among the factors
that could cause our operating results to fluctuate
significantly from quarter to quarter:



| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | The budget cycles of our customers;                                                                                                        
|
| |  | The availability of financing to our customers;                                                                                            
|
| |  | The size and timing of specific sales and any
    collection delays or defaults related to those sales;                                    
|
| |  | Changes in the relative contribution to our
    revenue from our various products;                                                         
|
| |  | The seasonality of capital equipment sales, with
    the fourth fiscal quarter traditionally being the highest;                            
|
| |  | Product and price competition;                                                                                                             
|
| |  | The timing, market acceptance and development
    costs of new product introductions and product enhancements by
    us or our competitors;
|
| |  | The length of our sales cycle;                                                                                                             
|
| |  | The timing of hiring and the timing of incentive
    compensation for our sales and marketing personnel;                                   
|
| |  | Changes in healthcare reimbursements and
    governmental laws and regulations;                                                            
|
| |  | A downturn in general economic conditions; and                                                                                             
|
| |  | The loss of key sales personnel or distributors.                                                                                           

Many of these factors are beyond our control, and
you should not rely on our results of operations for prior
periods as an indication of our expected results in any future
period. If our revenues vary significantly from quarter to
quarter, our business could be difficult to manage and our
quarterly results could fall below expectations of investors and
stock market analysts, which could cause our stock price to
decline.



| |                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to provide suitable
    capital equipment financing sources for our customers, our
    ability to compete in the molecular imaging equipment market may
    be impaired and our business, operations and financial condition
    could be adversely impacted.

Many of our customers require or desire financing
in connection with purchases of our molecular imaging equipment.
Some of our competitors have sufficient capital resources to
provide capital equipment financing directly to their customers
on attractive terms. In order to compete with these competitors,
we maintain relationships with third party financing sources who
offer financing services to our customers. Recently, the parent
company of the financing source we have historically relied on,
DVI, entered into bankruptcy. As a result, two of our scanner
sales remain partially funded. In addition, our cash flow was

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adversely impacted while we sought approval of
the bankruptcy court and DVI to find alternate financing for
five other sales. We have incurred, and may continue to incur,
unanticipated costs and expenses associated with DVIs
filing of bankruptcy. Although we have developed a relationship
with a new financing source, our business, operations and
financial condition could be adversely impacted if our new
financing source is unable to provide our customers with
competitive financing or experiences adverse financial
conditions that impact its ability to offer financing or fund
future sales.




| |                                                                      
| | ---------------------------------------------------------------------
| | We are subject to risks associated with
    international operations.

We conduct business globally. International sales
accounted for approximately 23% of sales in each of the years
ended September 30, 2003, 2002 and 2001. Our sales in the
U.S. have grown rapidly as a result of a significant expansion
in the U.S. market for PET products and services and our
expanded product line. We also acquire various raw materials and
components from international suppliers. We intend to expand our
presence in international markets, and we cannot assure you that
we will compete successfully in international markets or meet
the service and support needs of foreign customers. Our future
results could be harmed by a variety of factors, including:



| |   |                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Difficulties in enforcing agreements and
    collecting receivables through the legal systems of foreign
    countries;                                                                                                               
|
| |  | The longer payment cycles associated with many
    foreign customers;                                                                                                                                                                 
|
| |  | The possibility that foreign countries may impose
    additional withholding taxes or otherwise tax our foreign
    income, impose tariffs or adopt other restrictions on foreign
    trade;                                          
|
| |  | Fluctuations in exchange rates, which may affect
    product demand and adversely affect the profitability in U.S.
    dollars of products and services provided by us in foreign
    markets where payment is made in local currency;
|
| |  | Our ability to obtain U.S. export licenses and
    other required export or import licenses or approvals;                                                                                                                             
|
| |  | Changes in the political, regulatory or economic
    conditions in a country or region; and                                                                                                                                           
|
| |  | Difficulty protecting our intellectual property
    in foreign countries.                                                                                                                                                             



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | Our production and manufacturing
    capabilities may not be sufficient to meet the expected future
    demand for our products and services.

If we are unable to increase our production and
manufacturing capabilities, we may be unable to meet the
expected future demand for our products. In order to produce a
sufficient supply of products using our technology, we must
improve and expand our current manufacturing facilities and
processes. We may experience quality problems, substantial costs
and unexpected delays in our efforts to upgrade and expand our
manufacturing capabilities. If we fail to obtain the necessary
capital to expand our manufacturing facilities or if we incur
delays due to quality problems or other unexpected events, we
will be unable to produce a sufficient supply of products
necessary to meet our future growth expectations.



| |                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we lose or experience a deterioration in
    our relationship with any supplier of key product components, or
    if key components are otherwise not available in sufficient
    quantities, our manufacturing could be delayed.

We contract with third parties for the supply of
some of the components and materials used in our products. For
example, we obtain all of the raw materials needed to
manufacture our LSO detector material from a single source.
Isotopically enriched water, which is necessary for the
development of our radiopharmaceuticals, is only available from
a limited number of sources. Some of our suppliers are not
obligated to continue to supply us. For some of these materials
and components, relatively few alternative sources of supply
exist. In addition, the lead-time involved in the manufacturing
of some of these components can be lengthy. If these suppliers
become unwilling or unable to supply us with our

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requirements, it may be difficult to establish
additional or replacement suppliers in a timely manner, if at
all. This would cause our product sales to be disrupted and our
revenues and operating results to suffer.


Replacement or alternative sources might not be
readily obtainable due to regulatory requirements and other
complexities of our manufacturing operations and requirements.
Incorporation of components from a new supplier into our
products may require a new or supplemental filing with
applicable regulatory authorities and clearance or approval of
the filing before we could resume product sales. This process
may take a substantial period of time, and we may be unable to
obtain the necessary regulatory clearance or approval. This
could also create supply disruptions that would harm our product
sales and operating results.



| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to comply with health care
    regulations, we could face substantial penalties and our
    business, operations and financial condition could be adversely
    impacted.

While we do not deliver health care services
directly to patients, control referrals of health care services
or bill directly to Medicare, Medicaid or other third-party
payors, due to the breadth of many health care laws and
regulations, we cannot assure you that they will not apply to
our business. We could be subject to health care fraud and
patient privacy regulation by both the federal government and
the states in which we conduct our business. The regulations
that may affect our ability to operate include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Federal Medicare and Medicaid Anti-Kickback
    Law, which prohibits among other things persons from soliciting,
    receiving or providing remuneration, directly or indirectly, to
    induce either the referral of an individual, for an item or
    service or the purchasing or ordering of a good or service, for
    which payment may be made under federal health care programs
    such as the Medicare and Medicaid programs;                        
|
| |  | Federal false claims laws which prohibit, among
    other things, individuals or entities from knowingly presenting,
    or causing to be presented, claims for payment from Medicare,
    Medicaid, or other third-party payors that are false or
    fraudulent, and which may apply to entities like us which
    provide coding and billing advice to customers;                                                                                                 
|
| |  | The Federal Stark Law, which prohibits referrals
    by a physician for a designated health service to an entity with
    which the physician, or an immediate family member, has a
    financial relationship, and which prohibits submission of a
    claim for reimbursement to Medicare or Medicaid in connection
    with a prohibited referral;                                                                                                                
|
| |  | The Federal Health Insurance Portability and
    Accountability Act of 1996, or HIPAA, which prohibits executing
    a scheme to defraud any health care benefit program or making
    false statements relating to health care matters and which also
    imposes certain requirements relating to the privacy, security
    and transmission of individually identifiable health
    information; and                                                              
|
| |  | State law equivalents of each of the above
    federal laws, such as anti-kickback and false claims laws which
    may apply to items or services reimbursed by any third-party
    payor (including commercial insurers), and state laws governing
    the privacy of health information in certain circumstances, many
    of which differ from each other in significant ways and often
    are not preempted by HIPAA (thus complicating compliance
    efforts).

If our operations are found to be in violation of
any of the laws described above or any of the other governmental
regulations that apply to us, we may be subject to penalties,
including civil and criminal penalties, damages, fines and the
curtailment or restructuring of our operations. Any penalties,
damages, fines, curtailment or restructuring of our operations
could adversely affect our ability to operate our business and
our financial results. The risk of our being found in violation
of these laws is increased by the fact that many of them have
not been fully interpreted by the regulatory authorities or the
courts and their provisions are open to a variety of
interpretations. Any action against us for violation of these
laws, even if we successfully defend against it, could cause us
to incur significant legal expenses and divert our
managements attention from the operation of our business.
Moreover, to achieve compliance with applicable federal and
state privacy, security, and electronic transaction laws, we may
be required to

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modify our operations with respect to the
handling of patient information. Implementing these
modifications may prove costly and time consuming. At this time,
we are not able to determine the full consequences to us,
including the total cost of compliance, of these various federal
and state laws.




| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The application of state certificate of
    need regulations and compliance with federal and state licensing
    requirements could substantially limit our ability to sell our
    products and grow our business.

Some states require health care providers to
obtain a certificate of need or similar regulatory approval
prior to the acquisition of high-cost capital items including
molecular imaging systems like ours or the provision of
diagnostic imaging services. In many cases, a limited number of
these certificates are available. As a result of this limited
availability, hospitals and other health care providers have at
times been unable to obtain a certificate of need and purchase
our PET scanners. Further, our sales cycle for PET scanners is
typically longer in certificate of need states due to the time
it takes our customers to obtain the required approvals.
Accordingly, certificates of need or similar requirements could
limit our ability to market our products and adversely impact
our revenues and results of operations. Also, our ability to
grow our radiopharmaceutical distribution network is contingent
on our or our customers ability to obtain the necessary
licenses and registrations for each new facility, which may
include a radioactive materials license, pharmacy license, and
cyclotron registration. If we or our customers fail to obtain
such licenses and registrations or if substantial delays are
incurred in obtaining such licenses and registrations, we may be
unable to expand this business and our sales growth will be
negatively impacted. Further, the pharmacists operating in our
PETNET radiopharmacies must be licensed and many states require
imaging technologists that operate PET systems to be licensed or
certified. Any lapse in our licenses, or the licenses of our
pharmacists or technologists, could increase our costs and
adversely affect our operations and financial results. In
addition, our customers must meet various federal and state
regulatory and/or accreditation requirements in order to receive
payments from the government-sponsored health care programs such
as Medicare and Medicaid. Any lapse by our customers in
maintaining appropriate licensure, certification or
accreditation or the failure of our customers to satisfy the
other necessary requirements under government-sponsored health
care programs could cause our sales to decline.



| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business strategy emphasizes growth,
    which places significant demands on our financial, operational
    and management resources and creates the risk of failing to meet
    the growth expectations of investors.

Our growth strategy includes efforts to develop
new products, services and technologies as well as new
distribution channels. The pursuit of this growth strategy
consumes capital resources, thereby creating the financial risk
that we will not realize an adequate return on this investment.
In addition, our growth may involve the acquisition of
companies, the development of products or services or the
creation of strategic alliances in areas in which we do not
currently operate. This would require our management to develop
expertise in new areas, manage new business relationships and
attract new types of customers. The success of our growth
strategy also depends on our ability to expand our financial,
operational and management resources and to attract, train,
motivate and manage an increasing number of employees. The
success or failure of our growth strategy is difficult to
predict. The failure to achieve our stated growth objectives or
the growth expectations of investors could disappoint investors
and harm our stock price. We may not be able to implement our
growth strategy successfully or manage our expanded operations
effectively and profitably.



| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | Our costs could substantially increase if
    we receive a significant number of warranty
    claims.

We generally warrant each of our products against
defects in materials and workmanship for a period of twelve
months from the acceptance of our product by a customer or
eighteen months from the date of shipment to a distributor.
Further, we have entered into long-term service agreements with
certain customers pursuant to whom we have agreed to provide all
necessary maintenance and services for a fixed fee. If we
experience an increase in product returns or warranty claims, we
could incur unanticipated additional expenditures for parts and
service. In addition, our reputation and goodwill in the PET
market could be damaged. While we have established reserves for
liability associated with product warranties, unforeseen
warranty exposure in excess of those reserves could adversely
affect our operating results.

63



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| |                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our executive officers and directors and
    their affiliates hold a substantial portion of our stock and
    could exercise significant influence over matters requiring
    stockholder approval, regardless of the wishes of other
    stockholders.

Our executive officers, principal stockholders
and directors and entities affiliated with them beneficially
own, in the aggregate, approximately 38.5% of our common stock
as of September 30, 2003. This significant concentration of
share ownership may adversely affect the trading price for our
common stock because investors often perceive disadvantages in
owning stock in companies with controlling stockholders. These
stockholders, acting together, will have the ability to exert
substantial influence over all matters requiring approval by our
stockholders, including the election and removal of directors
and any proposed merger, consolidation or sale of all or
substantially all of our assets. In addition, they could dictate
the management of our business and affairs. This concentration
of ownership could have the effect of delaying, deferring, or
preventing a change in control, or impeding a merger or
consolidation, takeover, or other business combination that
could be favorable to our investors.



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | Certain provisions of our charter, bylaws
    and Delaware law may delay or prevent a change in control of our
    company.

Our corporate documents and Delaware law contain
provisions that may enable our board of directors to resist a
change in control of our company. These provisions include:



| |   |                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a staggered board of directors;                                                                                                                                               
|
| |  | limitations on persons authorized to call a
    special meeting of stockholders;                                                                                              
|
| |  | the authorization of undesignated preferred
    stock, the terms of which may be established and shares of which
    may be issued without stockholder approval;              
|
| |  | advance notice procedures required for
    stockholders to nominate candidates for election as directors or
    to bring matters before an annual meeting of stockholders; and
|
| |  | a stockholder protection rights agreement or
    poison pill.                                                                                                               

These anti-takeover defenses could discourage,
delay or prevent a transaction involving a change in control of
our company. These provisions could also discourage proxy
contests and make it more difficult for you and other
stockholders to elect directors of your choosing and cause us to
take other corporate actions you desire.



| |                                     
| | ------------------------------------
| | Our stock price may be
    volatile.

The market price for the common stock may
fluctuate and may be affected by a number of factors. Such
fluctuations in the market price of our common stock may cause
your investment in our common stock to decline in value, and
these factors include:



| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | volume and timing of orders for our products;                                                                            
|
| |  | our ability to develop, obtain regulatory
    clearance for, and market, new and enhanced products on a timely
    basis;
|
| |  | the announcement of new products or product
    enhancements by us or our competitors;                                   
|
| |  | announcements of technological or medical
    innovations in the monitoring or treatment of diabetes;                    
|
| |  | product liability claims or other litigation;                                                                            
|
| |  | quarterly variations in our or our
    competitors results of operations;                                               
|
| |  | changes in governmental regulations or in the
    status of our regulatory approvals or applications;                    
|
| |  | changes in the availability of third-party
    reimbursement in the United States or other countries;                    
|
| |  | changes in earnings estimates or recommendations
    by securities analysts; and                                         

64



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| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | general market conditions and other factors,
    including factors unrelated to our operating performance or the
    operating performance of our competitors.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

Interest Rate Sensitivity

Our exposure to market risk relates to changes in
interest rates for borrowings under our revolving credit
facility, our industrial revenue bonds and a building
construction loan. These borrowings bear interest at variable
rates. Based on our borrowings during 2003, a hypothetical 1.0%
increase in interest rates would have increased our annual
interest expense by approximately $0.2 million and would
have decreased our annual cash flow from operations by
approximately $0.1 million.

The Companys cash equivalents and
short-term investments are subject to market risk, primarily
interest-rate and credit risk. The Companys investments
are managed by outside professional managers within investment
guidelines set by the Company. Such guidelines include security
type, credit quality, and maturity and are intended to limit
market risk by restricting the Companys investments to
high credit quality securities with relatively short-term
maturities.

As of September 30, 2003, we had cash and
cash equivalents of $50.0 million. Because of the short
maturities of these instruments, a sudden change in market
interest rates would not have a material impact on the fair
value of the portfolio. We would not expect our operating
results or cash flows to be materially affected by the effect of
a sudden change in market interest rates on our portfolio.

The table below presents principal amounts and
related weighted average interest rates by year of maturity for
the Companys investment portfolio. All investments mature,
by policy, in one year or less.

|                  |                       |      |   |        |   |            |   |        |   |  |   |        |  
|----------------- | --------------------- | ---- | - | ------ | - | ---------- | - | ------ | - |  | - | ------ | -
|                  |                       |      |   |        |   | 9/30/03   
|                  |                       | 2003 |   | Total  |   | Fair Value
|                  |                       |      |   |        |   |           
|Assets:           |                       |      |   |        |   |            |   |        |   |  |   |       
|Cash equivalents: |                       |      |   |        |   |            |   |        |   |  |   |       
|                  | Fixed rate            |      | $ | 35,529 |   |            | $ | 35,529 |   |  | $ | 35,529 |  
|                  | Average interest rate |      |   | 1.27   | % |            |   | 1.27   | % |  |   | 1.27   | %
|                  | Variable rate         |      | $ | 113    |   |            | $ | 113    |   |  | $ | 113    |  
|                  | Average interest rate |      |   | 0.80   | % |            |   | 0.80   | % |  |   | 0.80   | %

Foreign Currency Risk

International revenues from the Companys
foreign direct sales and distributor sales comprised 23% of
total revenues for the year ended September 30, 2003. The
Company experienced approximately $0.8 million of foreign
currency transaction gains for the year ended September 30,
2003 that resulted primarily from the substantial collection of
long-term receivables in one of our international subsidiaries.
The Company is also exposed to foreign exchange rate
fluctuations as the financial results of its international
subsidiaries are translated into U.S. dollars in consolidation.
As exchange rates vary, these results when translated may vary
from expectations and adversely impact overall expected
profitability. A 10% change in the value of the U.S. dollar
relative to other currencies would not have a material effect on
our consolidated financial position, results of operations, or
cash flow.

Equity Security Price Risk

We do not have any investments in marketable
equity securities; therefore, we do not currently have any
direct equity price risk.

Commodity Price Risk

We use certain precious metals in the
manufacturing of our detector materials. These metals are not
traded and are depleted over several years. Accordingly, we do
not have any direct commodity price risk.

65



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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

The consolidated financial statements appear on
pages F-1 through F-30.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

Not applicable.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

The Companys Chief Executive Officer and
Chief Financial Officer evaluated the effectiveness of the
design and operation of the Companys disclosure controls
and procedures as of the end of the period covered by this
report. The Companys Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period
covered by this report, the Company maintains disclosure
controls and procedures that provide reasonable assurance that
information required to be disclosed by the Company in the
reports that the Company files or submits under the Securities
Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is
accumulated and communicated to the Companys management,
including its Chief Executive Officer and its Chief Financial
Officer, as appropriate to allow timely decisions regarding
required disclosure.

There have been no changes in the Companys
internal control over financial reporting that occurred during
the quarter ended September 30, 2003 that have materially
affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information required by this Item 10
will be contained in the section entitled Management
of the Companys definitive proxy statement for its 2004
Annual Meeting of Stockholders to be filed with the SEC, and
such information is incorporated in this Annual Report on
Form 10-K by this reference.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this Item 11
will be contained in the section entitled Executive
Compensation of the Companys definitive proxy
statement for its 2004 Annual Meeting of Stockholders to be
filed with the SEC, and such information is incorporated in this
Annual Report on Form 10-K by this reference.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The information required by this Item 12
will be contained in the section entitled Beneficial
Security Ownership of the Companys definitive proxy
statement for its 2004 Annual Meeting of Stockholders to be
filed with the SEC, and such information is incorporated in this
Annual Report on Form 10-K by this reference.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this Item 13
will be contained in the section entitled Certain
Transactions of the Companys definitive proxy
statement for its 2004 Annual Meeting of Stockholders to be
filed with the SEC, and such information is incorporated in this
Annual Report on Form 10-K by this reference.

66



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##### Table of Contents






Item 14. Exhibits, Consolidated Financial
Statement Schedules, and Reports on Form 8-K

(a) (1) Financial Statements:

|                                  |                                                                                                                                                                                  |      |  |            | 
|--------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | ---------- | 
|                                  |                                                                                                                                                                                  | Page
|                                  |                                                                                                                                                                                  |     
|                                  | The following consolidated financial statements
    of the Company and Report of PricewaterhouseCoopers LLP                                                                      |      |  |            | 
|                                  | Independent Auditors, are included in this report:                                                                                                                               |      |  |            | 
|                                  | Report of Independent Auditors                                                                                                                                                   |      |  | F-1        | 
|                                  | Consolidated Balance Sheets as of
    September 30, 2003 and 2002                                                                                                                |      |  | F-2        | 
|                                  | Consolidated Statements of Operations for the
    Years Ended September 30, 2003, 2002, and 2001                                                                                 |      |  | F-3        | 
|                                  | Consolidated Statements of Shareholders
    Equity for the Years Ended September 30, 2003, 2002 and 2001                                                                        |      |  | F-4        | 
|                                  | Consolidated Statements of Cash Flows for the
    Years Ended September 30, 2003, 2002 and 2001                                                                                  |      |  | F-5        | 
|                                  | Notes to Consolidated Financial Statements                                                                                                                                       |      |  | F-6  F-29 | 
|(2) Financial Statement Schedule: |                                                                                                                                                                                  |      |  |           
|                                  | Schedule II. Valuation and Qualifying
    Accounts  Years Ended September 30, 2003, 2002
    and 2001.                                                                          |      |  | F-30       | 
|                                 
|(3) Exhibits:                     |                                                                                                                                                                                  |      |  |           
|                                  | The Exhibits listed in the Index of Exhibits
    appearing at pages 70-73 are included in this annual report and
    such Index of Exhibits is incorporated herein by reference. |      |  |            | 

(b)     Reports on
Form 8-K:



| |                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company furnished one Current Report on
    Form 8-K during the quarter ended September 30, 2003,
    such report being furnished to the SEC on August 5, 2003,
    reporting, under Items 9 and 12, the Companys issuance of
    a press release announcing its financial results for the quarter
    ended June 30, 2003.

(c)     Exhibits:



| |                         
| | ------------------------
| | See Item 15(a)(3) above.

(d)     Financial
Statement Schedules:



| |                         
| | ------------------------
| | See Item 15(a)(2) above.

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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly
authorized, on the 22nd day of December, 2003.



| |                            
| | ---------------------------
| | CTI MOLECULAR IMAGING, INC.



| |     |                
| | --- | ---------------
| | By: | /s/ RONALD NUTT

| |                                          
| | -----------------------------------------
| |                                          
| | Ronald Nutt, Ph.D.                       
| | President and Chief Executive
    Officer

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Annual Report on Form 10-K 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/ RONALD NUTTRonald Nutt, Ph.D.             |  | President and Chief Executive Officer and
    Director (Principal Executive Officer)                                 |  | December 22, 2003
|                                             
|/s/ DAVID N. GILLDavid N. Gill                |  | Senior Vice President and Chief Financial Officer
    (Principal Financial Officer and Principal Accounting Officer) |  | December 22, 2003
|                                             
|/s/ TERRY D. DOUGLASSTerry D. Douglass, Ph.D. |  | Chairman of the Board of Directors                                                                                   |  | December 22, 2003
|                                             
|/s/ ROY DOUMANIRoy Doumani                    |  | Director                                                                                                             |  | December 22, 2003
|                                             
|Bernd Haetzel                                 |  | Director                                                                                                             |  | December 22, 2003
|                                             
|/s/ JAMES R. HEATHJames R. Heath, Ph.D.       |  | Director                                                                                                             |  | December 22, 2003
|                                             
|/s/ LEROY HOODLeroy Hood, M.D., Ph.D.         |  | Director                                                                                                             |  | December 22, 2003
|                                             
|/s/ HAMILTON JORDANHamilton Jordan            |  | Director                                                                                                             |  | December 22, 2003

68



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|                                              |  |          |  |                   |  | 
|--------------------------------------------- |  | -------- |  | ----------------- |  | 
|                                              |  |          |  |                  
|Signature                                     |  | Title    |  | Date             
|                                              |  |          |  |                  
|                                             
|/s/ WILLIAM W. MCINNESWilliam W. McInnes      |  | Director |  | December 22, 2003
|                                             
|/s/ MICHAEL E. PHELPSMichael E. Phelps, Ph.D. |  | Director |  | December 22, 2003

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EXHIBIT INDEX

|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1          |  | Certificate of Incorporation of CTI Molecular
    Imaging, Inc., filed as Exhibit 3.1 to the Companys
    Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.                                                                                                                                                                                                                             
|        | 3  | .2          |  | Bylaws of CTI Molecular Imaging Inc., filed as
    Exhibit 3.2 to the Companys Registration Statement on
    Form S-1 (Reg. No. 333-85714), and incorporated herein
    by reference.                                                                                                                                                                                                                                                    
|        | 3  | .3          |  | Certificate of Retirement of Stock of CTI
    Molecular Imaging, Inc., filed as Exhibit 3.1 to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2002 (File No. 000-49867), and
    incorporated herein by reference.                                                                                                                                                                                    
|        | 3  | .4          |  | Certificate of Elimination of Designations,
    Preferences and Rights, filed as Exhibit 3.2 to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2002 (File No. 000-49867), and
    incorporated herein by reference.                                                                                                                                                                                   
|        | 4  | .1          |  | Specimen Stock Certificate of Common Stock, par
    value $0.01 per share, filed as Exhibit 4.1 to the
    Companys Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.                                                                                                                                                                                                                   
|        | 4  | .2          |  | Reference is made to Exhibits 3.1, 3.2, 3.3 and
    3.4                                                                                                                                                                                                                                                                                                                                                                                   
|        | 4  | .3          |  | Shareholder Protection Rights Agreement, filed as
    Exhibit 4.3 to the Companys Registration Statement on
    Form S-1 (Reg. No. 333-85714), and incorporated herein
    by reference.                                                                                                                                                                                                                                                 
|        | 10 | .1          |  | Stock Purchase, Reorganization and Joint Venture
    Agreement, dated December 9, 1987, among CTI Group, Inc.,
    CTI PET Systems, Inc., Dr. Terry D. Douglass,
    Dr. Ronald Nutt, Michael C. Crabtree, J. Kelly Milam and
    Siemens Gammasonics, Inc. (Joint Venture Agreement),
    filed as Exhibit 10.1 to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference.
|        | 10 | .2          |  | Amendment to Joint Venture Agreement, dated
    March 31, 1995, filed as Exhibit 10.2 to the
    Companys Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.                                                                                                                                                                                                                             
|        | 10 | .3          |  | Second Amendment to Joint Venture Agreement,
    dated June 30, 1997, filed as Exhibit 10.3 to the
    Companys Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.                                                                                                                                                                                                                       
|        | 10 | .4          |  | Third Amendment to Joint Venture Agreement, dated
    April 2001, filed as Exhibit 10.4 to the Companys
    Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.                                                                                                                                                                                                                           
|        | 10 | .5          |  | Fourth Amendment to Joint Venture Agreement,
    dated March 20, 2002, filed as Exhibit 10.5 to the
    Companys Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.                                                                                                                                                                                                                      
|        | 10 | .6          |  | Distribution Agreement, dated March 1, 2002,
    between CTI PET Systems, Inc. and Siemens Medical Solutions USA,
    Inc., filed as Exhibit 10.6 to the Companys
    Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference. (The
    Company has been granted confidential treatment with respect to
    certain portions of this Exhibit.)                                                 
|        | 10 | .7          |  | Product Supply Agreement, dated December 7,
    1999, among CTI, Inc., P.E.T.Net Pharmaceutical Services, Inc.
    and Cambridge Isotope Laboratories, Inc., filed as
    Exhibit 10.10 to the Companys Registration Statement
    on Form S-1 (Reg. No. 333-85714), and incorporated
    herein by reference. (The Company has been granted confidential
    treatment with respect to certain portions of this Exhibit.)               
|        | 10 | .8          |  | Master Purchase Agreement, dated
    September 1, 1999, by and between CPS, Inc. and PHOTONIS,
    filed as Exhibit 10.13 to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference. (The Company has been granted
    confidential treatment with respect to certain portions of this
    Exhibit.)                                                                         

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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .9          |  | Master Purchase Agreement, dated
    September 1, 1999, between CPS, Inc. and Hamamatsu
    Corporation, filed as Exhibit 10.14 to the Companys
    Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference. (The
    Company has been granted confidential treatment with respect to
    certain portions of this Exhibit.)                                     
|        | 10 | .10         |  | Crystal Production and Technology Transfer
    Agreement, dated April 1, 1999 between Crystal Photonics,
    Inc. and CTI, Inc., filed as Exhibit 10.15 to the
    Companys Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference. (The
    Company has been granted confidential treatment with respect to
    certain portions of this Exhibit.)             
|        | 10 | .11         |  | Exclusive Patent and Technology License
    Agreement, dated February 1, 1995, between Schlumberger
    Technology Corporation and CTI, Inc., filed as
    Exhibit 10.16 to the Companys Registration Statement
    on Form S-1 (Reg. No. 333-85714), and incorporated
    herein by reference. (The Company has been granted confidential
    treatment with respect to certain portions of this Exhibit.)
|        | 10 | .12         |  | Agreement, dated January 3, 2002, between
    P.E.T.Net Pharmaceuticals, Inc. and ISOTEC, INC., filed as
    Exhibit 10.20 to the Companys Registration Statement
    on Form S-1 (Reg. No. 333-85714), and incorporated
    herein by reference. (The Company has been granted confidential
    treatment with respect to certain portions of this Exhibit.)                                              
|        | 10 | .13         |  | Agreement, dated March 9, 2000, between CTI
    Cyclotron Systems and Rotem Industries Ltd., filed as
    Exhibit 10.50 to the Companys Registration Statement
    on Form S-1 (Reg. No. 333-85714), and incorporated
    herein by reference. (The Company has been granted confidential
    treatment with respect to certain portions of this Exhibit.)                                                 
|        | 10 | .14         |  | Supply Agreement, dated January 1, 2000,
    filed as Exhibit 10.51 to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference. (The Company has been granted
    confidential treatment with respect to certain portions of this
    Exhibit.)                                                                                                 
|        | 10 | .15         |  | Amended and Restated Credit Agreement, effective
    September 30, 2002, among CTI Molecular Imaging, Inc., all
    of its present and future subsidiaries, the Lenders identified
    therein and SunTrust Bank.                                                                                                                                                                                           
|        | 10 | .16         |  | Loan Agreement, dated August 1, 1988,
    between The Industrial Development Board of Blount County,
    Tennessee and Advanced Crystal Technology, Inc., filed as
    Exhibit 10.21 to the Companys Registration Statement
    on Form S-1 (Reg. No. 333-85714), and incorporated
    herein by reference.                                                                                                
|        | 10 | .17         |  | Loan Agreement, dated January 13, 2000,
    between SunTrust Bank, East Tennessee and CTI, Inc., filed as
    Exhibit 10.22 to the Companys Registration Statement
    on Form S-1 (Reg. No. 333-85714), and incorporated
    herein by reference.                                                                                                                                                         
|        | 10 | .18         |  | Construction Loan Agreement, dated
    August 16, 2001, between SunTrust Bank and CTI, Inc., filed
    as Exhibit 10.23 to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference.                                                                                                                                                             
|        | 10 | .19         |  | Change in Control Agreement, dated May 15,
    2002, between CTI, Inc. and Terry D. Douglass, filed as
    Exhibit 10.40 to the Companys Registration Statement
    on Form S-1 (Reg. No. 333-85714), and incorporated
    herein by reference.                                                                                                                                                            
|        | 10 | .20         |  | Change in Control Agreement, dated May 15,
    2002, between CTI, Inc. and Ronald Nutt, filed as
    Exhibit 10.41 to the Companys Registration Statement
    on Form S-1 (File No. 333-85714), and incorporated
    herein by reference.                                                                                                                                                                  
|        | 10 | .21*        |  | Amendment dated December 9, 2003, to Change
    in Control Agreement between CTI Molecular Imaging, Inc. and
    Ronald Nutt.                                                                                                                                                                                                                                                                               
|        | 10 | .22         |  | Change in Control Agreement, dated May 15,
    2002, between CTI, Inc. and David Gill, filed as
    Exhibit 10.42 to the Companys Registration Statement
    on Form S-1 (Reg. No. 333-85714), and incorporated
    herein by reference.                                                                                                                                                                   
|        | 10 | .23*        |  | Change in Control Agreement dated
    December 9, 2003, between CTI Molecular Imaging, Inc. and
    Cliffreda W. Gilreath.                                                                                                                                                                                                                                                                                  

71



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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                               
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .24         |  | Change in Control Agreement, dated
    December 17, 2002, between CTI Molecular Imaging, Inc. and
    Thomas J. Hook, filed as Exhibit 10.24 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended September 30, 2002 (File No. 000-49867),
    and incorporated herein by reference.                                                                 
|        | 10 | .25         |  | Change in Control Agreement, dated
    December 17, 2002, between CTI Molecular Imaging, Inc. and
    R. Gregory Brophy, filed as Exhibit 10.25 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended September 30, 2002 (File No. 000-49867),
    and incorporated herein by reference.                                                              
|        | 10 | .26         |  | Form of Indemnity Agreement between CTI, Inc. and
    directors and certain officers, filed as Exhibit 10.46 to the
    Companys Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.                                                                                                                                          
|        | 10 | .27        |  | Letter Agreement, dated January 11, 2002,
    between CTI, Inc. and David N. Gill, filed as Exhibit 10.18 to
    the Companys Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.                                                                                                                                             
|        | 10 | .28        |  | Letter Agreement, dated July 19, 2002
    between CTI Molecular Imaging, Inc. and Thomas J. Hook, filed as
    Exhibit 10.29 to the Companys Annual Report on
    Form 10-K for the fiscal year ended September 30, 2002
    (File No. 000-49867), and incorporated herein by reference.                                                                                     
|        | 10 | .29        |  | Letter Agreement, dated August 02, 2002
    between CTI Molecular Imaging, Inc. and R. Gregory Brophy, filed
    as Exhibit 10.30 to the Companys Annual Report on
    Form 10-K for the fiscal year ended September 30, 2002
    (File No. 000-49867), and incorporated herein by reference.                                                                                
|        | 10 | .30        |  | CTI, Inc. 1998 Restated Incentive Stock Option
    Plan, filed as Exhibit 10.11 to the Companys
    Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.                                                                                                                                                                       
|        | 10 | .31        |  | Form of Incentive Stock Option Agreement under
    the CTI, Inc. 1998 Restated Incentive Stock Option Plan, filed
    as Exhibit 10.12 to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference.                                                                                                                
|        | 10 | .32        |  | CTI Molecular Imaging, Inc. 2002 Long-Term
    Incentive Plan, filed as Exhibit 10.24 to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2002 (File No. 000-49867), and
    incorporated herein by reference.                                                                                                                              
|        | 10 | .33        |  | Form of Incentive Stock Option Agreement under
    the CTI Molecular Imaging, Inc. 2002 Long-Term Incentive Plan,
    filed as Exhibit 10.34 to the Companys Annual Report
    on Form 10-K for the fiscal year ended September 30,
    2002 (File No. 000-49867), and incorporated herein by
    reference.                                                                 
|        | 10 | .34        |  | Form of Restricted Stock Agreement under the CTI
    Molecular Imaging, Inc. 2002 Long-Term Incentive Plan, filed as
    Exhibit 10.35 to the Companys Annual Report on
    Form 10-K for the fiscal year ended September 30, 2002
    (File No. 000-49867), and incorporated herein by reference.                                                                           
|        | 10 | .35        |  | CTI Molecular Imaging, Inc. 2002 Employee Stock
    Purchase Plan, filed as Exhibit 10.17 to the Companys
    Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.                                                                                                                                                             
|        | 10 | .36         |  | Stock Purchase and Stockholders Agreement,
    dated January 7, 1988, by and among CTI Group, Inc., CTI,
    Inc., Terry D. Douglass, Ronald Nutt, Michael C. Crabtree, J.
    Kelly Milam and Siemens Gammasonics, Inc. , filed as
    Exhibit 10.30 to the Companys Registration Statement
    on Form S-1 (Reg. No. 333-85714), and incorporated
    herein by reference.
|        | 10 | .37         |  | Stock Restriction and Non-Competition Agreement,
    dated April 9, 2001, between CTI, Inc. and Terry Douglass,
    filed as Exhibit 10.31 to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference.                                                                                                            
|        | 10 | .38         |  | Stock Restriction and Non-Competition Agreement,
    dated April 9, 2001, between CTI, Inc. and Ronald Nutt,
    filed as Exhibit 10.32 to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference.                                                                                                               

72



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                         
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .39         |  | Shareholder Agreement, dated June 30, 1991,
    between CTI, Inc. and Ronald Nutt, filed as Exhibit 10.35
    to the Companys Registration Statement on Form S-1
    (Reg. No. 333-85714), and incorporated herein by reference.                                       
|        | 10 | .40         |  | Shareholder Agreement, dated December 20,
    1996, between CTI, Inc. and Terry Douglass, filed as
    Exhibit 10.37 to the Companys Registration Statement
    on Form S-1 (Reg. No. 333-85714), and incorporated
    herein by reference.                            
|        | 10 | .41         |  | Registration Rights Agreement, dated
    September 30, 1999, between CTI, Inc. and First Union
    Capital Partners, Inc., filed as Exhibit 10.9 to the
    Companys Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.
|        | 10 | .42         |  | Warrant to Purchase 32,000 shares of common stock
    between CTI, Inc. and Jordan & Davis Partners, LLC, filed as
    Exhibit 10.47 to the Companys Registration Statement
    on Form S-1 (Reg. No. 333-85714), and incorporated
    herein by reference.            
|        | 10 | .43         |  | Warrant to Purchase 40,000 shares of common stock
    between CTI, Inc. and Jordan & Davis Partners, LLC, filed as
    Exhibit 10.48 to the Companys Registration Statement
    on Form S-1 (Reg. No. 333-85714), and incorporated
    herein by reference.            
|        | 10 | .44         |  | Warrant to Purchase 4,000 shares of common stock
    between CTI, Inc. and Gene McGrevin, filed as Exhibit 10.49
    to the Companys Registration Statement on Form S-1
    (Reg. No. 333-85714), and incorporated herein by reference.                                
|        | 10 | .45         |  | Stock Repurchase Agreement, dated March 15,
    2002, between CTI, Inc. and S.I.E. Netherlands B.V., filed as
    Exhibit 10.52 to the Companys Registration Statement
    on Form S-1 (Reg. No. 333-85714), and incorporated
    herein by reference.                 
|        | 10 | .46         |  | Stock Repurchase Agreement, dated March 15,
    2002, between CTI, Inc. and Seiko Instruments, Inc., filed as
    Exhibit 10.53 to the Companys Registration Statement
    on Form S-1 (Reg. No. 333-85714), and incorporated
    herein by reference.                 
|        | 10 | .47*       |  | Supply Agreement, dated August 1, 2003. (The
    Company has requested confidential treatment with respect to
    certain portions of this Exhibit.)                                                                                                                    
|        | 10 | .48*        |  | Lease Agreement, dated as of November 1,
    2002, between CTI Molecular Imaging, Inc. and CTI PET Systems,
    Inc.                                                                                                                                                    
|        | 10 | .49*        |  | Code of Business Conduct and Ethics of CTI
    Molecular Imaging, Inc.                                                                                                                                                                                                  
|        | 21 | .1*         |  | Subsidiaries of the Company.                                                                                                                                                                                                                                            
|        | 23 | .1*         |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                  
|        | 31 | .1*         |  | Certification pursuant to
    Rule 13a-14(a)/15d-14(a), as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                        
|        | 31 | .2*         |  | Certification pursuant to
    Rule 13a-14(a)/15d-14(a), as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                        
|        | 32 | .1**        |  | Certification pursuant to 18 U.S.C. §1350,
    as adopted pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002                                                                                                                                                 
|        | 32 | .2**        |  | Certification pursuant to 18 U.S.C. §1350,
    as adopted pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002                                                                                                                                                 



---



|  |                               
|- | ------------------------------
|* | Filed with this Annual Report.



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Filed with this Annual Report. In accordance with
    Release No. 34-47551, this exhibit is hereby furnished to
    the SEC as an accompanying document and is not to be deemed
    filed for purposes of Section 18 of the
    Securities Exchange Act of 1934, as amended, or otherwise
    subject to the liabilities of that section, nor shall it be
    deemed incorporated by reference into any filing under the
    Securities Act of 1933, as amended.



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  Management compensation contract or plan.                                                                                                               
|
| |  The Company agrees by this filing to
    supplementally furnish to the SEC, upon request, a copy of the
    exhibits and/or schedules to this agreement.

73



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##### Table of Contents





REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of CTI
Molecular Imaging, Inc.:

In our opinion, the consolidated financial
statements listed in the accompanying index present fairly, in
all material respects, the financial position of CTI Molecular
Imaging, Inc. and its subsidiaries at September 30, 2003
and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended
September 30, 2003, in conformity with accounting
principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule
listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Companys
management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

/s/ PricewaterhouseCoopers LLP

December 15, 2003

Atlanta, Georgia


F-1



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                          |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |        |         |         |         | 
|------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------------------------------------ | ------------- | ------- | ------- | ------ | ------- | ------- | ------- | 
|                                                                          |                                                                                                                                                                                                                                                 | September 30,               |                                            | September 30,
|                                                                          |                                                                                                                                                                                                                                                 | 2003                        |                                            | 2002         
|                                                                          |                                                                                                                                                                                                                                                 |                             |                                            |              
|                                                                          |                                                                                                                                                                                                                                                 |                            
|                                                                          |                                                                                                                                                                                                                                                 | (In thousands, except share
|                                                                          |                                                                                                                                                                                                                                                 | and per share data)        
|ASSETS                                                                   
|Current assets:                                                           |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |        |        
|                                                                          | Cash and cash equivalents                                                                                                                                                                                                                       |                             | $                                          | 49,978        |         |         | $      | 84,553  |        
|                                                                          | Marketable securities                                                                                                                                                                                                                           |                             |                                            |              |         |         |        | 6,704   |        
|                                                                          | Accounts receivable  trade, less
    allowance for doubtful accounts of $3,475 at September 30,
    2003 and $1,576 at September 30, 2002                                                                                                      |                             |                                            | 72,240        |         |         |        | 33,817  |        
|                                                                          | Accounts receivable  related party,
    less allowance for doubtful accounts of $186 at
    September 30, 2003 and $242 at September 30, 2002                                                                                                  |                             |                                            | 42,430        |         |         |        | 39,918  |        
|                                                                          | Inventories                                                                                                                                                                                                                                     |                             |                                            | 70,852        |         |         |        | 69,295  |        
|                                                                          | Deferred tax asset                                                                                                                                                                                                                              |                             |                                            | 17,751        |         |         |        | 9,827   |        
|                                                                          | Prepaid expenses and other current assets                                                                                                                                                                                                       |                             |                                            | 7,691         |         |         |        | 6,112   |        
|                                                                          |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |        |        
|                                                                          |                                                                                                                                                                                                                                                 |                             | Total current assets                       |               |         | 260,942 |        |         |         | 250,226 | 
|                                                                          |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |        |        
|Property and equipment, net                                               |                                                                                                                                                                                                                                                 |                             | 107,293                                    |               |         |         | 77,667 |        
|Deferred tax asset                                                        |                                                                                                                                                                                                                                                 |                             |                                           |               |         |         | 187    |        
|Goodwill                                                                  |                                                                                                                                                                                                                                                 |                             | 25,040                                     |               |         |         | 12,385 |        
|Other assets                                                              |                                                                                                                                                                                                                                                 |                             | 31,773                                     |               |         |         | 11,244 |        
|                                                                          |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |        |        
|                                                                          |                                                                                                                                                                                                                                                 |                             | Total assets                               |               | $       | 425,048 |        |         | $       | 351,709 | 
|                                                                          |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |        |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                 
|Current liabilities:                                                      |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |        |        
|                                                                          | Cash management clearing                                                                                                                                                                                                                        |                             | $                                          | 12,017        |         |         | $      | 2,121   |        
|                                                                          | Accounts payable                                                                                                                                                                                                                                |                             |                                            | 34,490        |         |         |        | 26,591  |        
|                                                                          | Current maturities of long-term debt and capital
    lease obligations                                                                                                                                                                          |                             |                                            | 5,501         |         |         |        | 4,008   |        
|                                                                          | Accrued payroll and benefits                                                                                                                                                                                                                    |                             |                                            | 16,708        |         |         |        | 12,914  |        
|                                                                          | Customer advances  trade                                                                                                                                                                                                                       |                             |                                            | 6,537         |         |         |        | 16,487  |        
|                                                                          | Customer advances  related party                                                                                                                                                                                                               |                             |                                            | 326           |         |         |        | 1,214   |        
|                                                                          | Accrued warranty expense                                                                                                                                                                                                                        |                             |                                            | 5,262         |         |         |        | 3,740   |        
|                                                                          | Income taxes payable                                                                                                                                                                                                                            |                             |                                            | 3,724         |         |         |        | 4,552   |        
|                                                                          | Other accrued expenses                                                                                                                                                                                                                          |                             |                                            | 3,884         |         |         |        | 2,339   |        
|                                                                          |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |        |        
|                                                                          |                                                                                                                                                                                                                                                 |                             | Total current liabilities                  |               |         | 88,449  |        |         |         | 73,966  | 
|                                                                          |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |        |        
|Deferred revenues                                                         |                                                                                                                                                                                                                                                 |                             | 2,332                                      |               |         |         | 1,420  |        
|Deferred tax liability                                                    |                                                                                                                                                                                                                                                 |                             | 8,999                                      |               |         |         |       |        
|Long-term debt and capital lease obligations,
    less current maturities |                                                                                                                                                                                                                                                 |                             | 18,688                                     |               |         |         | 26,730 |        
|                                                                          |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |        |        
|                                                                          |                                                                                                                                                                                                                                                 |                             | Total liabilities                          |               |         | 118,468 |        |         |         | 102,116 | 
|                                                                          |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |        |        
|Commitments and contingencies (Note 5)                                    |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |        |        
|Minority interest                                                         |                                                                                                                                                                                                                                                 |                             | 46,727                                     |               |         |         | 30,104 |        
|Shareholders equity:                                                     |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |        |        
|                                                                          | Common stock, $.01 par value;
    500,000,000 shares authorized, 46,290,459 shares
    issued and 44,458,494 shares outstanding at
    September 30, 2003; 44,048,117 shares issued and
    42,216,152 shares outstanding at September 30, 2002 |                             |                                            | 463           |         |         |        | 440     |        
|                                                                          | Additional paid-in capital                                                                                                                                                                                                                      |                             |                                            | 243,400       |         |         |        | 226,910 |        
|                                                                          | Retained earnings                                                                                                                                                                                                                               |                             |                                            | 21,207        |         |         |        | 644     |        
|                                                                          | Unearned compensation                                                                                                                                                                                                                           |                             |                                            | (4,516        | )       |         |        | (7,526  | )      
|                                                                          | Other comprehensive income  currency
    translation adjustment                                                                                                                                                                                |                             |                                            | 262           |         |         |        | (16     | )      
|                                                                          | Treasury stock, at cost, 1,831,965 shares                                                                                                                                                                                                       |                             |                                            | (963          | )       |         |        | (963    | )      
|                                                                          |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |        |        
|                                                                          |                                                                                                                                                                                                                                                 | Total shareholders equity  |                                            |               | 259,853 |         |        |         | 219,489 |        
|                                                                          |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |        |        
|                                                                          |                                                                                                                                                                                                                                                 |                             | Total liabilities and shareholders equity |               | $       | 425,048 |        |         | $       | 351,709 | 
|                                                                          |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |        |        

The accompanying notes are an integral part of
these financial statements.

F-2



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |            |        | 
|------------------------------------------------------------- | ------------------------------------------------ | --------------------------- | ------- | ---------- | ------- | ---- | ------- | ---------- | ------- | - | ------- | ---------- | ------ | 
|                                                              |                                                  |                            
|                                                              |                                                  | Year Ended September 30,   
|                                                              |                                                  |                            
|                                                              |                                                  | 2003                        |         | 2002       |         | 2001
|                                                              |                                                  |                             |         |            |         |     
|                                                              |                                                  |                            
|                                                              |                                                  | (In thousands, except share
|                                                              |                                                  | and per share data)        
|Revenues(1)                                                   |                                                  | $                           | 362,289 |            |         | $    | 258,395 |            |         | $ | 188,877 |           
|Cost of revenues(2),(3)                                       |                                                  |                             | 219,127 |            |         |      | 150,654 |            |         |   | 110,249 |           
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|                                                              |                                                  | Gross margin                |         |            | 143,162 |      |         |            | 107,741 |   |         |            | 78,628 | 
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|Operating expenses:                                           |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|                                                              | Selling, general and administrative expenses(3)  |                             |         | 52,221     |         |      |         | 37,069     |         |   |         | 29,433     |       
|                                                              | Research and development expenses(3)             |                             |         | 29,931     |         |      |         | 21,658     |         |   |         | 18,985     |       
|                                                              | Write-off of in process research and development |                             |         | 1,380      |         |      |         |           |         |   |         |           |       
|                                                              | Stock-based compensation expense                 |                             |         | 1,909      |         |      |         | 12,250     |         |   |         | 538        |       
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|                                                              |                                                  | Total operating expenses    |         |            | 85,441  |      |         |            | 70,977  |   |         |            | 48,956 | 
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|Income from operations                                        |                                                  |                             | 57,721  |            |         |      | 36,764  |            |         |   | 29,672  |           
|Warrant liability mark to market expense                      |                                                  |                             |        |            |         |      | 8,902   |            |         |   | 3,921   |           
|Interest expense, net                                         |                                                  |                             | 804     |            |         |      | 4,148   |            |         |   | 3,767   |           
|Other income                                                  |                                                  |                             | (1,968  | )          |         |      | (426    | )          |         |   | (428    | )         
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|Income before income taxes and minority interest              |                                                  |                             | 58,885  |            |         |      | 24,140  |            |         |   | 22,412  |           
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|Provision (benefit) for income taxes:                         |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|                                                              | Current                                          |                             |         | 18,545     |         |      |         | 15,544     |         |   |         | 8,847      |       
|                                                              | Deferred                                         |                             |         | 4,390      |         |      |         | (954       | )       |   |         | 1,083      |       
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|                                                              |                                                  |                             | 22,935  |            |         |      | 14,590  |            |         |   | 9,930   |           
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|Income before minority interest                               |                                                  |                             | 35,950  |            |         |      | 9,550   |            |         |   | 12,482  |           
|Amount applicable to minority interest, net of
    taxes      |                                                  |                             | 15,387  |            |         |      | 12,969  |            |         |   | 6,366   |           
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|Net income (loss)                                             |                                                  |                             | 20,563  |            |         |      | (3,419  | )          |         |   | 6,116   |           
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|Accretion of preferred stocks                                 |                                                  |                             |        |            |         |      | 3,544   |            |         |   | 653     |           
|Dividends on preferred stocks                                 |                                                  |                             |        |            |         |      | 1,120   |            |         |   | 1,400   |           
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|Net income (loss) attributable to common
    shareholders     |                                                  | $                           | 20,563  |            |         | $    | (8,083  | )          |         | $ | 4,063   |           
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|Earnings (loss) per share (Note 2):                           |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|                                                              | Basic                                            |                             | $       | 0.47       |         |      | $       | (0.25      | )       |   | $       | 0.15       |       
|                                                              | Diluted                                          |                             | $       | 0.44       |         |      | $       | (0.25      | )       |   | $       | 0.13       |       
|Weighted average shares:                                      |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|                                                              | Basic                                            |                             |         | 43,351,390 |         |      |         | 32,497,070 |         |   |         | 27,860,086 |       
|                                                              | Diluted                                          |                             |         | 46,457,355 |         |      |         | 32,497,070 |         |   |         | 31,340,041 |       
|                                                             
|(1) Includes revenues through related parties                 |                                                  | $                           | 143,856 |            |         | $    | 128,233 |            |         | $ | 120,730 |           
|(2) Includes cost of revenues through
    related parties     |                                                  | $                           | 94,490  |            |         | $    | 75,209  |            |         | $ | 60,609  |           
|(3) Excludes stock-based compensation
    expense as follows: |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|                                                              | Cost of revenues                                 |                             | $       | 229        |         |      | $       | 1,026      |         |   | $       |           |       
|                                                              | Selling, general and administrative expenses     |                             |         | 1,288      |         |      |         | 9,578      |         |   |         | 533        |       
|                                                              | Research and development expenses                |                             |         | 392        |         |      |         | 1,646      |         |   |         | 5          |       
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|                                                              |                                                  | $                           | 1,909   |            |         | $    | 12,250  |            |         | $ | 538     |           
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           

The accompanying notes are an integral part of
these financial statements.

F-3



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY

|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |      |     |  |   |      |      |   |   |         |         |  
|------------------------------ | --------------------------------------------------------------------------------- | ----------------------------------------------- | ---------- | ---------- | - | ------- | --- | -------- | - | ------------ | ------- | ------------- | - | -------- | ------ | ------------- | - | - | ------ | ------ | - | - | ---- | --- |  | - | ---- | ---- | - | - | ------- | ------- | -
|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |         
|                               |                                                                                   | Common Stock                                    |            |            |   |         |     |          |   |              |         |               |   |         
|                               |                                                                                   |                                                 |            | Additional |   |         |     |          |   | Other        |         |               |   | Total   
|                               |                                                                                   | Number of                                       |            |            |   | Paid-In |     | Retained |   | Unearned     |         | Comprehensive |   | Treasury |        | Shareholders
|                               |                                                                                   | Shares                                          |            | Amount     |   | Capital |     | Earnings |   | Compensation |         | Income        |   | Stock    |        | Equity       
|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |              
|                               |                                                                                   |                                                
|                               |                                                                                   | (In thousands, except share and per share data)
|Balances at September 30, 2000 |                                                                                   |                                                 | 27,535,814 |            |   | $       | 275 |          |   | $            | 8,767   |               |   | $        |       |               |   | $ |       |        |   | $ | (311 | )   |  | $ | (621 | )    |   | $ | 8,110   |        
|                               | Issued common stock upon exercise of stock options                                |                                                 |            | 72,846     |   |         |     | 1        |   |              |         | 64            |   |          |        |              |   |   |        |       |   |   |      |    |  |   |      |     |   |   |         | 65      |  
|                               | Purchase and retirement of common stock                                           |                                                 |            | (102,115   | ) |         |     | (1       | ) |              |         | (226          | ) |          |        |              |   |   |        |       |   |   |      |    |  |   |      |     |   |   |         | (227    | )
|                               | Issuance of common stock for remaining interest
    in PETNET                     |                                                 |            | 3,193,024  |   |         |     | 32       |   |              |         | 11,437        |   |          |        |              |   |   |        |       |   |   |      |    |  |   |      |     |   |   |         | 11,469  |  
|                               | Issuance of options to purchase 128,000 shares of
    common stock                |                                                 |            |           |   |         |     |         |   |              |         | 420           |   |          |        |              |   |   |        |       |   |   |      |    |  |   |      |     |   |   |         | 420     |  
|                               | Translation adjustment from foreign functional
    currency to reporting currency |                                                 |            |           |   |         |     |         |   |              |         |              |   |          |        |              |   |   |        |       |   |   |      | 257 |  |   |      |     |   |   |         | 257     |  
|                               | Net income                                                                        |                                                 |            |           |   |         |     |         |   |              |         |              |   |          |        | 6,116         |   |   |        |       |   |   |      |    |  |   |      |     |   |   |         | 6,116   |  
|                               | Dividends accrued and paid on redeemable
    preferred stock                      |                                                 |            |           |   |         |     |         |   |              |         |              |   |          |        | (1,400        | ) |   |        |       |   |   |      |    |  |   |      |     |   |   |         | (1,400  | )
|                               | Accretion of preferred stock                                                      |                                                 |            |           |   |         |     |         |   |              |         |              |   |          |        | (653          | ) |   |        |       |   |   |      |    |  |   |      |     |   |   |         | (653    | )
|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |      |     |  |   |      |      |   |   |         |        
|Balances at September 30, 2001 |                                                                                   |                                                 | 30,699,569 |            |   |         | 307 |          |   |              | 20,462  |               |   |          | 4,063  |               |   |   |       |        |   |   | (54  | )   |  |   | (621 | )    |   |   | 24,157  |        
|                               | Issued common stock upon exercise of stock options                                |                                                 |            | 1,390,650  |   |         |     | 14       |   |              |         | 4,721         |   |          |        |              |   |   |        |       |   |   |      |    |  |   |      |     |   |   |         | 4,735   |  
|                               | Issued common stock upon exercise of warrant                                      |                                                 |            | 2,446,563  |   |         |     | 24       |   |              |         | 20,356        |   |          |        |              |   |   |        |       |   |   |      |    |  |   |      |     |   |   |         | 20,380  |  
|                               | Issued common stock options in lieu of
    compensation                           |                                                 |            | 21,440     |   |         |     |         |   |              |         | 367           |   |          |        |              |   |   |        | (253   | ) |   |      |    |  |   |      |     |   |   |         | 114     |  
|                               | Issued restricted common stock                                                    |                                                 |            | 216,395    |   |         |     | 2        |   |              |         | 3,731         |   |          |        |              |   |   |        | (3,724 | ) |   |      |    |  |   |      |     |   |   |         | 9       |  
|                               | Purchase and retirement of common stock                                           |                                                 |            | (3,054,500 | ) |         |     | (30      | ) |              |         | (12,219       | ) |          |        |              |   |   |        |       |   |   |      |    |  |   |      | (342 | ) |   |         | (12,591 | )
|                               | Proceeds from initial public offering                                             |                                                 |            | 11,048,000 |   |         |     | 110      |   |              |         | 171,387       |   |          |        |              |   |   |        |       |   |   |      |    |  |   |      |     |   |   |         | 171,497 |  
|                               | Conversion of preferred stock to common stock                                     |                                                 |            | 1,280,000  |   |         |     | 13       |   |              |         | 6,767         |   |          |        |              |   |   |        |       |   |   |      |    |  |   |      |     |   |   |         | 6,780   |  
|                               | Issued incentive stock options to employees                                       |                                                 |            |           |   |         |     |         |   |              |         | 15,679        |   |          |        |              |   |   |        | (4,441 | ) |   |      |    |  |   |      |     |   |   |         | 11,238  |  
|                               | Amortization of unearned compensation                                             |                                                 |            |           |   |         |     |         |   |              |         |              |   |          |        |              |   |   |        | 892    |   |   |      |    |  |   |      |     |   |   |         | 892     |  
|                               | Tax benefits realized from exercises of stock
    options                         |                                                 |            |           |   |         |     |         |   |              |         | 323           |   |          |        |              |   |   |        |       |   |   |      |    |  |   |      |     |   |   |         | 323     |  
|                               | Translation adjustment from foreign functional
    currency to reporting currency |                                                 |            |           |   |         |     |         |   |              |         |              |   |          |        |              |   |   |        |       |   |   |      | 38  |  |   |      |     |   |   |         | 38      |  
|                               | Net loss                                                                          |                                                 |            |           |   |         |     |         |   |              |         |              |   |          |        | (3,419        | ) |   |        |       |   |   |      |    |  |   |      |     |   |   |         | (3,419  | )
|                               | Dividends accrued and paid on preferred stock                                     |                                                 |            |           |   |         |     |         |   |              |         | (1,120        | ) |          |        |              |   |   |        |       |   |   |      |    |  |   |      |     |   |   |         | (1,120  | )
|Accretion of preferred stock   |                                                                                   |                                                 |           |            |   |         |    |          |   |              | (3,544  | )             |   |          |       |               |   |   |       |        |   |   |     |     |  |   |     |      |   |   | (3,544  | )      
|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |      |     |  |   |      |      |   |   |         |        
|Balances at September 30, 2002 |                                                                                   |                                                 | 44,048,117 |            |   |         | 440 |          |   |              | 226,910 |               |   |          | 644    |               |   |   | (7,526 | )      |   |   | (16  | )   |  |   | (963 | )    |   |   | 219,489 |        
|                               | Issued common stock upon exercise of stock options                                |                                                 |            | 2,060,413  |   |         |     | 21       |   |              |         | 5,395         |   |          |        |              |   |   |        |       |   |   |      |    |  |   |      |     |   |   |         | 5,416   |  
|                               | Proceeds from employee stock purchase plan                                        |                                                 |            | 152,474    |   |         |     | 2        |   |              |         | 2,290         |   |          |        |              |   |   |        |       |   |   |      |    |  |   |      |     |   |   |         | 2,292   |  
|                               | Issued restricted common stock                                                    |                                                 |            | 10,000     |   |         |     |         |   |              |         | 178           |   |          |        |              |   |   |        | (178   | ) |   |      |    |  |   |      |     |   |   |         |        |  
|                               | Issued unrestricted common stock                                                  |                                                 |            | 19,455     |   |         |     |         |   |              |         | 277           |   |          |        |              |   |   |        |       |   |   |      |    |  |   |      |     |   |   |         | 277     |  
|                               | Forfeitures of common stock options                                               |                                                 |            |           |   |         |     |         |   |              |         | (1,305        | ) |          |        |              |   |   |        | 1,305  |   |   |      |    |  |   |      |     |   |   |         |        |  
|                               | Amortization of unearned compensation                                             |                                                 |            |           |   |         |     |         |   |              |         |              |   |          |        |              |   |   |        | 1,883  |   |   |      |    |  |   |      |     |   |   |         | 1,883   |  
|                               | Tax benefits realized from exercises of stock
    options                         |                                                 |            |           |   |         |     |         |   |              |         | 9,655         |   |          |        |              |   |   |        |       |   |   |      |    |  |   |      |     |   |   |         | 9,655   |  
|                               | Translation adjustment from foreign functional
    currency to reporting currency |                                                 |            |           |   |         |     |         |   |              |         |              |   |          |        |              |   |   |        |       |   |   |      | 278 |  |   |      |     |   |   |         | 278     |  
|                               | Net income                                                                        |                                                 |            |           |   |         |     |         |   |              |         |              |   |          |        | 20,563        |   |   |        |       |   |   |      |    |  |   |      |     |   |   |         | 20,563  |  
|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |      |     |  |   |      |      |   |   |         |        
|Balances at September 30, 2003 |                                                                                   |                                                 | 46,290,459 |            |   | $       | 463 |          |   | $            | 243,400 |               |   | $        | 21,207 |               |   | $ | (4,516 | )      |   | $ | 262  |     |  | $ | (963 | )    |   | $ | 259,853 |        
|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |      |     |  |   |      |      |   |   |         |        

The accompanying notes are an integral part of
these financial statements.

F-4



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                           |                                                                                                 |                                                                                              |                                           |                                                         |        |         |         |          |        |         |         |         |       |         |         |  
|-------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------------- | ------ | ------- | ------- | -------- | ------ | ------- | ------- | ------- | ----- | ------- | ------- | -
|                                                                           |                                                                                                 |                                                                                             
|                                                                           |                                                                                                 | Year Ended September 30,                                                                    
|                                                                           |                                                                                                 |                                                                                             
|                                                                           |                                                                                                 | 2003                                                                                         |                                           | 2002                                                    |        | 2001   
|                                                                           |                                                                                                 |                                                                                              |                                           |                                                         |        |        
|                                                                           |                                                                                                 |                                                                                             
|                                                                           |                                                                                                 | (In thousands, except                                                                       
|                                                                           |                                                                                                 | share and per share data)                                                                   
|Cash flows provided by (used in) operating
    activities:                 |                                                                                                 |                                                                                              |                                           |                                                         |        |         |         |          |        |         |         |        
|                                                                           | Net income (loss)                                                                               |                                                                                              | $                                         | 20,563                                                  |        |         | $       | (3,419   | )      |         | $       | 6,116   |      
|                                                                           | Adjustments to reconcile net income to net cash
    provided by (used in) operating activities: |                                                                                              |                                           |                                                         |        |         |         |          |        |         |         |         |      
|                                                                           |                                                                                                 | Minority interest in income of subsidiaries                                                  |                                           |                                                         | 15,387 |         |         |          | 12,969 |         |         |         | 6,366 |        
|                                                                           |                                                                                                 | Depreciation and amortization                                                                |                                           |                                                         | 11,937 |         |         |          | 7,098  |         |         |         | 4,465 |        
|                                                                           |                                                                                                 | Accretion of discount on marketable securities                                               |                                           |                                                         | (59    | )       |         |          |       |         |         |         |      |        
|                                                                           |                                                                                                 | Deferred tax provision (benefit)                                                             |                                           |                                                         | 4,390  |         |         |          | (954   | )       |         |         | 1,083 |        
|                                                                           |                                                                                                 | Provision for bad debts                                                                      |                                           |                                                         | 2,791  |         |         |          | 1,061  |         |         |         | 406   |        
|                                                                           |                                                                                                 | Equity in (income) losses of equity investees                                                |                                           |                                                         | (16    | )       |         |          | (268   | )       |         |         | (757  | )      
|                                                                           |                                                                                                 | Stock-based compensation expense                                                             |                                           |                                                         | 1,909  |         |         |          | 12,250 |         |         |         | 538   |        
|                                                                           |                                                                                                 | Write-off of in process research and development                                             |                                           |                                                         | 1,380  |         |         |          |       |         |         |         |      |        
|                                                                           |                                                                                                 | Tax benefit realized from exercises of employee
    stock options                            |                                           |                                                         | 2,287  |         |         |          | 323    |         |         |         |      |        
|                                                                           |                                                                                                 | Provision to mark to market warrant liability                                                |                                           |                                                         |       |         |         |          | 8,901  |         |         |         | 3,921 |        
|                                                                           |                                                                                                 | Loss on disposal of machinery and equipment                                                  |                                           |                                                         | (8     | )       |         |          | 252    |         |         |         | 41    |        
|                                                                           |                                                                                                 | Changes in operating assets and liabilities, net
    of effects of acquisition of businesses |                                           |                                                         |        |         |         |          |        |         |         |         |       |        
|                                                                           |                                                                                                 |                                                                                              | Accounts receivable                       |                                                         |        | (41,518 | )       |          |        | 2,171   |         |         |       | (25,434 | )      
|                                                                           |                                                                                                 |                                                                                              | Inventories                               |                                                         |        | (631    | )       |          |        | (26,350 | )       |         |       | (6,751  | )      
|                                                                           |                                                                                                 |                                                                                              | Other receivables                         |                                                         |        | 1,365   |         |          |        | 465     |         |         |       | (1,378  | )      
|                                                                           |                                                                                                 |                                                                                              | Prepaid expenses and other current assets |                                                         |        | (237    | )       |          |        | 302     |         |         |       | (2,939  | )      
|                                                                           |                                                                                                 |                                                                                              | Accounts payable                          |                                                         |        | 6,126   |         |          |        | 15,343  |         |         |       | 3,521   |        
|                                                                           |                                                                                                 |                                                                                              | Accrued payroll and benefits              |                                                         |        | 3,745   |         |          |        | 4,117   |         |         |       | 3,446   |        
|                                                                           |                                                                                                 |                                                                                              | Customer advances                         |                                                         |        | (10,838 | )       |          |        | (4,407  | )       |         |       | 662     |        
|                                                                           |                                                                                                 |                                                                                              | Accrued warranty expense                  |                                                         |        | 1,522   |         |          |        | 307     |         |         |       | 1,629   |        
|                                                                           |                                                                                                 |                                                                                              | Income taxes payable                      |                                                         |        | (3,594  | )       |          |        | 1,835   |         |         |       | (2,833  | )      
|                                                                           |                                                                                                 |                                                                                              | Other accrued expenses                    |                                                         |        | 4       |         |          |        | (949    | )       |         |       | (2,986  | )      
|                                                                           |                                                                                                 |                                                                                              |                                           |                                                         |        |         |         |          |        |         |         |        
|                                                                           |                                                                                                 |                                                                                              |                                           | Net cash provided by (used in) operating
    activities |        |         | 16,505  |          |        |         | 31,047  |         |       |         | (10,884 | )
|                                                                           |                                                                                                 |                                                                                              |                                           |                                                         |        |         |         |          |        |         |         |        
|Cash flows used in investing activities:                                   |                                                                                                 |                                                                                              |                                           |                                                         |        |         |         |          |        |         |         |        
|                                                                           | Additions to property and equipment                                                             |                                                                                              |                                           | (36,866                                                 | )      |         |         | (29,433  | )      |         |         | (10,362 | )    
|                                                                           | Purchases of marketable securities                                                              |                                                                                              |                                           | (7,897                                                  | )      |         |         | (6,704   | )      |         |         |        |      
|                                                                           | Proceeds from sales of marketable securities                                                    |                                                                                              |                                           | 14,660                                                  |        |         |         |         |        |         |         |        |      
|                                                                           | Proceeds from the sale of machinery and equipment                                               |                                                                                              |                                           | 564                                                     |        |         |         |         |        |         |         | 665     |      
|                                                                           | Acquisitions of businesses, net of cash acquired                                                |                                                                                              |                                           | (19,588                                                 | )      |         |         |         |        |         |         |        |      
|                                                                           | Additions to other assets                                                                       |                                                                                              |                                           | (5,605                                                  | )      |         |         | (4,209   | )      |         |         | (1,923  | )    
|                                                                           |                                                                                                 |                                                                                              |                                           |                                                         |        |         |         |          |        |         |         |        
|                                                                           |                                                                                                 |                                                                                              |                                           | Net cash used in investing activities                   |        |         | (54,732 | )        |        |         | (40,346 | )       |       |         | (11,620 | )
|                                                                           |                                                                                                 |                                                                                              |                                           |                                                         |        |         |         |          |        |         |         |        
|Cash flows provided by financing activities:                               |                                                                                                 |                                                                                              |                                           |                                                         |        |         |         |          |        |         |         |        
|                                                                           | Increase (decrease) in cash management
    clearing                                             |                                                                                              |                                           | 9,887                                                   |        |         |         | (1,772   | )      |         |         | (552    | )    
|                                                                           | Proceeds from exercise of stock options                                                         |                                                                                              |                                           | 5,416                                                   |        |         |         | 4,735    |        |         |         | 65      |      
|                                                                           | Proceeds from employee stock purchase plan                                                      |                                                                                              |                                           | 2,292                                                   |        |         |         |         |        |         |         |        |      
|                                                                           | Repurchase common stock                                                                         |                                                                                              |                                           |                                                        |        |         |         | (12,249  | )      |         |         | (1,086  | )    
|                                                                           | Proceeds from initial public offering (net of
    costs)                                        |                                                                                              |                                           |                                                        |        |         |         | 171,497  |        |         |         |        |      
|                                                                           | Purchase of treasury stock                                                                      |                                                                                              |                                           |                                                        |        |         |         | (342     | )      |         |         |        |      
|                                                                           | Redemption of preferred stock                                                                   |                                                                                              |                                           |                                                        |        |         |         | (10,000  | )      |         |         |        |      
|                                                                           | Issuance of long-term debt                                                                      |                                                                                              |                                           | 1,698                                                   |        |         |         | 5,364    |        |         |         | 3,128   |      
|                                                                           | Payment of dividends on preferred stock                                                         |                                                                                              |                                           |                                                        |        |         |         | (663     | )      |         |         | (900    | )    
|                                                                           | Unused proceeds from bond issue                                                                 |                                                                                              |                                           |                                                        |        |         |         |         |        |         |         | 2,060   |      
|                                                                           | Principal payments of long-term debt and capital
    lease obligations                          |                                                                                              |                                           | (15,919                                                 | )      |         |         | (20,795  | )      |         |         | (3,594  | )    
|                                                                           | Draws on line of credit                                                                         |                                                                                              |                                           | 60,840                                                  |        |         |         | 148,367  |        |         |         | 105,470 |      
|                                                                           | Payments under line of credit                                                                   |                                                                                              |                                           | (60,840                                                 | )      |         |         | (192,155 | )      |         |         | (81,814 | )    
|                                                                           |                                                                                                 |                                                                                              |                                           |                                                         |        |         |         |          |        |         |         |        
|                                                                           |                                                                                                 |                                                                                              |                                           | Net cash provided by financing activities               |        |         | 3,374   |          |        |         | 91,987  |         |       |         | 22,777  |  
|                                                                           |                                                                                                 |                                                                                              |                                           |                                                         |        |         |         |          |        |         |         |        
|Effect of foreign currency exchange rates on cash
    and cash equivalents |                                                                                                 |                                                                                              | 278                                       |                                                         |        |         | 38      |          |        |         | 257     |        
|                                                                           |                                                                                                 |                                                                                              |                                           |                                                         |        |         |         |          |        |         |         |        
|Net (decrease) increase in cash and cash
    equivalents                   |                                                                                                 |                                                                                              | (34,575                                   | )                                                       |        |         | 82,726  |          |        |         | 530     |        
|Cash and cash equivalents, beginning of year                               |                                                                                                 |                                                                                              | 84,553                                    |                                                         |        |         | 1,827   |          |        |         | 1,297   |        
|                                                                           |                                                                                                 |                                                                                              |                                           |                                                         |        |         |         |          |        |         |         |        
|Cash and cash equivalents, end of year                                     |                                                                                                 | $                                                                                            | 49,978                                    |                                                         |        | $       | 84,553  |          |        | $       | 1,827   |        
|                                                                           |                                                                                                 |                                                                                              |                                           |                                                         |        |         |         |          |        |         |         |        
|Interest paid (net of $319, $170 and $15
    capitalized)                  |                                                                                                 | $                                                                                            | 2,506                                     |                                                         |        | $       | 5,394   |          |        | $       | 3,871   |        
|Income taxes paid                                                          |                                                                                                 |                                                                                              | 18,075                                    |                                                         |        |         | 14,047  |          |        |         | 11,949  |        
|Non cash investing and financing activities:                               |                                                                                                 |                                                                                              |                                           |                                                         |        |         |         |          |        |         |         |        
|                                                                           | Equipment purchased with capital lease obligations                                              |                                                                                              |                                           | 676                                                     |        |         |         | 8,453    |        |         |         | 14,523  |      
|                                                                           | Issuance of notes for acquisition of business                                                   |                                                                                              |                                           | 3,188                                                   |        |         |         |         |        |         |         |        |      
|                                                                           | Debt and capital leases assumed through
    acquisition of business                             |                                                                                              |                                           | 3,806                                                   |        |         |         |         |        |         |         |        |      
|                                                                           | Issuance of common stock shares for acquisition
    of business                                 |                                                                                              |                                           | 251                                                     |        |         |         |         |        |         |         | 11,469  |      

The accompanying notes are an integral part of
these financial statements.

F-5



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(In thousands, except share and per share
data)


1.     Organization
and Presentation

The consolidated financial statements include the
accounts of CTI Molecular Imaging, Inc. (CTI) and all of
its subsidiaries (the Company). All of the subsidiaries are
wholly owned except for CTI PET Systems (CPS) in which CTI
owns 50.1%. The balance of CPS is owned by Siemens Medical
Solutions USA, Inc. (Siemens).

The Companys products and services can be
broadly classified into four principal categories: Positron
Emission Tomography (PET) scanners, radiopharmaceuticals,
detector materials, and other PET products and services. CPS
manages the development, production and sale of the ECAT®
line of PET scanners. PETNET develops, produces and distributes
radiopharmaceuticals. CTI Detector Materials develops and
manufactures detector materials used in PET scanners. CTI
Services includes the direct sale and service by CTI of the
ECAT® line of PET scanners, cyclotron systems and other PET
related products.

The minority shareholders interest in
equity and earnings/losses of CPS and a PETNET subsidiary is
presented separately in the accompanying financial statements.
All significant intercompany balances and transactions have been
eliminated.

2.     Summary of
Significant Accounting Policies

Principles of
Consolidation The Company
periodically enters into arrangements in which it holds a
majority of the equity ownership. In some instances, the Company
also has influence over a majority of the board of directors or
managers. The Company determines accounting for these
investments under Statement of Financial Accounting Standard
(SFAS) No. 94 and Accounting Principles Board
(APB) Opinion No. 18 and, where appropriate, evaluates
its and the minority shareholders participating rights in
accordance with Emerging Issues Task Force (EITF)
Issue 96-16 to determine whether consolidation or equity
method accounting is appropriate in each case.

CTI owns a majority interest in CPS. Under the
terms of the CPS operating agreement, CTI has influence over a
majority of the board of directors. Decisions deemed
participating rights, including approval of operating budgets
and management compensation, are determined by a majority vote
of the board of directors. The board of directors of CPS
consists of two directors selected by CTI, two directors
selected by Siemens, and a fifth director selected by Siemens
from a list of persons selected by CTI. Neither Siemens nor any
member of the board of directors of CPS who was selected or
nominated by Siemens has any substantive participating or veto
rights with regard to significant operating, budget, capital and
other decisions. CPS is consolidated in the Companys
financial statements.

PETNET owns 90.0% and 51.0% interests in
radiopharmacies in Denver and Houston, respectively. Under the
terms of the Denver and Houston radiopharmacy operating
agreements, PETNET has control over all significant operating
decisions and these radiopharmacies are consolidated in our
financial statements. PETNET accounted for the Houston joint
venture under the equity method in the 2002 financial statements
in accordance with EITF 96-16. In March 2003, an amendment to
the joint venture agreement was adopted, which removed the
participating rights of the minority partner. PETNET is now
deemed to have control over the significant operating decisions
of the joint venture and the entity is consolidated in the
Companys financial statements effective March 1, 2003.

In cases where the minority shareholder is deemed
to have veto rights or has equal representation on
the board of directors, the Company accounts for these
investments using the equity method as the Company does not have
control over significant operating decisions. The Company has
invested in four radiopharmacies which are accounted for under
the equity method.

F-6



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The Company is assessing the potential impact of
FASB Interpretation No. 46, Consolidation of Variable
Interest Entities,an interpretation of Accounting Research
Bulletin No. 51. See the recent accounting pronouncements
section of this note.

Revenue
Recognition The Company
records revenues in accordance with the guidance of the
Securities and Exchange Commissions Staff Accounting
Bulletin No. 101(SAB 101), specifically when
persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the contract price is
fixed or determinable, and collectibility is reasonably assured.
No right of return privileges are granted to customers after
shipment.

The Company accounts for sales of scanning
equipment and related installation and associated training
services as multiple-element arrangements. The Company
recognizes revenue for the elements separately as (i) the
sales of the equipment, installation and training services
represent separate earnings processes, (ii) revenue is
allocated among the elements based on the fair value of the
elements and (iii) installation and associated training are
not deemed essential to the functionality of the equipment (as
other companies are available to provide the installation and
associated training services and are sometimes employed by CTI
to do so). The Company determines the value of the equipment and
installation and training services based on sales of the
equipment both with and without installation and training. The
Company derives its revenues from sales of scanners, calibration
sources, spare parts, detector materials, cyclotrons,
radiopharmaceuticals and the provision of services on equipment
sold, including site planning and installation, repair and
maintenance, training, technical support and assistance with
licensing. Revenues derived from the sale of scanners,
calibration sources, spare parts, and detector materials are
recognized upon either shipment or arrival at destination
depending on shipment terms.

Until April 2001, the Companys scanners
were distributed exclusively by Siemens. Under this exclusive
distribution arrangement, the Company received and recognized
revenue in an amount equal to the price to the customer and paid
Siemens a fee to cover its selling, marketing, and distribution
costs. Under this arrangement, the Company set the price to the
end customer, had ultimate liability to the end customer for
product performance, and retained credit risk associated with
sales to end customers. In April 2001, the Company implemented a
new multiple distributor strategy for the sale of scanners by
commencing direct distribution and by pursuing additional
third-party distributor agreements. Following the implementation
of the new multiple distributor strategy, the Company received
and recognized revenue in an amount equal to the price to the
distributor and ceased paying fees to distributors to cover
their selling, marketing, and distribution costs. Under these
agreements, the Company set the transfer price to distributors
who set their own prices to the end customer. The Company does
not bear credit risk associated with the sales made by the
distributors to end customers. Our CTI Services segment
distributes and installs PET scanners manufactured by CPS and
bears the credit risk on sales made directly to end customers.
Under the Companys distribution agreements for scanners,
revenues are recognized upon delivery to our distributors when
all other revenue recognition criteria have been met. Revenues
derived from installing scanning equipment and associated
training are deferred and recognized when installation and
training are complete.

For arrangements with multiple deliverables, such
as scanner and cyclotron sales, we recognize product revenue by
allocating the revenue to each deliverable based on the fair
value of each deliverable in accordance with Emerging Issues
Task Force, or EITF, Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables(EITF 00-21).
This issue is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Due to our
adoption of the provisions of EITF 00-21 the Company can
now, for cyclotron arrangements entered into after July 1,
2003, separate cyclotron equipment from cyclotron installation
services and recognize revenue for cyclotron equipment upon
shipment and for cyclotron installation as services are
performed. Prior to the implementation of EITF 00-21, the
Company recognized revenue for cyclotrons in accordance with
SAB 101 and did not recognize revenue for cyclotron

F-7



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

system sales until installation was complete and
customer acceptance was obtained, as functionality was deemed
essential for cyclotrons. In accordance with transition
provisions of EITF 00-21, revenue recognition for any cyclotron
system sales, which were entered into prior to July 1,
2003, will continue to be accounted for under SAB 101 and
recognition will be deferred until installation is complete and
customer acceptance is obtained. Effective July 1, 2003,
the Company implemented EITF 00-21 and recognized
$2.5 million of revenue on cyclotron sales that would have
been deferred under previous accounting guidance.

Revenues derived from distribution of
radiopharmaceuticals are recognized upon delivery of the
product. Equipment maintenance service contracts are typically
three or more years in duration and related revenues are
recognized ratably over the respective contract periods as the
services are performed. For other services, revenue is
recognized upon completion of the service.

The Companys contracts require customer
payments in advance of revenue recognition. These amounts are
reflected as customer advances and recognized as revenue when
the Company has fulfilled its obligations under the respective
contracts.

Cash and Cash
Equivalents The Company
considers all highly liquid debt instruments with maturity of
three months or less when purchased to be cash equivalents.

Marketable
Securities The Company
considers all highly liquid debt instruments with maturity of
the three months or more when purchased to be marketable
securities. The Companys marketable securities are
classified as available for sale and reported at their fair
value. Interest, dividends, and realized gains and losses on the
sale of marketable securities are included in other expense
(income). Amounts recorded for unrealized gains and losses were
insignificant.

Concentrations of Credit
Risk Financial instruments
that potentially subject the Company to significant
concentrations of credit risk consist of cash and cash
equivalents and trade accounts receivable. Cash and cash
equivalents are deposited with high quality financial
institutions. The Company performs ongoing credit evaluations of
customers financial condition and does not require
collateral to support customer receivables. As noted above,
CPS sales of scanners are made through distribution
agreements with CTI, Siemens and other entities. The
Companys sales through and to Siemens represented 40%, 50%
and 64% of consolidated sales for 2003, 2002 and 2001,
respectively.

Inventories
Inventories are valued at the lower of cost or market, with cost
being determined utilizing the first-in, first-out method.
Cyclotrons, which have been delivered prior to July 1,
2003, but not yet accepted by customers, are included in
inventories.

Property and
Equipment Property and
equipment are recorded at cost and depreciation is provided for
buildings, building and leasehold improvements, and machinery
and equipment using the straight-line method of depreciation
over the estimated useful lives of the related assets ranging
from 30 years for buildings, 7 years for building
improvements, and 3 to 10 years for machinery and
equipment. Assets under capital lease and leasehold improvements
are amortized over their estimated useful lives or the
respective lease terms, whichever is shorter. Maintenance,
repairs and minor replacements are charged to operations as
incurred; major replacements and betterments are capitalized.
The cost of any assets sold or retired and related accumulated
depreciation are removed from the accounts at the time of
disposition, and any resulting profit or loss is reflected in
operations for the period.

Goodwill
Goodwill is presented at cost, net of accumulated amortization.
Effective September 30, 2001, the Company replaced ratable
amortization of goodwill with annual testing of impairment in
accordance with the provisions of Statement of Financial
Accounting Standard No. 142, Goodwill and Intangible
Assets, (SFAS 142). The Company completed the required
annual impairment test and determined that there is no
impairment of its goodwill under SFAS 142 for all fiscal years
presented.

F-8



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Other
Assets Other assets
include purchased technology arising from the Mirada
acquisition, long-term lease receivables, precious metals
utilized in the production of detector materials, other
long-term receivables and investments accounted for under the
equity method. Purchased technology, patents, trademarks are
presented at cost, net of accumulated amortization. Intangible
assets with finite lives are amortized over their estimated
useful lives of 5 to 10 years using the straight-line
method. Other assets consist of the following:

|                     |  |               |        |      |  |   |        | 
|-------------------- |  | ------------- | ------ | ---- |  | - | ------ | 
|                     |  |              
|                     |  | September 30,
|                     |  |              
|                     |  | 2003          |        | 2002
|                     |  |               |        |     
|Purchased technology |  | $             | 14,209 |      |  | $ |       | 
|Lease receivables    |  |               | 8,123  |      |  |   |       | 
|Other                |  |               | 9,441  |      |  |   | 11,244 | 
|                     |  |               |        |      |  |   |        | 
|                     |  | $             | 31,773 |      |  | $ | 11,244 | 
|                     |  |               |        |      |  |   |        | 

Long-Lived
Assets The carrying value
of long-lived assets is periodically reviewed by the Company and
impairment losses, if any, are recognized when the expected
future operating cash flows derived from the assets is less than
their carrying values.

Cash Management
Clearing Outstanding
checks of $12,017 and $2,121 at September 30, 2003 and
2002, respectively, had not been presented for payment to the
bank and are reflected in Cash management clearing
in current liabilities.

Warranty
The Company provides a parts and labor warranty on its products
typically for a period of twelve months after installation.
Estimated costs of this warranty obligation are charged to cost
of revenues at the time revenue is recognized.

Income
Taxes The Company records
deferred tax liabilities and assets for the expected future tax
consequences of events that have been recognized in the
Companys financial statements. Deferred tax liabilities
and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse. Tax credits are
accounted for as a reduction of tax expense in the year in which
the credits reduce taxes payable.

The Company does not recognize deferred income
taxes for temporary differences associated with its investment
in foreign subsidiaries because the differences are essentially
permanent in duration.

Research and
Development Research and
development expenses are expensed as incurred.

Stock-Based
Compensation Statement of
Financial Accounting Standards No. 148 (SFAS 148),
Accounting for Stock-Based Compensation 
Transition and Disclosure, an amendment of FASB Statement
No. 123,amends the disclosure requirements of FASB
Statement No. 123, Accounting for Stock-Based
Compensation (SFAS 123), to require more prominent
disclosure in both annual and interim financial statements
regarding the method of accounting for stock-based employee
compensation and the effect of the method used on reported
results.

The Company applies APB Opinion No. 25,
Accounting for Stock Issued to Employees(APB 25) and
related interpretations in accounting for its stock option
plans. Under APB 25, compensation expense is based on the
difference, if any, on the date of grant, between the fair value
of the Companys stock and the exercise price. Had
compensation expense related to the Companys outstanding
options been

F-9



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

determined based on the fair value at the grant
dates consistent with SFAS 123, net income and earnings per
share would be as reflected below:

|                                                                                                                                                  |                       |                          |        |      |  |      |         |       |   |   |        |      | 
|------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ------------------------ | ------ | ---- |  | ---- | ------- | ----- | - | - | ------ | ---- | 
|                                                                                                                                                  |                       |                         
|                                                                                                                                                  |                       | Year Ended September 30,
|                                                                                                                                                  |                       |                         
|                                                                                                                                                  |                       | 2003                     |        | 2002 |  | 2001
|                                                                                                                                                  |                       |                          |        |      |  |     
|Net income (loss), as reported                                                                                                                    |                       | $                        | 20,563 |      |  | $    | (3,419  | )     |   | $ | 6,116  |     
|Add: Stock-based employee compensation expense
    included in reported net income, net of related tax effects                                    |                       |                          | 1,490  |      |  |      | 11,911  |       |   |   | 516    |     
|Less: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                       |                          | (4,603 | )    |  |      | (14,764 | )     |   |   | (1,248 | )   
|                                                                                                                                                  |                       |                          |        |      |  |      |         |       |   |   |        |     
|Pro forma net income (loss)                                                                                                                       |                       | $                        | 17,450 |      |  | $    | (6,272  | )     |   | $ | 5,384  |     
|                                                                                                                                                  |                       |                          |        |      |  |      |         |       |   |   |        |     
|Earnings (loss) per share:                                                                                                                        |                       |                          |        |      |  |      |         |       |   |   |        |     
|                                                                                                                                                  | Basic  as reported   |                          | $      | 0.47 |  |      | $       | (0.25 | ) |   | $      | 0.15 | 
|                                                                                                                                                  | Basic  pro forma     |                          | $      | 0.40 |  |      | $       | (0.34 | ) |   | $      | 0.12 | 
|                                                                                                                                                 
|                                                                                                                                                  | Diluted  as reported |                          | $      | 0.44 |  |      | $       | (0.25 | ) |   | $      | 0.13 | 
|                                                                                                                                                  | Diluted  pro forma   |                          | $      | 0.38 |  |      | $       | (0.34 | ) |   | $      | 0.11 | 

The fair value of each option is estimated using
the Black-Scholes option-pricing model using a risk-free
interest rate ranging from 2.27% to 3.37% in 2003, 2.94% to
4.74% in 2002, and 4.10% to 6.60% in 2001, an expected option
life of five years to ten years, volatility of 52% in 2003, 35%
in 2002, and 74% in 2001 and expected dividends of $0. For 2002,
volatility is calculated using activity from the date of the
Companys initial public offering in June 2002 through
September 30, 2002.

Warrants
In 1999 CTI recorded a liability upon issuing redeemable
preferred stock and convertible redeemable preferred stock based
on the relative fair value of the warrants issued in the
transaction. These warrants were subsequently exercised in 2002
(Note 12). While these warrants were outstanding CTI made
periodic mark to market adjustments, which are reflected in the
accompanying consolidated statements of operations in accordance
with the provisions of EITF Issue 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock(Note 12).

Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. In the
accompanying financial statements, management has made
assumptions and estimates in accounting for credit risk,
inventories, property and equipment, goodwill, warranty, income
taxes, capital leases, stock-based compensation, and warrants.

Reclassifications
Certain amounts in the comparative 2002 and 2001 financial
statements have been reclassified to conform to the 2003
presentation with no impact on previously reported net income or
retained earnings.

Earnings (Loss) Per
Share Basic net income
(loss) per share is computed by dividing net income
(loss) attributable to common shareholders by the
weighted-average number of common shares outstanding during the
period. The weighted average number of common shares outstanding
does not include unvested restricted shares. These shares,
although classified as issued and outstanding, are considered
contingently returnable until the restrictions lapse and will
not be included in the basic earnings per share calculation
until the shares are vested. Diluted net income per share is
computed by giving effect to all dilutive potential common
shares, including restricted stock and options. A reconciliation
of the

F-10



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

numerator and denominator used in the calculation
of historical basic and diluted earnings per share follows:

|             |                                                                                            |                          |           |            |           |      |   |            |   |  |           |            |           | 
|------------ | ------------------------------------------------------------------------------------------ | ------------------------ | --------- | ---------- | --------- | ---- | - | ---------- | - |  | --------- | ---------- | --------- | 
|             |                                                                                            |                         
|             |                                                                                            | Year Ended September 30,
|             |                                                                                            |                         
|             |                                                                                            | 2003                     |           | 2002       |           | 2001
|             |                                                                                            |                          |           |            |           |     
|Numerator:   |                                                                                            |                          |           |            |           |      |   |            |   |  |           |           
|             | Net income (loss) available to common
    shareholders  basic and diluted                 |                          | $         | 20,563     |           |      | $ | (8,083     | ) |  | $         | 4,063      |          
|             |                                                                                            |                          |           |            |           |      |   |            |   |  |           |           
|Denominator: |                                                                                            |                          |           |            |           |      |   |            |   |  |           |           
|             | Weighted-average number of common shares
    outstanding                                   |                          |           | 43,351,390 |           |      |   | 32,497,070 |   |  |           | 27,860,086 |          
|             |                                                                                            |                          |           |            |           |      |   |            |   |  |           |           
|             | Dilutive potential common shares relating to:                                              |                          |           |            |           |      |   |            |   |  |           |            |          
|             |                                                                                            | Restricted stock         |           |            | 164,595   |      |   |            |  |  |           |            | 1,973,715 | 
|             |                                                                                            | Options and warrants     |           |            | 2,941,370 |      |   |            |  |  |           |            | 1,506,240 | 
|             |                                                                                            |                          |           |            |           |      |   |            |   |  |           |           
|             |                                                                                            |                          | 3,105,965 |            |           |      |  |            |   |  | 3,479,955 |           
|             |                                                                                            |                          |           |            |           |      |   |            |   |  |           |           
|             | Total weighted average number of shares used in
    computing diluted net income per share |                          |           | 46,457,355 |           |      |   | 32,497,070 |   |  |           | 31,340,041 |          
|             |                                                                                            |                          |           |            |           |      |   |            |   |  |           |           

The following amounts of outstanding warrants,
convertible redeemable preferred stock, restricted stock and
options were excluded from the computation of diluted net income
per common share for the years ended September 30, 2003,
2002, and 2001 because including them would have had an
antidilutive effect:

|                                       |  |                          |           |      |  |      |           |  |  |  |           | 
|-------------------------------------- |  | ------------------------ | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                                       |  |                         
|                                       |  | Year Ended September 30,
|                                       |  |                         
|                                       |  | 2003                     |           | 2002 |  | 2001
|                                       |  |                          |           |      |  |     
|Warrants                               |  |                          | 25,215    |      |  |      | 1,220,238 |  |  |  | 2,447,181 | 
|Convertible redeemable preferred stock |  |                          |          |      |  |      | 918,795   |  |  |  | 1,280,000 | 
|Restricted stock                       |  |                          |          |      |  |      | 1,245,850 |  |  |  |          | 
|Options                                |  |                          | 1,757,189 |      |  |      | 5,398,737 |  |  |  | 43,411    | 
|                                       |  |                          |           |      |  |      |           |  |  |  |           | 
|                                       |  |                          | 1,782,404 |      |  |      | 8,783,620 |  |  |  | 3,770,592 | 
|                                       |  |                          |           |      |  |      |           |  |  |  |           | 

Fair Value of Financial
Instruments The carrying
amounts of financial instruments including cash, cash
equivalents, marketable securities, accounts receivable,
accounts payable and accrued expenses approximate fair value.
The carrying amounts of borrowings under lines of credit and
long-term debt approximate fair value based on current rates of
interest available to the Company for loans of similar
maturities.

Comprehensive
Income Comprehensive
income is defined as the change in equity from transactions and
other events and circumstances other than those resulting from
investments by owners and distributions to owners. For the years
ended September 30, 2003, 2002, and 2001 the Company
recorded a foreign currency translation adjustment to recognize
the changes in stockholders equity arising from converting
the accounts of our international subsidiaries from their
foreign functional currency to the Companys United States
dollar reporting currency.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

Consolidation of Variable Interest
Entities On
January 17, 2003, the FASB issued FASB Interpretation
No. 46 (FIN 46), Consolidation of Variable Interest
Entities,an interpretation of

F-11



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Accounting Research Bulletin No. 51. FIN 46
expands upon and strengthens existing accounting guidance that
addresses when a company should include in its financial
statements the assets, liabilities and activities of another
entity. A variable interest entity is any legal structure used
for business purposes that either does not have equity investors
with voting rights or has equity investors that do not provide
sufficient financial resources for the entity to support its
activities. A variable interest entity often holds financial
assets, including loans or receivables, real estate or other
property. A variable interest entity may be essentially passive
or it may engage in research and development or other activities
on behalf of another company. Previously, one company generally
has included another entity in its consolidated financial
statements only if it controlled the entity through voting
interests. FIN 46 changes that by requiring a variable interest
entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable
interest entitys activities or entitled to receive a
majority of the entitys residual returns or both. As of
December 17, 2003 the effective date of FIN 46 has been
deferred until the end of the first interim or annual reporting
period ending after March 15, 2004. In addition, the FASB
expects to release additional guidance related to its
application. The Company will review the applicability of
additional guidance when it is available.

Accounting for Stock-Based
Compensation On
December 31, 2002 the FASB issued SFAS 148, Accounting
for Stock-Based Compensation  Transition and
Disclosure. SFAS 148 amends SFAS 123 to provide alternative
methods of transition to SFAS 123s fair value method of
accounting for stock-based employee compensation. SFAS 148 also
amends the disclosure provisions of SFAS 123 and APB Opinion
No. 28, Interim Financial Reporting, to require the
disclosure in the summary of significant accounting policies of
the effects of an entitys accounting policy with respect
to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements.
The Statements amendments of transition and annual
disclosure requirements are effective for fiscal years ending
after December 15, 2002, with earlier application permitted
for entities with fiscal years ending prior to December 15,
2002. In addition, SFAS 148s amendment of interim
disclosure requirements is effective for interim periods
beginning after December 15, 2002. As now required by SFAS
148 additional information about stock options has been
presented in the stock-based compensation accounting policy
disclosure in the Companys financial statements.

Amendment of Statement 133 on Derivative
Instruments and Hedging
Activities In April 2003,
the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149
amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under
FASB Statement No. 133 (SFAS 133), Accounting for
Derivative Instruments and Hedging Activities. This
Statement amends SFAS 133 for decisions made as part of the
Derivative Implementation Group process that effectively
required amendments to SFAS 133, in connection with other FASB
projects dealing with financial instruments, and in connection
with implementation issues raised in relation to the application
of the definition of a derivative. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003.
Also, the provisions of SFAS 149 that relate to SFAS 133
implementation issues that have been effective for fiscal years
that began prior to June 15, 2003, should continue to be
applied in accordance with their respective effective dates. In
addition provisions of this statement related to forward
purchases or sales of when-issued securities or other securities
that do not yet exist, should be applied to both existing and
new contracts entered into after June 30, 2003. The
adoption of SFAS 149 did not have a significant impact on the
Companys financial statements.

Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and
Equity In May 2003, the
FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity. SFAS 150 requires issuers to classify as liabilities
(or assets in some circumstances) certain financial instruments
that embody obligations. Financial instruments within the scope
of SFAS 150 shall be initially measured at fair value and
subsequently revalued with changes in

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CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

value being reflected in interest cost. SFAS 150
is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after
June 15, 2003. Restatement is not permitted. The adoption
of SFAS 150 did not have a significant impact on the
Companys financial statements.

Determining Whether an Arrangement Contains a
Lease In May 2003, the
FASB reached a consensus on EITF Issue 01-8 (the Issue),
Determining Whether an Arrangement Contains a Lease.The
guidance in this Issue is effective for all arrangements agreed
or committed to, or modified after the beginning of the next
fiscal quarter beginning after May 28, 2003. The Issue
addresses whether or not an arrangement contains a lease that is
within the scope of SFAS 13, Accounting for Leases.
Depending on the facts and circumstances and the classification
of the lease, the seller or supplier may be required to record
rental income instead of sales for a portion of the
consideration received and the purchaser may be required to
record both an asset under capital lease and a corresponding
debt obligation. The adoption of the issue did not have a
significant impact on the Companys financial statements.

3.     Inventories

Inventories consist of the following:

|                |  |               |        |      |  |   |        | 
|--------------- |  | ------------- | ------ | ---- |  | - | ------ | 
|                |  |              
|                |  | September 30,
|                |  |              
|                |  | 2003          |        | 2002
|                |  |               |        |     
|Component parts |  | $             | 25,581 |      |  | $ | 19,410 | 
|Work in process |  |               | 27,122 |      |  |   | 21,505 | 
|Finished goods  |  |               | 18,149 |      |  |   | 28,380 | 
|                |  |               |        |      |  |   |        | 
|                |  | $             | 70,852 |      |  | $ | 69,295 | 
|                |  |               |        |      |  |   |        | 

Cyclotrons, which were delivered prior to
July 1, 2003, but not yet accepted by the customers, are
included in inventories as finished goods in the consolidated
balance sheets for the years ended September 30, 2003 and
2002 in the amount of $1,346 and $5,978, respectively.

4.     Property and
Equipment

Property and equipment consist of the following:

|                                    |  |               |         |      |  |   |         |  
|----------------------------------- |  | ------------- | ------- | ---- |  | - | ------- | -
|                                    |  |              
|                                    |  | September 30,
|                                    |  |              
|                                    |  | 2003          |         | 2002
|                                    |  |               |         |     
|Land                                |  | $             | 2,044   |      |  | $ | 2,044   |  
|Buildings                           |  |               | 21,179  |      |  |   | 9,417   |  
|Building and leasehold improvements |  |               | 22,025  |      |  |   | 15,739  |  
|Machinery and equipment             |  |               | 83,081  |      |  |   | 54,994  |  
|Less accumulated depreciation       |  |               | (33,062 | )    |  |   | (21,709 | )
|Assets under construction           |  |               | 12,026  |      |  |   | 17,182  |  
|                                    |  |               |         |      |  |   |         |  
|Property and equipment, net         |  | $             | 107,293 |      |  | $ | 77,667  |  
|                                    |  |               |         |      |  |   |         |  

Depreciation expense for the years ended
September 30, 2003, 2002 and 2001 was $11,519, $6,960 and
$3,619, respectively.

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

5.     Commitments
and Contingencies

Leases
The Company leases certain equipment under non-cancelable
agreements. The leases have original terms ranging from three to
ten years.

Future minimum payments, by year and in the
aggregate, under non-cancelable operating leases with initial or
remaining terms of one year or more consist of the following at
September 30, 2003:

|           |  |   |       | 
|---------- |  | - | ----- | 
|2004       |  | $ | 2,300 | 
|2005       |  |   | 2,686 | 
|2006       |  |   | 830   | 
|2007       |  |   | 833   | 
|2008       |  |   | 1,425 | 
|Thereafter |  |   | 2,100 | 

Rental expense for the years ended
September 30, 2003, 2002, and 2001 was $3,289, $2,676 and
$1,777, respectively.

The Company guarantees lease obligations for
radiopharmacy facilities and equipment on behalf of
unconsolidated investees in the maximum aggregate amount of $898
at September 30, 2003. No liability has been recorded for
these lease obligations which expire through 2009. The
guarantees are not collateralized by any assets, and are without
recourse.

In August 2003, the Company also guaranteed a
debt obligation related to a cyclotron and radiopharmacy project
for an international distributor in the maximum aggregate amount
of 5.3 million Euros (or approximately $6.1 million).
The debt obligation and the guarantee expire in July 2009. In
the event a claim is made under this guarantee, the Company has
the right to acquire the facility and all related customer
contracts and would operate the facility as a PETNET
radiopharmacy. The Company has recorded a liability of $150 for
this guarantee to reflect the estimated fair value of the
Companys obligation in accordance with FASB Interpretation
No. 45 (FIN 45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others.

In September 2003, the Company entered into a new
financing program arrangement with De Lage Landen Financial
Services, Inc. (DLL). The new program provides flexible lease
financing for the full range of PET and PET/CT scanners and
other products and services sold by CTI. In connection with this
program a credit reserve pool was established whereby the
Company provided a guarantee to DLL for 9.9% on the first
$25 million of transactions and 5.0% once $50 million
in transactions is achieved, of the principal balance of all
leases DLL executes on the Companys behalf. At
September 30, 2003, the Company had recorded a reserve of
$136 for this guarantee to reflect the estimated fair value of
the Companys obligation after recovery and resale of the
underlying equipment in accordance with FIN 45.

The Company provides a parts and labor warranty
on products it distributes directly, typically for a period of
twelve months after installation. Estimated costs of this
warranty obligation are charged to cost of revenues at the time
revenue is recognized. A summary of the activity in our warranty
reserve is as follows:

|                                                 |  |                          |        |      |  |      |        |   |  |   |        |  
|------------------------------------------------ |  | ------------------------ | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                 |  |                         
|                                                 |  | Year Ended September 30,
|                                                 |  |                         
|                                                 |  | 2003                     |        | 2002 |  | 2001
|                                                 |  |                          |        |      |  |     
|Balance at the beginning of the period           |  | $                        | 3,740  |      |  | $    | 3,433  |   |  | $ | 1,805  |  
|Accruals for warranties issued during the period |  |                          | 6,185  |      |  |      | 6,800  |   |  |   | 5,437  |  
|Settlements made (in cash or in kind)            |  |                          | (4,663 | )    |  |      | (6,493 | ) |  |   | (3,809 | )
|                                                 |  |                          |        |      |  |      |        |   |  |   |        |  
|Balance at the end of the period                 |  | $                        | 5,262  |      |  | $    | 3,740  |   |  | $ | 3,433  |  
|                                                 |  |                          |        |      |  |      |        |   |  |   |        |  

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The Company has an exclusive patent and
technology license to manufacture and use materials and products
containing lutetium oxyorthosilicate (LSO). The Company pays an
annual royalty based on a percentage of the manufacturing cost
of materials sold. The royalty amounts paid were $835, $429, and
$221, for the years ending September 30, 2003, 2002, and
2001, respectively. The agreement is in effect until
October 27, 2008 when the patent is due to expire.

During fiscal year 2001 PETNET entered into a
collaboration agreement with UCLA. In consideration for the
research services provided by UCLA, PETNET pays a general
research fee, an incentive fee and specific research fees. The
general research fee and the incentive research fee are based on
a percentage of net revenues received by PETNET from the sale of
products produced at the LA Tech Center. Research fees were $387
and $507 for the years ended September 30, 2003 and 2002,
respectively. No research fees were incurred for the year ending
September 30, 2001.

In May 2002, Cox Nuclear Pharmacy Inc.
& Accuscan LLC filed an action against CTI, PETNET
Pharmaceuticals, Inc. and an employee of PETNET, in the United
States District Court for the Southern District of Alabama,
Southern Division, civil action no. 02-cv-0321-CG-C. The
plaintiffs set forth fourteen causes of action against the
defendants, including a breach of contract claim related to the
sale of a cyclotron and various tort claims alleging violation
of a covenant not to compete in the Mobile, Alabama market. The
plaintiffs sought $20 million in compensatory damages on
the breach of contract claims and $50 million in aggregate
compensatory and punitive damages on the tort claims. The claims
against the PETNET employee have been dismissed. On
December 5, 2003, the District Court granted summary
judgment against the plaintiffs as to all remaining claims but
leaving unaffected CTIs counterclaim for liquidated
damages under CTIs purchase order with the plaintiffs.

On November 21, 2002 General Electric
Company filed an action against us and a former General Electric
employee now employed by us in the District Court of Johnson
County, Kansas, civil case no. 02-CV-07947. The complaint
charges us and our employee with alleged misappropriation of
trade secrets and unfair competition, and the employee with
breach of contract and breach of fiduciary duty. The complaint
seeks injunctive relief and an undisclosed amount of damages. On
November 21, 2002, General Electric, without notice to us
or our employee, obtained a temporary restraining order
enjoining the employee from using General Electrics
confidential information and trade secrets, and enjoining us
from disclosing or using any confidential information or trade
secrets gained by the employee during his employment at General
Electric. We have denied liability and intend to vigorously
defend this suit; however, given the circumstances inherent in
the litigation process, we are unable to predict the ultimate
outcome of this suit.

On September 19, 2002 General Electric filed
a complaint against two former employees of General Electric who
are now employed by CTI in the United States District Court,
Eastern District of Wisconsin. The complaint alleged threatened
or actual misappropriation of trade secrets, breach of contract
and unfair competition. CTI was not named as a defendant in that
action. The defendants answered the complaint and denied
liability. On September 23, 2003, the District Court in
Wisconsin granted General Electrics motion for voluntary
dismissal without prejudice, which afforded General Electric an
opportunity to refile the action in another United States
District Court and potentially include additional defendants in
addition to the two former employees. On November 24, 2003,
General Electric refiled this action in the United States
District Court for the Eastern District of Tennessee, Knoxville
Division, against the two employees, CTI and PETNET. The
defendants filed their motion for dismissal against all of
GEs claims on December 15, 2003. Due to the early
stage of this action we are not able at the present time to
render an opinion as to the likelihood of an outcome unfavorable
to CTI or PETNET or as to the amount or range of potential loss
by CTI or PETNET in the event of an unfavorable outcome, but we
intend to vigorously contest this suit.

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

We are also involved in various other lawsuits
and claims arising in the normal course of business. Although
the outcomes of these other lawsuits and claims are uncertain,
we do not believe any of them will have a material adverse
effect on our business, financial condition or results of
operations.

6.     Long-Term
Debt

The Company has a $125,000 syndicated revolving
credit facility (the Syndicated Facility) with a group of banks.
Borrowing under the Syndicated Facility is collateralized by all
property, and interests in property, presently existing or
hereafter created by CTI or its subsidiaries as guarantors,
including any and all proceeds thereof, in which a security
interest is now or hereinafter granted; provided, however, that
all real property of CTI as of March 14, 2002, is excluded;
and provided further that the property and interests of CPS are
limited to the inventory and accounts receivable and all
proceeds therefrom of CPS. Interest is at LIBOR plus 0.75% to
1.75% or, at our option, the lenders base rate plus 0.00%
to 0.75%, payable monthly (2.37% at September 30, 2003).
The Syndicated Facility matures on October 15, 2005 and
contains certain restrictive covenants, which, among other
things, require minimum tangible net worth, funded debt, and
debt service ratios; impose limitations on other indebtedness
and liens; and, restrict investments, disposals of assets and
dividend payments. There was no outstanding balance of the
Syndicated Facility at September 30, 2003.

Industrial Revenue
Bonds In 1988 the
Company entered into an agreement with the Industrial
Development Board of Blount County, Tennessee (the Board)
relating to the issue of Industrial Development Revenue Bonds
(the Series 1988 Bonds) by the Board in the aggregate
principal amount of $5,000 for the purpose of lending proceeds
from the Bonds to the Company. Such proceeds were restricted to
use in the acquisition, construction, improvement, and equipping
of a manufacturing plant in Blount County, Tennessee. The
remaining $4,000 balance of the Series 1988 Bonds is
supported by an irrevocable letter of credit agreement that
expires October 15, 2005. The Series 1988 Bonds are
due in August 2008.

On August 1, 2000 the Company entered into
an agreement with the Board relating to the issue of Industrial
Development Revenue Bonds (the Series 2000 Bonds) by the
Board in the aggregate principal amount of $3,000 for the
purpose of lending proceeds from the Series 2000 Bonds to
the Company. Such proceeds are restricted to use in the
acquisition, construction, improvement and equipping of the
Companys manufacturing plant in Blount County, Tennessee.
At September 30, 2003 and 2002, the remaining balances were
$1,600 and $2,300, respectively. The remaining $1,600 balance of
the Series 2000 Bonds is supported by an irrevocable letter
of credit agreement that expires October 15, 2005. The
Series 2000 Bonds are due in August 2010. In May 2002, the
Company redeemed all outstanding tax exempt bonds and reissued
taxable bonds for the purpose of terminating federal government
limitations on aggregate capital expenditures.

CTI is required to repay 10.0% of the outstanding
debt annually, for both series. Both bond series bear interest
at variable rates, which change from time to time as set by the
remarketing agents for the bonds, in order to remarket both bond
series in a secondary market (interest rates were from 1.20% to
1.30% at September 30, 2003 and 1.90% to 2.00% at
September 30, 2002, respectively).

Notes
Payable CTI was able
to borrow up to $7,900 under the terms of a construction loan
agreement with a bank. Interest was payable monthly at LIBOR
plus 1.00% to 2.00%, and this loan was repaid in June 2003.

In August 2003 in conjunction with the
acquisition of Mirada Solutions Limited (Note 11),
we assumed a $365 note payable to a bank and issued $3,188 of
unsecured loan notes. Interest on the bank note is at the bank
base rate plus 1.25% (5.00% at September 30, 2003). The
outstanding balance on the assumed bank note payable was $366 at
September 30, 2003. For the unsecured loan notes issued
during the acquisition, the note holder can request to be paid
the lower of $15 or their outstanding note balance

F-16



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

on April 30, 2004 along with any accrued
interest to date. The remaining balance and outstanding interest
on the unsecured loan notes will then be paid in full by
April 30, 2005. Interest on the unsecured loan notes is
fixed at 1.50%.

In 2003, CTI, through its subsidiary CPS, entered
into a mortgage loan to purchase additional manufacturing space,
which had previously been leased. The Company is required to
make principal and interest payments totaling $78 per year
through 2008, with a balloon payment upon maturity. The debt
bears interest at a fixed rate of 4%. The outstanding balance on
this mortgage loan was $873.

In 2000 CTI entered into a mortgage loan
agreement to purchase its current office space, which had
previously been leased. Interest on the debt was at LIBOR plus
1.00% to 2.00%. This loan was repaid in August 2003.

Annual maturities of long-term debt at
September 30, 2003, are as follows:

|           |  |   |       | 
|---------- |  | - | ----- | 
|2004       |  | $ | 2,300 | 
|2005       |  |   | 2,686 | 
|2006       |  |   | 830   | 
|2007       |  |   | 833   | 
|2008       |  |   | 1,425 | 
|Thereafter |  |   | 2,100 | 

Capital Lease
Obligations Leased capital
assets included in machinery and equipment and other assets at
September 30 are as follows:

|                         |  |      |        |      |  |   |        |  
|------------------------ |  | ---- | ------ | ---- |  | - | ------ | -
|                         |  | 2003 |        | 2002
|                         |  |      |        |     
|Machinery and equipment  |  | $    | 21,641 |      |  | $ | 18,220 |  
|Accumulated amortization |  |      | (5,942 | )    |  |   | (4,150 | )
|Other assets             |  |      |       |      |  |   | 416    |  
|                         |  |      |        |      |  |   |        |  
|                         |  | $    | 15,699 |      |  | $ | 14,486 |  
|                         |  |      |        |      |  |   |        |  

Future minimum payments, by year and in the
aggregate, under non-cancelable capital leases with initial or
remaining terms of one year or more consist of the following at
September 30, 2003:

|                                             |  |   |        |  
|-------------------------------------------- |  | - | ------ | -
|2004                                         |  | $ | 4,528  |  
|2005                                         |  |   | 3,716  |  
|2006                                         |  |   | 2,947  |  
|2007                                         |  |   | 2,943  |  
|2008                                         |  |   | 1,883  |  
|Thereafter                                   |  |   | 1,285  |  
|                                             |  |   |        |  
|Total minimum lease payments                 |  |   | 17,302 |  
|Amounts representing interest                |  |   | (3,287 | )
|                                             |  |   |        |  
|Present value of net minimum payments        |  |   | 14,015 |  
|Current portion of capital lease obligations |  |   | (3,201 | )
|                                             |  |   |        |  
|Capital lease obligations, long-term         |  | $ | 10,814 |  
|                                             |  |   |        |  

PETNET extinguished capital lease obligations
totaling $14,503 in September 2002 prior to maturity, resulting
in losses on early extinguishments of debt of $1,303, which is
reported in selling, general and administrative expense.

F-17



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

7.     Income
Taxes

The Company files a consolidated U.S. federal
income tax return that includes CTI, PETNET, CTI Services and
ACT. CPS files a separate U.S. federal income tax return and all
foreign subsidiaries file returns in their country of
incorporation. At September 30, 2003, the Company also had
federal, foreign, and state net operating loss carryforwards of
$15,415, $4,178, and $29,683, respectively, expiring in the
period 2010 to 2018, that are available to reduce future income
taxes. At September 30, 2003, the Company had tax credit
carryforwards of $828, that are available to reduce future
federal income taxes.

The components of deferred tax assets and
liabilities at September 30, were as follows:

|                                      |                                              |      |        |        |   |   |       |        |  
|------------------------------------- | -------------------------------------------- | ---- | ------ | ------ | - | - | ----- | ------ | -
|                                      |                                              | 2003 |        | 2002  
|                                      |                                              |      |        |       
|Current deferred tax assets:          |                                              |      |        |        |   |   |       |       
|                                      | Allowance for doubtful accounts              |      | $      | 1,268  |   |   | $     | 816    |  
|                                      | Inventory capitalization                     |      |        | 762    |   |   |       | 315    |  
|                                      | Inventory obsolescence reserves              |      |        | 1,212  |   |   |       | 1,133  |  
|                                      | Accrued incentive compensation               |      |        | 309    |   |   |       | 259    |  
|                                      | Accrued vacation                             |      |        | 921    |   |   |       | 574    |  
|                                      | Accrued warranty reserves                    |      |        | 1,736  |   |   |       | 1,026  |  
|                                      | Installation reserve                         |      |        | 127    |   |   |       | 322    |  
|                                      | Other accrued expenses                       |      |        | 357    |   |   |       | 485    |  
|                                      | Deferred revenues                            |      |        | 3,953  |   |   |       | 2,545  |  
|                                      | Research and development credit carryforward |      |        |       |   |   |       |       |  
|                                      | Alternative minimum tax credit carryforward  |      |        | 11     |   |   |       | 11     |  
|                                      | Net operating loss carryforwards             |      |        | 6,012  |   |   |       |       |  
|                                      | Stock-based compensation                     |      |        | 604    |   |   |       | 2,341  |  
|                                      | Insurance reserve                            |      |        | 479    |   |   |       |       |  
|                                      |                                              |      |        |        |   |   |       |       
|Net current deferred tax assets       |                                              | $    | 17,751 |        |   | $ | 9,827 |       
|                                      |                                              |      |        |        |   |   |       |       
|Noncurrent deferred tax assets:       |                                              |      |        |        |   |   |       |       
|                                      | Deferred revenue                             |      | $      | 1,661  |   |   | $     | 2,213  |  
|                                      | Amortization                                 |      |        | 159    |   |   |       | 217    |  
|                                      | Stock-based compensation                     |      |        |       |   |   |       |       |  
|Noncurrent deferred liabilities:      |                                              |      |        |        |   |   |       |       
|                                      | Research and development credit carryforward |      |        | 817    |   |   |       | 495    |  
|                                      | Alternative minimum tax credit carryforward  |      |        |       |   |   |       | 22     |  
|                                      | Net operating loss carryforwards             |      |        | 2,106  |   |   |       | 344    |  
|                                      | Other noncurrent                             |      |        |       |   |   |       | (172   | )
|                                      | Fixed asset disposition                      |      |        |       |   |   |       | 41     |  
|                                      | Acquired intangibles                         |      |        | (3,933 | ) |   |       |       |  
|                                      | Depreciation                                 |      |        | (9,809 | ) |   |       | (2,973 | )
|                                      |                                              |      |        |        |   |   |       |       
|Net noncurrent deferred tax liability |                                              | $    | (8,999 | )      |   | $ | 187   |       
|                                      |                                              |      |        |        |   |   |       |       

The ultimate realization of net deferred tax
assets is dependent upon the generation of future taxable income
sufficient to offset the related deductions and credits within
the applicable carryforward and carryback periods.

F-18



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The Companys effective tax rate on income
taxes and minority interest differs from the federal statutory
rate as follows:

|                                                          |  |      |        |      |  |      |        |   |  |   |       |  
|--------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ----- | -
|                                                          |  | 2003 |        | 2002 |  | 2001
|                                                          |  |      |        |      |  |     
|Federal tax                                               |  | $    | 20,610 |      |  | $    | 8,445  |   |  | $ | 7,844 |  
|State tax                                                 |  |      | 1,766  |      |  |      | 401    |   |  |   | 874   |  
|Research and development credit                           |  |      |       |      |  |      |       |   |  |   | (583  | )
|Warrant liability mark to market permanent
    difference |  |      |       |      |  |      | 3,405  |   |  |   | 1,525 |  
|Stock based compensation                                  |  |      | 245    |      |  |      | 3,364  |   |  |   |      |  
|Extraterritorial income benefit                           |  |      | (677   | )    |  |      | (522   | ) |  |   |      |  
|In process research and development                       |  |      | 416    |      |  |      |       |   |  |   |      |  
|Other permanent differences                               |  |      | 575    |      |  |      | (503   | ) |  |   | 270   |  
|                                                          |  |      |        |      |  |      |        |   |  |   |       |  
|Provision for income taxes                                |  | $    | 22,935 |      |  | $    | 14,590 |   |  | $ | 9,930 |  
|                                                          |  |      |        |      |  |      |        |   |  |   |       |  

8.     Employee
Benefit Plan

The Company provides a defined contribution plan
that covers substantially all domestic employees. Company
contributions to the Plan are based on employees earnings.
In addition, the employees may elect to contribute to the Plan
and the Company will match 50% of employee contributions up to
6% of their compensation. The total Company expense was
approximately $1,982, $1,886 and $890 for the years ended
September 30, 2003, 2002 and 2001, respectively.

9.     Stock Options,
Warrants, and Restricted Stock



| |                             
| | ----------------------------
| | Incentive Stock Option Plans

In 1998 the Company adopted an incentive stock
option plan for officers and key employees. The options are
generally exercisable in installments of 25% per year from the
grant date, except that options granted to persons who, at the
time of grant, have been employed by the Company for at least
10 years are fully exercisable upon grant. The options
expire after five to ten years. Twelve million eight hundred
thousand shares have been authorized under this plan; however,
after the effective date of the 2002 Long-Term Incentive Plan,
described below, no further awards will be granted under this
plan.

On May 23, 2002, the Companys
shareholders approved the 2002 Long-Term Incentive Plan which
became effective upon the closing of our initial public
offering. Three million shares have been authorized under the
2002 plan.

F-19



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

A summary of the Companys stock option
activity for these plans is as follows:

|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |      | 
|---------------------------------------- |  | ----------- | ---------- | -------- |  | ---------- | ----- | ----------- |  | -------- | ---- |  |  |  | --------- |  |  | - | ---- | 
|                                         |  |             |            | Weighted |  | Weighted   |       |             |  | Weighted
|                                         |  |             |            | Average  |  | Average    |       |             |  | Average 
|                                         |  | Options     |            | Exercise |  | Grant Date |       | Options     |  | Exercise
|                                         |  | Outstanding |            | Price    |  | Fair Value |       | Exercisable |  | Price   
|                                         |  |             |            |          |  |            |       |             |  |         
|Balance at September 30, 2000            |  |             | 1,692,531  |          |  | $          | 2.84  |             |  |          |      |  |  |  | 1,405,466 |  |  | $ | 2.84 | 
|Options granted in 2001 at fair value    |  |             | 1,205,323  |          |  |            | 4.25  |             |  | $        | 2.41 |  |  |  |           |  |  |   |      | 
|Options exercised in 2001                |  |             | (51,514    | )        |  |            | 2.91  |             |  |          |      |  |  |  |           |  |  |   |      | 
|Options expired in 2001                  |  |             | (102,581   | )        |  |            | 3.08  |             |  |          |      |  |  |  |           |  |  |   |      | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |      | 
|Balance at September 30, 2001            |  |             | 2,743,759  |          |  |            | 3.45  |             |  |          |      |  |  |  | 1,904,464 |  |  |   | 3.25 | 
|Options granted in 2002 at fair value    |  |             | 147,433    |          |  |            | 11.06 |             |  |          | 4.49 |  |  |  |           |  |  |   |      | 
|Options granted in 2002 below fair value |  |             | 776,265    |          |  |            | 5.49  |             |  |          | 9.59 |  |  |  |           |  |  |   |      | 
|Options exercised in 2002                |  |             | (306,168   | )        |  |            | 3.16  |             |  |          |      |  |  |  |           |  |  |   |      | 
|Options expired in 2002                  |  |             | (64,211    | )        |  |            | 3.60  |             |  |          |      |  |  |  |           |  |  |   |      | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |      | 
|Balance at September 30, 2002            |  |             | 3,297,078  |          |  |            | 4.30  |             |  |          |      |  |  |  | 2,572,544 |  |  |   | 3.78 | 
|Options granted in 2003 at fair value    |  |             | 160,292    |          |  |            | 21.73 |             |  |          | 9.42 |  |  |  |           |  |  |   |      | 
|Options exercised in 2003                |  |             | (1,247,913 | )        |  |            | 3.49  |             |  |          |      |  |  |  |           |  |  |   |      | 
|Options expired in 2003                  |  |             | (122,946   | )        |  |            | 5.54  |             |  |          |      |  |  |  |           |  |  |   |      | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |      | 
|Balance at September 30, 2003            |  |             | 2,086,511  |          |  | $          | 6.03  |             |  |          |      |  |  |  | 1,619,823 |  |  |   | 4.70 | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |      | 

The following table summarizes information about
incentive stock options at September 30, 2003:

|                         |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | -------- | ---- | --------- |  | -------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |           |                    
|                         |  | Options Outstanding |           | Options Exercisable
|                         |  |                     |           |                    
|                         |  | Number of           |           | Average             |  | Average  |      | Number of |  | Average 
|Range of Exercise Prices |  | Shares              |           | Life(1)             |  | Price(2) |      | Shares    |  | Price(2)
|                         |  |                     |           |                     |  |          |      |           |  |         
|$2.81                    |  |                     | 435,089   |                     |  |          | 2.06 |           |  | $        | 2.81  |  |  |  | 435,089   |  |  | $ | 2.81  | 
|$3.09 to $3.87           |  |                     | 344,639   |                     |  |          | 2.87 |           |  |          | 3.38  |  |  |  | 344,639   |  |  |   | 3.38  | 
|$4.69                    |  |                     | 558,823   |                     |  |          | 5.01 |           |  |          | 4.69  |  |  |  | 424,127   |  |  |   | 4.69  | 
|$5.56 to $6.12           |  |                     | 524,736   |                     |  |          | 5.39 |           |  |          | 5.60  |  |  |  | 354,111   |  |  |   | 5.62  | 
|$15.55 to $16.15         |  |                     | 28,981    |                     |  |          | 8.68 |           |  |          | 15.60 |  |  |  | 13,512    |  |  |   | 15.57 | 
|$17.00 to $17.63         |  |                     | 8,816     |                     |  |          | 9.41 |           |  |          | 17.16 |  |  |  | 2,593     |  |  |   | 17.11 | 
|$18.31 to $18.80         |  |                     | 36,519    |                     |  |          | 9.65 |           |  |          | 18.32 |  |  |  | 7,357     |  |  |   | 18.33 | 
|$19.37 to $19.76         |  |                     | 25,404    |                     |  |          | 8.86 |           |  |          | 19.68 |  |  |  | 7,125     |  |  |   | 19.65 | 
|$21.97 to $22.40         |  |                     | 74,675    |                     |  |          | 9.16 |           |  |          | 22.06 |  |  |  | 21,184    |  |  |   | 22.16 | 
|$23.90                   |  |                     | 3,329     |                     |  |          | 9.29 |           |  |          | 23.90 |  |  |  | 986       |  |  |   | 23.90 | 
|$25.00                   |  |                     | 45,500    |                     |  |          | 9.20 |           |  |          | 25.00 |  |  |  | 9,100     |  |  |   | 25.00 | 
|                         |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |           |  |  |   |       | 
|                         |  |                     | 2,086,511 |                     |  |          |      |           |  |          |       |  |  |  | 1,619,823 |  |  |   |       | 
|                         |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |           |  |  |   |       | 



---



|    |                                                          
|--- | ---------------------------------------------------------
|(1) | Weighted average contractual life remaining in
    years.
|   
|(2) | Weighted average exercise price.                         

F-20



---



##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                      
| | ---------------------
| | Non-Qualified Options

In addition, the Company provides non-qualified
stock options to certain officers and key employees. The options
are generally exercisable in installments of 20% or 25% per year
from the grant date. The options expire after five to ten years.

A summary of the Companys non-qualified
stock option activity is as follows:

|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |       | 
|---------------------------------------- |  | ----------- | ---------- | -------- |  | ---------- | ----- | ----------- |  | -------- | ---- |  |  |  | --------- |  |  | - | ----- | 
|                                         |  |             |            | Weighted |  | Weighted   |       |             |  | Weighted
|                                         |  |             |            | Average  |  | Average    |       |             |  | Average 
|                                         |  | Options     |            | Exercise |  | Grant Date |       | Options     |  | Exercise
|                                         |  | Outstanding |            | Price    |  | Fair Value |       | Exercisable |  | Price   
|                                         |  |             |            |          |  |            |       |             |  |         
|Balance at September 30, 2000            |  |             | 926,598    |          |  | $          | 0.54  |             |  |          |      |  |  |  | 923,078   |  |  | $ | 0.53  | 
|Options granted in 2001 at fair value    |  |             | 377,342    |          |  |            | 3.70  |             |  | $        | 2.49 |  |  |  |           |  |  |   |       | 
|Options granted in 2001 below fair value |  |             | 128,000    |          |  |            | 0.16  |             |  |          | 3.33 |  |  |  |           |  |  |   |       | 
|Options exercised in 2001                |  |             | (21,333    | )        |  |            | 0.16  |             |  |          |      |  |  |  |           |  |  |   |       | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |       | 
|Balance at September 30, 2001            |  |             | 1,410,607  |          |  |            | 1.39  |             |  |          |      |  |  |  | 1,356,432 |  |  |   | 1.31  | 
|Options granted in 2002 at fair value    |  |             | 1,043,517  |          |  |            | 17.04 |             |  |          | 6.34 |  |  |  |           |  |  |   |       | 
|Options granted in 2002 below fair value |  |             | 1,218,645  |          |  |            | 5.39  |             |  |          | 8.85 |  |  |  |           |  |  |   |       | 
|Options exercised in 2002                |  |             | (1,084,532 | )        |  |            | 3.46  |             |  |          |      |  |  |  |           |  |  |   |       | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |       | 
|Balance at September 30, 2002            |  |             | 2,588,237  |          |  |            | 8.72  |             |  |          |      |  |  |  | 1,409,761 |  |  |   | 4.72  | 
|Options granted in 2003 at fair value    |  |             | 134,553    |          |  |            | 18.39 |             |  |          | 9.22 |  |  |  |           |  |  |   |       | 
|Options exercised in 2003                |  |             | (820,462   | )        |  |            | 1.49  |             |  |          |      |  |  |  |           |  |  |   |       | 
|Options expired in 2003                  |  |             | (112,552   | )        |  |            | 5.27  |             |  |          |      |  |  |  |           |  |  |   |       | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |       | 
|Balance at September 30, 2003            |  |             | 1,789,776  |          |  | $          | 12.98 |             |  |          |      |  |  |  | 998,465   |  |  |   | 11.72 | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |       | 

The following table summarizes information about
non-qualified stock options at September 30, 2003:

|                         |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |         |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | -------- | ---- | --------- |  | -------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                         |  |                     |           |                    
|                         |  | Options Outstanding |           | Options Exercisable
|                         |  |                     |           |                    
|                         |  | Number of           |           | Average             |  | Average  |      | Number    |  | Average 
|Range of Exercise Prices |  | Shares              |           | Life(1)             |  | Price(2) |      | of Shares |  | Price(2)
|                         |  |                     |           |                     |  |          |      |           |  |         
|$0.16                    |  |                     | 3,400     |                     |  |          | 0.70 |           |  | $        | 0.16  |  |  |  | 3,400   |  |  | $ | 0.16  | 
|$2.81 to $3.09           |  |                     | 101,440   |                     |  |          | 1.44 |           |  |          | 3.03  |  |  |  | 101,440 |  |  |   | 3.03  | 
|$4.69 to $5.56           |  |                     | 541,530   |                     |  |          | 5.40 |           |  |          | 5.21  |  |  |  | 345,866 |  |  |   | 5.41  | 
|$15.55                   |  |                     | 574,280   |                     |  |          | 8.82 |           |  |          | 15.55 |  |  |  | 287,140 |  |  |   | 15.55 | 
|$17.00 to $18.37         |  |                     | 137,197   |                     |  |          | 9.30 |           |  |          | 17.67 |  |  |  | 87,041  |  |  |   | 17.29 | 
|$19.00 to $19.76         |  |                     | 343,321   |                     |  |          | 8.94 |           |  |          | 19.67 |  |  |  | 115,436 |  |  |   | 19.50 | 
|$22.40                   |  |                     | 86,608    |                     |  |          | 8.95 |           |  |          | 22.40 |  |  |  | 57,742  |  |  |   | 22.40 | 
|$25.00                   |  |                     | 2,000     |                     |  |          | 9.20 |           |  |          | 25.00 |  |  |  | 400     |  |  |   | 25.00 | 
|                         |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |         |  |  |   |       | 
|                         |  |                     | 1,789,776 |                     |  |          |      |           |  |          |       |  |  |  | 998,465 |  |  |   |       | 
|                         |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |         |  |  |   |       | 



---



|    |                                                          
|--- | ---------------------------------------------------------
|(1) | Weighted average contractual life remaining in
    years.
|   
|(2) | Weighted average exercise price.                         

F-21



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                         
| | ------------------------
| | Stock-Based Compensation

During the year ended September 30, 2002,
the Company issued options to employees to purchase common stock
with exercise prices ranging from $4.69 to $22.40. The Company
recorded non-cash compensation charges to earnings for the
excess of estimated fair value over the exercise price of these
options totaling $11,265 and also recorded unearned compensation
of $4,441. The Company is amortizing the balance of unearned
compensation over the respective vesting periods ranging from
three to four years. For the years ended September 30, 2003
and 2002, the Company amortized $885 and $723 to stock-based
compensation expense.

During the year ended September 30, 2002,
the Company issued warrants and options to purchase common stock
to non-employee consultants in exchange for receiving consulting
services. The fair value of the warrants and options was
estimated using the Black-Scholes option-pricing model. In
connection with the issuance of these warrants to purchase
common stock, the Company recorded $93 to stock-based
compensation and $253 to unearned compensation. The Company is
amortizing the balance of unearned compensation to stock-based
compensation expense over the term of the consulting contract.
For the years ended September 30, 2003 and 2002, the
Company amortized $51 and $25 to stock-based compensation
expense.

During 2002 and 2003, the Company issued 224,528
restricted shares of common stock at prices ranging from $15.55
to $22.40 in connection with hiring executives. In connection
with these restricted common shares, the Company recorded
unearned compensation of $3,902. The Company is amortizing the
balance to stock-based compensation expense over the four year
vesting periods during which the restrictions expire. The
Company amortized $947 and $144 to stock-based compensation
expense for the years ended September 30, 2003 and 2002,
respectively.

During the year ended September 30, 2003,
2,000 options to purchase common stock were issued to
non-employees. The fair value of these options of $26 was
charged to stock-based compensation, and was determined using
the Black-Scholes option-pricing model using a risk-free
interest rate of 7.39%, an expected life of seven years (the
life of the options), volatility of 35%, and no expected
dividends.

During the fourth quarter of the year ended
September 30, 2002, the subsidiary companies agreed to
reimburse CTI for their respective amounts of stock-based
compensation expenses; consequently, these charges, which had
been previously reported as costs of the Corporate and
Other segment, were pushed down to each of the reportable
segments and are reflected accordingly. In addition, for
consistency, all prior years have been restated to reflect
stock-based compensation expenses in the respective segments
where the personnel were employed. The allocation of stock-based
compensation to CPS in the fourth quarter of 2002 resulted in a
reduction of CPS net income, which further resulted in a
reduction in minority interest expense of approximately
$1.0 million, and a corresponding increase in CTIs
consolidated net income.

10.     Related Party
Transactions

From 1987 through April 2001, Siemens was
the exclusive distributor of scanners manufactured by CPS. In
April 2001, CPS implemented a new multiple distributor
strategy. The current distribution agreement with Siemens, which
was effective March 1, 2002, has an initial term of five
years with one renewal period of one year. Transfer prices are
set annually and vary with product type and annual shipment
volume. Sales are F.O.B. factory. Siemens is provided a warranty
discount to cover their cost of parts during the first twelve
months of usage. Siemens is responsible for all site planning,
installation and customer training.

F-22



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following additional transactions occurred in
2003, 2002 and 2001, between the Company and Siemens, a CTI
shareholder, or its affiliates:



| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Companys sales through and to Siemens
    were $143,856, $128,233 and $120,730 in 2003, 2002 and 2001,
    respectively.              
|
| |  | Accounts receivable and customer advances
    received through Siemens totaled $42,430 and $326, respectively,
    at September 30, 2003.  
|
| |  | Accounts receivable and customer advances
    received through Siemens totaled $39,918 and $1,214,
    respectively, at September 30, 2002.

Under the terms of an agreement with Siemens (the
Siemens Agreement), Siemens shall have the right to purchase, or
CTI shall have the right to require Siemens to purchase, an
additional 30.1% of CPS. The exercise of this put/call is
contingent upon cumulative unit sales of ECAT® scanners
reaching a defined target level. At September 30, 2003 the
cumulative total number of units sold by CPS was 697. By the end
of 2003, CPS would need to have sold a cumulative total of
981 units to achieve the required cumulative sales level
for the put/call to be exercisable, with such cumulative unit
sales requirement increasing by 74 units each year
thereafter. Upon exercise of the put/call, the Siemens Agreement
provides for the purchase price to be established through an
independent third party valuation process if the parties are
unable to agree upon a price. Once CTI is notified of
Siemens intent to purchase the additional interest, CTI
shall have the right to defer the Siemens purchase for one year.
CTI does not expect this target level to be reached before the
fiscal year ending September 30, 2005.

The Company has four agreements with Concorde
Microsystems, Inc. (Concorde), a company partially owned and
operated by children of CTIs President and Chief Executive
Officer who is also a director and major shareholder in CTI.

In the MicroPET Agreement, CPS assigned its
rights to develop positron emission tomography for animals.
Concorde was granted a non-exclusive royalty-free license for
the sole purpose of production by Concorde of products for use
in the high-resolution animal PET tomography market. All
technology developed by Concorde useful in the design,
development or production of PET tomographs for humans belongs
to CPS. All technology developed by Concorde that is useful in
the development of PET tomographs for animal applications
belongs to Concorde. For a period of five years, CPS agreed to
sell Concorde equipment and components needed to develop animal
tomographs and Concorde agreed to sell MicroPET tomographs and
related equipment for resale by CPS. The MicroPET Agreement has
a five-year term, but CPS has retained the right upon
180 days notice to Concorde to begin developing positron
emission tomographs for animals.

As part of the transactions contemplated by the
MicroPET Agreement, CPS entered into a Patent and Technology
Sublicense Agreement. Pursuant to this Sublicense, CPS granted
Concorde a non-exclusive, royalty-free right to use the LSO
technology in the field of detector systems for high-resolution
animal tomographs. The Patent and Technology Sublicense
Agreement expires on the date that CTIs license to use the
LSO technology expires.

Effective October 1, 1999, CPS and Concorde
entered into a Development and Exclusive Supply Agreement
pursuant to which CPS engaged Concorde to develop, manufacture
and supply application specific integrated circuits (commonly
referred to as ASICS) used in the PET scanners manufactured by
CPS. CPS agreed to pay Concorde for its development costs,
production set-up costs and design maintenance procedures
incurred in connection with the development and production of
the microchips or ASICS. CPS agreed that upon the successful
development of the ASICS, Concorde would be the exclusive
supplier of the ASICS. CPS also agreed to acquire at least
$50,000 worth of ASICS from Concorde during the term of the
agreement. All technology developed by Concorde in the
performance of

F-23



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

the agreement belongs to CPS. Concorde agreed for
a period of five years after the new ASICS are developed not to
engage in or own an interest in a business competitive with CPS
or to design ASICS for any competitor of CPS. The agreement has
a five-year term. In connection with these agreements, CPS paid
Concorde $601, $459 and $554 for the years ended
September 30, 2003, 2002, and 2001, respectively.

In September 2002, PETNET entered into an
agreement with Concorde. Under the terms of the agreement,
PETNET was granted an exclusive, royalty-free license to
distribute Concorde products throughout the continental United
States and Canada. PETNET is responsible for sales, marketing
and education activities while Concorde is responsible for all
product warranty, installation, training, service and technical
support. In the event the annual orders do not exceed each
previous years orders by 10%, distribution rights can be
made nonexclusive at the sole discretion of Concorde. During the
year ended September 30, 2003, total PETNET sales and cost
of sales of Concorde products under this distribution agreement
were $5,436 and $5,061, respectively. In addition, during 2003
PETNET purchases from Concorde were $5,550, and accounts payable
at September 30, 2003 included $3,206 in payables to
Concorde. There were no transactions under the agreement for the
year-ended September 30, 2002.

On September 5, 2002 CTI entered into an LSO
Supply Agreement with Concorde pursuant to which CTI agreed to
provide Concorde with LSO. This agreement expires upon the
termination of CTIs license with Schlumberger to use the
LSO technology. In this agreement, CTI agreed not to sell LSO to
another third party engaged in the development or manufacture of
PET scanners for use in animal applications. During the year
ended September 30, 2003, LSO sales to Concorde were $1,371.

CTI acquired land in 2001 for $1,454 from a
general partnership owned in part by certain directors and
officers of the Company. The ongoing expansion of the
Companys facilities is being constructed on this land. CTI
has also been granted a right of first refusal to purchase an
adjacent parcel from the same general partnership.

11.     Business
Acquisitions

On August 15, 2003, the Company acquired
100% of the capital stock of Mirada Solutions Limited (Mirada).
The results of Miradas operations have been included in
the consolidated financial statements since that date.
Miradas products aid better detection, diagnosis and
management of disease through the application of image analysis
tools to medical images. The Company will incorporate
Miradas image analysis and fusion software into all of its
PET scanner workstations, providing greatly enhanced analytical
and diagnostics capabilities.

The aggregate purchase price was $23,091,
including $19,652 of cash, common stock of $251, and the balance
of $3,188 in notes payable. The purchase price allocation is
subject to refinement as additional transaction related costs
may be incurred. Under the purchase agreement, the Company may
be required to make additional payments to the former
shareholders if Mirada net income exceeds defined goals for 2004
and 2005. If additional payments are required the Company will
adjust goodwill at that time. The

F-24



---



##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

following table summarizes the estimated fair
values of the assets acquired and liabilities assumed at the
date of acquisition.

|                          |  |            |        | 
|------------------------- |  | ---------- | ------ | 
|                          |  | At        
|                          |  | August 15,
|                          |  | 2003      
|                          |  |           
|Current assets            |  | $          | 2,257  | 
|Property and equipment    |  |            | 331    | 
|Other assets              |  |            | 5      | 
|Intangible assets         |  |            | 14,209 | 
|Goodwill                  |  |            | 12,464 | 
|                          |  |            |        | 
|Total assets acquired     |  |            | 29,266 | 
|                          |  |            |        | 
|Current liabilities       |  |            | 2,923  | 
|Long-term debt            |  |            | 365    | 
|Deferred tax liability    |  |            | 2,887  | 
|                          |  |            |        | 
|Total liabilities assumed |  |            | 6,175  | 
|                          |  |            |        | 
|Net assets acquired       |  | $          | 23,091 | 
|                          |  |            |        | 

Of the $14,209 in acquired intangible assets,
$12,829 was assigned to existing product technology and is being
amortized on a straight-line basis over a weighted average life
of approximately 10 years. Amortization expense recorded on
theses assets was $176 in 2003. The remaining intangible assets
of $1,380 were assigned to research and development assets that
were written off at the date of acquisition in accordance with
FASB Interpretation No. 4, Applicability of FASB
No. 2 to Business Combinations Accounted for by the
Purchase Method.None of the goodwill is expected to be
deductible for tax purposes. No pro forma disclosures have been
included in these financial statements as Mirada was immaterial
to the consolidated financial statements taken as a whole.

In October 2000, the Company acquired the
remaining minority interest in PETNET. Under the terms of the
agreement, holders of PETNET common stock received
1.60 shares of CTI common stock for each 3.6875 shares
of PETNET common stock outstanding. Approximately
3,193,000 shares of CTI common stock with a fair value of
$11,469 were issued to PETNET shareholders. The merger has been
treated as a forward triangular merger in order to qualify as a
tax-free reorganization under IRS Section 368(a)(2)(D). The
Company accounted for this transaction under the purchase method
of accounting and accordingly, allocated the purchase price to
cash, accounts receivable, prepaid expenses, fixed assets,
current liabilities and capital leases based on their estimated
fair values. Goodwill resulting from the transaction was $8,371
which was being amortized over twenty years prior to the
adoption of SFAS 142.

The changes in the carrying value of goodwill for
the year ended September 30, 2003 are as follows:

|                            |  |           |     |             |  |             |     |              |  |   |        |  |  |   |        | 
|--------------------------- |  | --------- | --- | ----------- |  | ----------- | --- | ------------ |  | - | ------ |  |  | - | ------ | 
|                            |  | Detector  |     | Corporate & |  | Eliminating |     | Consolidated
|                            |  | Materials |     | Other       |  | Entries     |     | Total       
|                            |  |           |     |             |  |             |     |             
|Balance, October 1, 2002    |  | $         | 520 |             |  | $           | 593 |              |  | $ | 11,272 |  |  | $ | 12,385 | 
|Goodwill acquired           |  |           | 191 |             |  |             |    |              |  |   | 12,464 |  |  |   | 12,655 | 
|                            |  |           |     |             |  |             |     |              |  |   |        |  |  |   |        | 
|Balance, September 30, 2003 |  | $         | 711 |             |  | $           | 593 |              |  | $ | 23,736 |  |  | $ | 25,040 | 
|                            |  |           |     |             |  |             |     |              |  |   |        |  |  |   |        | 

The Eliminating Entries column
reflects the goodwill arising from the acquisitions of PETNET
and Mirada that was not pushed down to the subsidiaries for
segment reporting. Of the $23,736 total, $11,272 relates to
PETNET and $12,464 relates to Mirada.

F-25



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Had the Company applied the non-amortization of
goodwill provisions of SFAS 142 in the year ended
September 30, 2001, reported net income and basic and
diluted earnings per share would have been as follows:

|                                        |  |   |       | 
|--------------------------------------- |  | - | ----- | 
|Reported net income                     |  | $ | 6,116 | 
|Goodwill amortization                   |  |   | 689   | 
|                                        |  |   |       | 
|Adjusted net income                     |  | $ | 6,805 | 
|                                        |  |   |       | 
|Reported basic earnings per share       |  |   | 0.15  | 
|Goodwill amortization                   |  |   | 0.02  | 
|                                        |  |   |       | 
|Adjusted basic earnings per share       |  | $ | 0.17  | 
|                                        |  |   |       | 
|Reported diluted earnings per share     |  |   | 0.13  | 
|Goodwill amortization                   |  |   | 0.02  | 
|                                        |  |   |       | 
|Amortization diluted earnings per share |  | $ | 0.15  | 
|                                        |  |   |       | 

No SFAS 142 pro forma disclosures have been made
for 2003 and 2002 as the effect of SFAS 142 is already included
in the results of operations.

12.     Preferred
Stock and Warrants

On September 30, 1999, CTI issued 400,000
shares of 9% redeemable preferred stock, 200,000 shares of 10%
convertible redeemable preferred stock and a warrant to purchase
2,196,326 common shares for gross proceeds of $15,000. Both
issues of preferred stock were convertible into common stock
which subsequently occurred concurrent with the Companys
initial public offering. The Company accreted both issues of the
preferred stock to their respective redemption amounts using the
effective interest method. The aggregate accretion on both
issues of redeemable preferred stock in the years ended
September 30, 2002 and 2001 was $1,283 and $310,
respectively.

The warrant, which had an exercise price of
$0.0016 per share, was valued at $4,374 on the date of issuance
based on its relative fair value using the Black-Scholes
option-pricing model with the following assumptions: risk-free
rate of 6.8%, estimated life of ten years, 75% volatility and no
dividend yield. Pursuant to anti-dilution provisions in the
agreement, the number of common shares available to be purchased
under the warrant was increased by 250,854 shares to 2,447,181
in connection with CTIs acquisition of the remaining
minority interest in PETNET in October 2000. CTI recorded a
warrant liability upon issuing the 9% redeemable preferred stock
and 10% convertible redeemable preferred stock based on the
relative fair value of the warrants issued in the transaction.
Through the date the warrants were exercised, CTI made periodic
mark to market adjustments, which are reflected in the
accompanying consolidated statements of operations in accordance
with the provisions of EITF Issue 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock.

On March 29, 2002, the purchaser exercised
the warrant through a cashless exercise and received 2,446,563
shares of common stock. Because the warrant had a put feature
and thus gave the holder the choice of cash settlement or
settlement in shares, the Company was required to report the
proceeds from the issuance of the warrant as a liability and
subsequently measure the warrant at fair value with changes in
the fair value reported in earnings until the put feature was
eliminated on March 31, 2002. The mark-to-market adjustment
expensed in the statement of operations was $8,902 and $3,921,
for the years ended September 30, 2002, and 2001,
respectively.

On June 26, 2002, CTI exercised a repurchase
option in connection with its initial public offering which
qualified as a Liquidity Event (as defined in the warrant
agreement). The option called for a $1,000

F-26



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

payment in exchange for a portion of the warrant
covering from 188,189 to 1,191,165 shares, based on the internal
rate of return to the purchaser of the preferred stock. Pursuant
to the warrant agreement, the Company received a credit against
the $1,000 payment in an amount equal to fifty percent of any
underwriting fees paid by the Company to an affiliate of the
holder of the warrant in connection with a public offering of
the Companys common stock. The Company received a credit
in the amount of $658 in connection with its initial public
offering and therefore paid $342 to repurchase 1,191,165 shares
upon the closing of the offering. The cost of the common shares
acquired is reflected as treasury stock in the accompanying
consolidated financial statements.

On June 26, 2002, the Company closed its
initial public offering in which it sold 11,048,000 shares of
common stock at $17 per share for net proceeds of approximately
$171.4 million, net of underwriting discounts, commissions
and other offering costs. Upon the closing of the initial public
offering, all of the Companys convertible preferred stock,
totaling $6,000, automatically converted into 1,280,000 shares
of common stock. On June 26, 2002, the Company used
approximately $10.2 million of the proceeds from the
offering to redeem all of its redeemable preferred stock,
including accrued dividends.

On May 13, 2002, the Company purchased an
aggregate of 2,536,109 shares of its outstanding common stock
from two shareholders for the aggregate price of
$11.9 million in cash. On May 15, 2002, the Board of
Directors approved a 1.6-for-1 common stock split and an
increase in the number of authorized common shares, which was
effective on June 1, 2002. All references to number of
common shares, per share amounts, and stock option and warrant
data have been revised for all periods presented to reflect the
stock split.

On May 21, 2002, the Companys Board of
Directors adopted a stockholder protection rights agreement and
declared a dividend of one Right for each share of Common Stock
held of record as of the close of business on the closing date
of the initial public offering of Common Stock of the Company
pursuant to an effective registration statement filed by the
Company with the Securities and Exchange Commission under the
Securities Act of 1933. The Rights, which do not have any voting
rights, are generally not exercisable until 10 days after
an announcement by the Company that a person has acquired at
least 15% of the Companys Common Stock. Each Right, should
it become exercisable, will entitle the owner to buy one
ten-thousandth of a share of Series C Junior Participating
Preferred Stock at an exercise price of $130. The Rights may be
terminated without payment by the Company at any time prior to
the date that is ten business days after the acquisition of 15%
or more of the Companys Common Stock by a person or group.

In the event the Rights become exercisable as a
result of the acquisition of at least 15% of the Companys
Common Stock, each Right will entitle the owner, other than the
acquiring person, to buy at the Rights then current
exercise price a number of shares of Common Stock with a market
value equal to twice the exercise price. In addition, unless the
acquiring person owns more than 50% of the outstanding shares of
Common Stock, the Board of Directors may elect to exchange all
outstanding Rights (other than those owned by such acquiring
person or affiliates thereof) at an exchange ratio of one share
of Common Stock per Right. The Rights expire on June 1,
2012 unless earlier terminated by the Board. As a result of the
adoption of the Shareholders Rights Plan, 50,000 shares of
authorized preferred stock have been reserved and designated as
Series C Junior Participating Preferred Stock.

13.     Segments

The Company operates in four reportable business
segments based on differences in products and services: CPS,
PETNET, Detector Materials, and CTI Services. The CPS segment
designs, manufactures and markets medical research and scanning
equipment. The PETNET segment manufactures and distributes
radiopharmaceuticals to customers. The Detector Materials
segment manufactures a scintillation

F-27



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

component sold primarily to the CPS segment. The
Companys direct distribution and service of cyclotron
systems and PET scanners are reflected in the CTI Services
segment.

The accounting policies of the segments are the
same as those described in the Summary of Significant
Accounting Policies with the exception of deferred tax
assets and liabilities for the Detector Materials segment, which
are included in Corporate and Other. Segment data
includes intersegment revenues. Assets and costs of the
corporate headquarters are allocated to the segments based on
usage with the exception of the Companys headquarters
building and non-allocable costs which are included in
Corporate and Other. The Company evaluates the
performance of its segments based on net income (loss). The
Companys business is conducted principally in the U.S.

The following table summarizes information about
net income (loss) and segment assets used by the chief
operating decision maker of the Company in making decisions
regarding allocation of assets and resources as of and for the
years ended September 30, 2003, 2002, and 2001:

|                                       |  |     |         |        |  |           |        |          |  |           |        |             |  |              |         |   |  |   |         |   |  |   |          |   |  |   |         |  
|-------------------------------------- |  | --- | ------- | ------ |  | --------- | ------ | -------- |  | --------- | ------ | ----------- |  | ------------ | ------- | - |  | - | ------- | - |  | - | -------- | - |  | - | ------- | -
|                                       |  |     |         |        |  | Detector  |        | CTI      |  | Corporate |        | Eliminating |  | Consolidated
|                                       |  | CPS |         | PETNET |  | Materials |        | Services |  | and Other |        | Entries     |  | Total       
|                                       |  |     |         |        |  |           |        |          |  |           |        |             |  |             
|Year Ended September 30, 2003          |  |     |         |        |  |           |        |          |  |           |        |             |  |              |         |   |  |   |         |   |  |   |          |   |  |   |         |  
|External revenues                      |  | $   | 172,013 |        |  | $         | 74,868 |          |  | $         | 2,852  |             |  | $            | 112,556 |   |  | $ |        |   |  | $ |         |   |  | $ | 362,289 |  
|Intersegment revenues                  |  |     | 75,726  |        |  |           | 21     |          |  |           | 52,312 |             |  |              | 13,331  |   |  |   |        |   |  |   | (141,390 | ) |  |   |        |  
|Depreciation and amortization          |  |     | 1,539   |        |  |           | 6,895  |          |  |           | 1,800  |             |  |              | 664     |   |  |   | 1,994   |   |  |   | (955     | ) |  |   | 11,937  |  
|Stock-based compensation               |  |     | 326     |        |  |           | 286    |          |  |           | 21     |             |  |              | 634     |   |  |   | 642     |   |  |   |         |   |  |   | 1,909   |  
|Interest expense                       |  |     | 14      |        |  |           | 1,644  |          |  |           | 860    |             |  |              | 1,508   |   |  |   | 1,327   |   |  |   | (3,427   | ) |  |   | 1,926   |  
|Interest income                        |  |     | 411     |        |  |           | 8      |          |  |           | 116    |             |  |              | 298     |   |  |   | 3,716   |   |  |   | (3,427   | ) |  |   | 1,122   |  
|Equity in (income) losses of investees |  |     |        |        |  |           | (406   | )        |  |           |       |             |  |              | 288     |   |  |   |        |   |  |   | 102      |   |  |   | (16     | )
|Income tax expense                     |  |     | 17,704  |        |  |           | 997    |          |  |           | 9,850  |             |  |              | (4,743  | ) |  |   | 979     |   |  |   | (1,852   | ) |  |   | 22,935  |  
|Minority interest expense              |  |     |        |        |  |           | 345    |          |  |           |       |             |  |              |        |   |  |   |        |   |  |   | 15,042   |   |  |   | 15,387  |  
|Net income (loss)                      |  |     | 30,144  |        |  |           | 932    |          |  |           | 15,445 |             |  |              | (8,415  | ) |  |   | 1,556   |   |  |   | (19,099  | ) |  |   | 20,563  |  
|Total assets                           |  |     | 143,397 |        |  |           | 87,233 |          |  |           | 45,510 |             |  |              | 131,683 |   |  |   | 102,393 |   |  |   | (85,168  | ) |  |   | 425,048 |  
|Investment in equity method investees  |  |     |        |        |  |           | 1,903  |          |  |           |       |             |  |              | 18      |   |  |   |        |   |  |   |         |   |  |   | 1,921   |  
|Capital expenditures                   |  |     | 10,199  |        |  |           | 21,937 |          |  |           | 2,411  |             |  |              | 1,361   |   |  |   | 11,461  |   |  |   | (2,563   | ) |  |   | 44,806  |  
|Year Ended September 30, 2002          |  |     |         |        |  |           |        |          |  |           |        |             |  |              |         |   |  |   |         |   |  |   |          |   |  |   |         |  
|External revenues                      |  | $   | 151,264 |        |  | $         | 55,314 |          |  | $         | 1,047  |             |  | $            | 50,770  |   |  | $ |        |   |  | $ |         |   |  | $ | 258,395 |  
|Intersegment revenues                  |  |     | 37,774  |        |  |           | 260    |          |  |           | 28,155 |             |  |              | 14,878  |   |  |   |        |   |  |   | (81,067  | ) |  |   |        |  
|Depreciation and amortization          |  |     | 839     |        |  |           | 4,440  |          |  |           | 884    |             |  |              | 461     |   |  |   | 1,347   |   |  |   | (873     | ) |  |   | 7,098   |  
|Stock-based compensation               |  |     | 3,926   |        |  |           | 1,388  |          |  |           | 1,671  |             |  |              | 2,290   |   |  |   | 2,975   |   |  |   |         |   |  |   | 12,250  |  
|Interest expense                       |  |     | 464     |        |  |           | 2,652  |          |  |           | 1,046  |             |  |              | 893     |   |  |   | 159     |   |  |   |         |   |  |   | 5,214   |  
|Interest income                        |  |     | 20      |        |  |           | 95     |          |  |           | 192    |             |  |              | 369     |   |  |   | 390     |   |  |   |         |   |  |   | 1,066   |  
|Equity in (income) losses of investees |  |     |        |        |  |           | (539   | )        |  |           |       |             |  |              | 271     |   |  |   |        |   |  |   | 301      |   |  |   | 33      |  
|Income tax expense                     |  |     | 13,599  |        |  |           | (634   | )        |  |           | 2,327  |             |  |              | (100    | ) |  |   | 2,119   |   |  |   | (2,237   | ) |  |   | 15,074  |  
|Minority interest expense              |  |     |        |        |  |           | 125    |          |  |           |       |             |  |              |        |   |  |   |        |   |  |   | 12,844   |   |  |   | 12,969  |  
|Net income (loss)                      |  |     | 25,740  |        |  |           | (1,955 | )        |  |           | 3,659  |             |  |              | (373    | ) |  |   | (14,029 | ) |  |   | (16,461  | ) |  |   | (3,419  | )
|Total assets                           |  |     | 102,386 |        |  |           | 64,785 |          |  |           | 39,473 |             |  |              | 72,729  |   |  |   | 115,782 |   |  |   | (43,446  | ) |  |   | 351,709 |  
|Investment in equity method investees  |  |     |        |        |  |           | 1,348  |          |  |           |       |             |  |              | (70     | ) |  |   |        |   |  |   |         |   |  |   | 1,278   |  
|Capital expenditures                   |  |     | 2,907   |        |  |           | 18,973 |          |  |           | 3,911  |             |  |              | 921     |   |  |   | 12,292  |   |  |   | (2,930   | ) |  |   | 36,074  |  

F-28



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                       |  |     |         |        |  |           |        |          |  |           |        |             |  |              |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|-------------------------------------- |  | --- | ------- | ------ |  | --------- | ------ | -------- |  | --------- | ------ | ----------- |  | ------------ | ------ |  |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                       |  |     |         |        |  | Detector  |        | CTI      |  | Corporate |        | Eliminating |  | Consolidated
|                                       |  | CPS |         | PETNET |  | Materials |        | Services |  | and Other |        | Entries     |  | Total       
|                                       |  |     |         |        |  |           |        |          |  |           |        |             |  |             
|Year Ended September 30, 2001          |  |     |         |        |  |           |        |          |  |           |        |             |  |              |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|External revenues                      |  | $   | 126,879 |        |  | $         | 35,610 |          |  | $         | 1,803  |             |  | $            | 24,585 |  |  | $ |       |   |  | $ |        |   |  | $ | 188,877 |  
|Intersegment revenues                  |  |     | 6,716   |        |  |           |       |          |  |           | 16,580 |             |  |              | 17,128 |  |  |   |       |   |  |   | (40,424 | ) |  |   |        |  
|Depreciation and amortization          |  |     | 609     |        |  |           | 2,094  |          |  |           | 705    |             |  |              | 224    |  |  |   | 1,587  |   |  |   | (754    | ) |  |   | 4,465   |  
|Stock-based compensation               |  |     | 425     |        |  |           |       |          |  |           |       |             |  |              | 113    |  |  |   |       |   |  |   |        |   |  |   | 538     |  
|Interest expense                       |  |     | 544     |        |  |           | 1,098  |          |  |           | 1,516  |             |  |              | 1,812  |  |  |   | (1,103 | ) |  |   |        |   |  |   | 3,867   |  
|Interest income                        |  |     | 1       |        |  |           | 23     |          |  |           | 237    |             |  |              | 419    |  |  |   | (580   | ) |  |   |        |   |  |   | 100     |  
|Equity in (income) losses of investees |  |     |        |        |  |           | (757   | )        |  |           |       |             |  |              |       |  |  |   |       |   |  |   | 71      |   |  |   | (686    | )
|Income tax expense                     |  |     | 7,135   |        |  |           | 578    |          |  |           | 1,790  |             |  |              | 1,653  |  |  |   | (1,245 | ) |  |   | 19      |   |  |   | 9,930   |  
|Minority interest expense              |  |     |        |        |  |           | 26     |          |  |           |       |             |  |              |       |  |  |   |       |   |  |   | 6,340   |   |  |   | 6,366   |  
|Net income (loss)                      |  |     | 12,280  |        |  |           | 845    |          |  |           | 2,408  |             |  |              | 1,555  |  |  |   | (1,907 | ) |  |   | (9,065  | ) |  |   | 6,116   |  
|Total assets                           |  |     | 89,178  |        |  |           | 45,124 |          |  |           | 27,040 |             |  |              | 45,025 |  |  |   | 15,180 |   |  |   | (13,766 | ) |  |   | 207,781 |  
|Investment in equity method investees  |  |     |        |        |  |           | 1,323  |          |  |           |       |             |  |              |       |  |  |   |       |   |  |   |        |   |  |   | 1,323   |  
|Capital expenditures                   |  |     | 1,566   |        |  |           | 17,243 |          |  |           | 2,746  |             |  |              | 2,648  |  |  |   | 2,793  |   |  |   | (2,111  | ) |  |   | 24,885  |  

Effective October 1, 2003, the PETNET and
CTI Services segments have been combined to reflect
organizational changes. In future fiscal reporting periods these
two segments will be reported as one segment, CTI Solutions.

Sales were distributed to the following locations:

|              |  |               |     |      |  |      |     |   |  |  |     |  
|------------- |  | ------------- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|              |  |              
|              |  | Year Ended   
|              |  | September 30,
|              |  |              
|              |  | 2003          |     | 2002 |  | 2001
|              |  |               |     |      |  |     
|United States |  |               | 77  | %    |  |      | 77  | % |  |  | 77  | %
|Foreign       |  |               | 23  |      |  |      | 23  |   |  |  | 23  |  
|              |  |               |     |      |  |      |     |   |  |  |     |  
|              |  |               | 100 | %    |  |      | 100 | % |  |  | 100 | %
|              |  |               |     |      |  |      |     |   |  |  |     |  

No individual foreign country represents 10% or
more of the Companys total sales since 2001. Sales are
based on final destination of products sold.

F-29



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES

SCHEDULE II.     FINANCIAL
STATEMENT SCHEDULES

Valuation and Qualifying Accounts and
Reserves


|                                                        |  |  |      |            |  |           |       |            |  |            |       |  |  |   |      |      |  |   |       | 
|------------------------------------------------------- |  |  | ---- | ---------- |  | --------- | ----- | ---------- |  | ---------- | ----- |  |  | - | ---- | ---- |  | - | ----- | 
|                                                        |  |  |      | Balance at |  |           |       |            |  | Balance at
|                                                        |  |  |      | Beginning  |  |           |       |            |  | End of    
|                                                        |  |  |      | of Period  |  | Additions |       | Deductions |  | Period    
|                                                        |  |  |      |            |  |           |       |            |  |           
|Description                                             |  |  |      |            |  |           |       |            |  |            |       |  |  |   |      |      |  |   |       | 
|                                                        |  |  |      |            |  |           |       |            |  |            |       |  |  |   |      |      |  |   |       | 
|Accounts receivable allowance for doubtful
    accounts |  |  | 2001 |            |  | $         | 825   |            |  | $          | 406   |  |  | $ | (474 | )(i) |  | $ | 757   | 
|                                                        |  |  | 2002 |            |  |           | 757   |            |  |            | 1,466 |  |  |   | (405 | )(i) |  |   | 1,818 | 
|                                                        |  |  | 2003 |            |  |           | 1,818 |            |  |            | 2,791 |  |  |   | (948 | )(i) |  |   | 3,661 | 
|                                                       
|Inventory reserve for obsolescence                      |  |  | 2001 |            |  | $         | 1,531 |            |  | $          | 594   |  |  | $ | (387 | )    |  | $ | 1,738 | 
|                                                        |  |  | 2002 |            |  |           | 1,738 |            |  |            | 1,002 |  |  |   | (889 | )    |  |   | 1,851 | 
|                                                        |  |  | 2003 |            |  |           | 1,851 |            |  |            | 1,471 |  |  |   | (476 | )    |  |   | 2,846 | 



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|    |                                                                                   
|--- | ----------------------------------------------------------------------------------
|(i) | Represents write-offs during the respective
    period for uncollectible accounts.

All other schedules have been omitted as they are
not required under the related instructions, are inapplicable,
or because the information required is included in the
consolidated financial statements or notes thereto.

F-30