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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,
    2002                                            
|          
|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)                          

(865) 218-2000

(Registrants Telephone Number, Including
Area Code)


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 proceeding 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 o          No þ

The aggregate market value of the common stock
held by non-affiliates of the registrant was $666,327,906 as of
December 2, 2002, 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).
Because there was no public market for the common stock of the
registrant as of the last business day of its most recently
completed second fiscal quarter, the foregoing information is
provided as of a recent date.

There were 42,955,599 shares of common stock
outstanding at December 2, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the registrants proxy statement
for its 2003 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                                                                    
|                                                       | Item 4. Submission of Matters to a Vote of Security Holders                                  
|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 
|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                      
|                                                       | Item 13. Certain Relationships and Related Transactions                                      
|                                                       | Item 14. Controls and Procedures                                                             
|                                                       | Item 15. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K       
|SIGNATURES                                            
|CERTIFICATION                                         



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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                                                                                |    |      | 26 | 
|Item 3.                                                    |  | Legal Proceedings                                                                         |    |      | 26 | 
|Item 4.                                                    |  | Submission of Matters to a Vote of Security
    Holders                                   |    |      | 27 | 
|PART II                                                   
|Item 5.                                                    |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |    |      | 27 | 
|Item 6.                                                    |  | Selected Financial Data                                                                   |    |      | 29 | 
|Item 7.                                                    |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 30 | 
|Item 7A.                                                   |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |    |      | 62 | 
|Item 8.                                                    |  | Financial Statements and Supplementary Data                                               |    |      | 63 | 
|Item 9.                                                    |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |    |      | 63 | 
|PART III                                                  
|Item 10.                                                   |  | Directors and Executive Officers of the Registrant                                        |    |      | 63 | 
|Item 11.                                                   |  | Executive Compensation                                                                    |    |      | 63 | 
|Item 12.                                                   |  | Security Ownership of Certain Beneficial Owners
    and Management                        |    |      | 64 | 
|Item 13.                                                   |  | Certain Relationships and Related Transactions                                            |    |      | 64 | 
|PART IV                                                   
|Item 14.                                                   |  | Controls and Procedures                                                                   |    |      | 64 | 
|Item 15.                                                   |  | Exhibits, Consolidated Financial Statement
    Schedules, and Reports on Form 8-K         |    |      | 65 | 
|SIGNATURES                                                 |  |                                                                                           | 66 |     
|CERTIFICATIONS                                             |  |                                                                                           | 67 |     



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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, 2002;                                                                                         
|
| |  | our future sources of and needs for liquidity and
    capital resources;                                                                                                                                  
|
| |  | 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;                                                                                                           
|
| |  | our business strategies and our ability to grow
    our business;                                                                                                                                         
|
| |  | our ability to enhance existing, or develop new,
    products and services and the impact of any such enhancements or
    developments;                                                                   
|
| |  | the development 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; and                                           
|
| |  | our ability to maintain our existing, or to
    develop additional, valuable intellectual property rights.                                                                                                

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.

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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, or CT, ultrasound and magnetic resonance imaging, or
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 simultaneously 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
    next 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, which we market as our
ECAT® scanners. We manufacture the detection materials
utilized in PET scanners including our proprietary 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. 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.

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

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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 dedicated PET imaging equipment and
related products and services have grown rapidly and are
expected to continue growing rapidly. Dedicated PET imaging
equipment refers to scanners that utilize PET imaging technology
in isolation rather than in combination with another imaging
technology such as the recently introduced PET/CT scanner. Based
on a 2001 market analysis prepared by Frost & Sullivan, a
marketing consulting firm, the estimated installed base of
dedicated PET scanners in the U.S. grew from 107 in 1997 to 348
in 2000, and the estimated number of units shipped annually in
the U.S. grew from 12 in 1997 to 160 in 2000. The Frost &
Sullivan analysis forecasts that from 2000 through 2007 the U.S.
installed base of dedicated PET scanners will grow at an
estimated compound annual growth rate of 38.7%, and the number
of units shipped in the U.S. will grow at an estimated compound
annual growth rate of 22.0%.

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, 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. 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 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                                   

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|                |  |                                                                          |  |                                                                                                               
|--------------- |  | ------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------
|Effective Date  |  | Clinical Condition                                                       |  | Coverage                                                                                                      
|                |  |                                                                          |  |                                                                                                               
|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




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 30 minutes to approximately
ten minutes. Other research and development activities focused
on improving image quality have recently resulted in the
commercial

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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 monitoring 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 managing the treatment of disease; and                                                                               
|
| |  | developing new applications for PET technology by
    supporting clinical trials that involve PET, collaborating with
    pharmaceutical companies and developing new radiopharmaceuticals.

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 to offer customers
    financing arrangements and price concessions for PET scanners
    but lack the full array of 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 dealers and distributors in key international
    markets; and
|
| |  | pursuing a multiple distributor strategy for our
    PET scanner products through CTI PET Systems.                                                                                                        

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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.            

Maintain Our Technological Leadership Through
Focused Research and Development.We
have been a leading innovator of PET technology, and through CTI
PET Systems are dedicated to the development of next generation
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.                                                                                        

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
    improve image quality, extend imaging capabilities to biological
    processes of additional organs 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                                    
|
| |  | 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, CTI PET Systems, 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 CTI PET
Systems range in price from $800,000 to $2.5 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.

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

We believe we are now the leading manufacturer of
bismuth germanate, or BGO, detector material, the most widely
used detector material in PET today.

We also manufacture 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, we expect our
scanners to 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 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 without violating the Schlumberger
patent and, therefore, our exclusive license.

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 smaller 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 require 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 better
    image quality 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

A fundamental tenet of the diagnostic PET imaging
technique is the fact that the injection of the radioactive
material does not interfere with or disrupt the natural state of
the biological system. This means that PET radiopharmaceuticals
do not cause a pharmacologic effect. Radiopharmaceuticals probe
the molecular processes operative in living organisms.
Radiopharmaceuticals are intended for use in the diagnosis or
monitoring of diseases or manifestations of diseases.

8



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Through our PETNET subsidiary, we currently
operate 35 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
36 radiopharmacies, we operate 12 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. 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.



| |                                    
| | -----------------------------------
| | 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 the Reveal Network Solutions to connect
physicians, PETNET radiopharmacies and patients to PET
providers. The Reveal Network Solutions will facilitate the
sharing of relevant information among users, thereby improving
efficiency by automating some aspects of the PET process. The
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, the Reveal Network Solutions will provide us
with an on-line method to educate physicians regarding the
clinical advantages of PET.

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. Of the
    approximately 275 PET scanners sold by us in the U.S., 130 are
    under contract for repair and maintenance services at an average
    price of $118,000 per year.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 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 source rods used to calibrate our ECAT®
    scanners. All dedicated PET scanners require transmission
    sources as well as calibration sources. These sources are used
    by CTI PET Systems 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 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
    (not commercially approved)                                                                                                                                                                        
|1998 |  | Invented the combined PET/CT and demonstrated the
    first clinical image using a PET/CT                                                                                                                                                                
|2001 |  | Introduced LSO scanners on a commercial basis                                                                                                                                                                                                            

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 CTI PET Systems, 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 $21.7 million in 2002,
$19.0 million in 2001 and $14.9 million in 2000 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. CTI PET Systems also
worked with Dr. David Townsend at the University of Geneva
to develop the PET/CT, which was recognized by TIME Magazine as
the medical science Invention of the Year in 2000.
Further, CTI PET Systems 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. 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 and scientific institutions
including The Cleveland Clinic, Columbia Presbyterian, Emory
University, Washington University in St. Louis, Baylor
University, UCLA, MD Anderson Cancer Center, Hospital

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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

CTI PET Systems is developing a next generation
of dedicated PET scanners that use our advanced LSO-based
detector systems. The next generation of scanners is expected to
provide substantially higher patient throughput while providing
improved image quality, a larger field of view and upgradeable
performance. CTI PET Systems is also developing the next
generation of PET/CT scanners that will incorporate advanced
LSO-based detector systems. This next generation PET/CT is
expected to better integrate PET and CT and is 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 new
facility as the LA Tech Center. One of the goals 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 expanding the
use of PET in the drug development process, we hope to increase
awareness in the medical community of the significant benefits
of PET in identifying and measuring the progression of diseases.

Our Relationship with Siemens



| |                             
| | ----------------------------
| | Ownership of CTI PET Systems

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, CTI
PET Systems. The cash consideration paid by Siemens for its
49.9% interest was paid directly to the individual shareholders
of CTI PET Systems. 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 CTI PET Systems. Neither Siemens nor any of its
affiliates has any ongoing financial obligations, commitments or
guarantees with respect to CTI PET Systems 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 CTI PET
Systems common stock necessary to bring Siemens aggregate
ownership interest in CTI PET Systems to 80%. We refer to this
as the call right. The call right becomes exercisable upon CTI
PET Systems 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 defer the sale for a period of one
year. Upon CTI PET Systems exceeding the same minimum unit sales
volumes, we have a right to require Siemens to

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purchase from us the same number of shares of CTI
PET Systems 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 CTI PET Systems 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 CTI PET Systems
beginning on December 9, 1987. As of September 30,
2002, the cumulative total number of units sold by CTI PET
Systems was 522 and CTI PET Systems would need to have sold a
cumulative total of 907 units to achieve the required cumulative
sales level for the put/call right to be exercisable. After 2002
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 that the minimum sales
volumes are not likely to be met before 2005.

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 CTI PET Systems
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 CTI PET Systems shares by an independent professional
experienced in the valuation of closely held corporations
similar to CTI PET Systems. If the valuations that are obtained
are within 20% of each other, the price to be paid for the CTI
PET Systems 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
CTI PET Systems 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 CTI PET Systems
increases to 80%, Siemens will then be able to effect a merger
of CTI PET Systems 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 General Corporation Act. In the event Siemens acquires
a controlling interest in CTI PET Systems, CTI will no longer
include CTI PET Systems 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 CTI PET Systems. 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 CTI PET Systems to us or to
Siemens. Since the formation of the joint venture, CTI PET
Systems 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 CTI PET Systems would be at the
discretion of the CTI PET Systems 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 CTI PET Systems. This non-compete provision
will remain in effect for a period of three years following the
sale of our shares of CTI PET Systems 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 CTI PET Systems
and will therefore control the rights to the patents and other
intellectual property then held by CTI PET Systems. These
patents cover various electronics,

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detector technologies and 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 CTI PET Systems. Siemens would also acquire control of
the other tangible and intangible property owned by CTI PET
Systems, 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 CTI PET Systems, we
are obligated to sell LSO-based products to CTI PET Systems 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 CTI PET Systems. This sublicense automatically
terminates upon the termination of our current LSO license,
which expires in October 2008.

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



| |   |                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | designate two members of the five member board of
    directors of CTI PET Systems (we also have the right to
    designate two members of the CTI PET Systems board);                                             
|
| |  | select the fifth director of CTI PET Systems 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 CTI PET
    Systems 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 CTI
PET Systems, 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 CTI PET
Systems. Additionally, this process has 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 the next generation
PET/CT.

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

Changes due to Multiple Distributor
Strategy.Prior to the implementation
of the multiple distributor strategy, CTIs senior officers
also served as senior officers of CTI PET Systems in similar
capacities. Given the growth of our business and the transition
to the use of multiple distributors, we have agreed with Siemens
that we will appoint separate officers to serve each entity.
Accordingly, effective October 1, 2002, Dr. Nutt
resigned as CTIs Senior Vice President and Technology
Director. Dr. Nutt will continue to serve as the President
of CTI PET Systems and as a member of CTIs board of
directors. In addition, Michael Templin resigned as an officer
of CTI. Mr. Templin will continue to serve as the Chief
Financial Officer of CTI PET Systems. We currently anticipate
that Dr. Nutt will resign as President of CTI PET

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Systems following exercise of the put/call right
and immediately prior to Siemens acquiring control of CTI PET
Systems. In doing so, there are no restrictions upon
Dr. Nutts ability to immediately assume a role as an
officer of CTI.


CTI PET Systems has implemented other changes in
connection with the transition to the use of multiple
distributors, including the adoption of policies and procedures
to protect the confidential information of its distributors and
the elimination of its sales force.



| |                       
| | ----------------------
| | Distribution Agreement

Siemens served as our exclusive distributor of
ECAT® scanners from 1987 to 1997. From 1997 until 2001,
Siemens and CTI PET Systems served as the only distributors of
ECAT® scanners. In 2001, CTI PET Systems adopted a multiple
distributor strategy in order to expand its distribution
channel. As a result, we are now serving as a direct distributor
of the products manufactured by CTI PET Systems. Our
distribution agreement with CTI PET Systems grants us a
non-exclusive worldwide right to distribute PET scanners
manufactured by CTI PET Systems. Pursuant to the terms of our
distribution agreement, CTI PET Systems has an obligation to
sell scanners to us at a price that is no less favorable than
the price offered by CTI PET Systems to any of its other
distributors based on comparable volumes. In connection with
this new multiple distributor strategy, CTI PET Systems 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 new distribution agreement
with CTI PET Systems, we anticipate that following the exercise
of the put/call right we will continue to have a right to
distribute PET products manufactured by CTI PET Systems through
at least 2010. During the term of our distribution agreement, we
will have access to new products developed by CTI PET Systems on
the same terms and conditions that CTI PET Systems grants
distribution rights to Siemens.



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

Pursuant to the terms of our revolving credit
facility with SunTrust Bank, CTI PET Systems is allowed to
borrow up to $55.0 million under the credit facility to
finance its operations. At September 30, 2002, CTI PET
Systems did not have an outstanding balance under the credit
facility. CTI PET Systems 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 CTI PET Systems 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 CTI
PET Systems is principally limited to the accounts receivable
and inventory of CTI PET Systems.



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

In addition to the relationships previously
discussed, we have entered into various other commercial
arrangements with Siemens. For example, Siemens and CTI PET
Systems recently entered into an agreement pursuant to which
Siemens agreed to supply CTI PET Systems with CT scanners for
the purpose of manufacturing a combined PET/CT scanner. Siemens
has also agreed to provide us with replacement parts, training
and other support for the CT scanners incorporated into the
combined PET/CT systems. CTI PET Systems 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

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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 CTI
PET Systems. We also compete with Siemens in connection with the
sale and distribution of the PET scanners manufactured by CTI
PET Systems, 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 group
consists of national radiopharmacy companies such as Amersham,
Tyco, Syncor 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 36 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, CTI PET Systems
recently implemented 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 a direct
distributor of ECAT® scanners, we target customers whom we
believe would particularly benefit from our integrated line of
PET products and services. As a direct distributor of CTI PET
Systems products, we have also entered into
sub-distribution agreements in certain international markets in
an effort to sell more ECAT® scanners abroad and in order
to provide us access to new markets in which to sell our other
PET products and services.

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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 recent 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 CTI
PET Systems and today PETNET provides the center with all of its
PET related radiopharmaceutical requirements.

For fiscal years 2002, 2001 and 2000, our
revenues from U.S. sales were $197.7 million,
$144.7 million and $92.8 million, respectively. For
fiscal years 2002, 2001 and 2000, our revenues from sales
outside the U.S. were $60.7 million, $44.2 million and
$31.2 million, respectively. Sales through Siemens
represented approximately 49.6% of our consolidated revenues for
the fiscal year ended September 30, 2002. We have no other
single third-party customer that accounts for more than 10% of
our sales.

Firm backlog orders at September 30, 2002
and September 30, 2001 were $112.2 million and
$109.6 million, respectively. A majority of this backlog is
expected to be realized as revenues by the end of 2003.

Customer Service and Support

Due to the anticipated growth in our business, we
are in the process of expanding our customer service and support
staff. We maintain a network of more than 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 CTI
PET Systems 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, 2002, we held 27 U.S. patents and have 17
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

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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 CTI PET Systems 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

CTI PET Systems assembles ECAT® 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 ECAT®
scanners, the most significant internal manufacturing process
involves the production of detector materials, which includes
several proprietary processes. Examples of components
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. In addition, while we do
manufacture LSO detector material internally, our internal
production capacity does not meet all of our requirements. We
obtain the balance of our LSO requirements from a single
supplier. 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
quality assurance systems have been found by TÜV Essen to
conform to the requirements of ISO-9001, ISO 13485 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 have not been the
subject of federal or state regulatory interpretation. As a
result, we can not 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.

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| |               
| | --------------
| | 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, 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.

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

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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 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, each of which operates
under an applicable state pharmacy license and compounds PET
products in response to the prescription order of a licensed
practitioner. The FDA traditionally has deferred regulation of
the practice of medicine and pharmacy to state and local
authorities. However, the Food and Drug Administration
Modernization Act of 1997 (the 1997 Act) provides a
new framework for FDA regulation of 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 United States Pharmacopeia until two years
after the agency adopts appropriate new drug approval procedures
and current good manufacturing practice requirements for these
products. The FDA believes that the 1997 Act directs the agency
to establish approval procedures and current good manufacturing
practice requirements for all PET products, without any
exclusion for compounded PET products. Currently, any PET
product that does not comply with United States Pharmacopeia PET
compounding standards and official monographs is deemed by FDA
to be adulterated and may not lawfully be sold.

On March 10, 2000, FDA published a
Federal Registernotice 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

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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 regulation of PET products takes
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 to comply with
these requirements. When FDA finalizes its new drug approval and
current good manufacturing practice requirements for the
production and distribution of PET products, 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. The 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

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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 and ISO 13485 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.



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

Our scanners, cyclotrons, and PETNET
radiopharmacies require the use of radioactive materials. While
virtually all of this material has a short half-life, meaning it
quickly breaks down into inert, or non-radioactive substances,
using such materials presents the risk of accidental
environmental contamination and physical injury. We are subject
to federal, state and local regulations governing the storage,
use, transportation and disposal of such materials and resulting
waste products. Although we believe that our procedures for
storing, handling, transporting and disposing of these hazardous
materials comply with the standards prescribed by law and
regulation, we cannot completely eliminate the risk of
accidental contamination or injury from those hazardous
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 and formal clinical trials. 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

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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 will no longer be
eligible for pass-through payments in 2003. Instead, CMS
indicated that these products will be incorporated 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 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, 2002, the Executive Committee
of the Medicare Coverage Advisory Committee, which provides
advice and recommendations to CMS about clinical issues, held a
hearing regarding the scientific justification for the use of
PET applications for the diagnosis and management of
Alzheimers disease. At this meeting, the Executive
Committee voted to ratify earlier conclusions of the Medicare
Coverage Advisory Committees Diagnostic Imaging Panel that
currently there is not adequate evidence of a clinical benefit
of PET in evaluating patients with possible Alzheimers
disease and, therefore, CMS should not at this time provide
Medicare coverage for the use of PET in the diagnosis and
management of Alzheimers disease. The negative
recommendation came despite evidence from scientists
representing the Academy of Molecular Imaging that PET is the
only current technology available that can definitively diagnose
Alzheimers disease. At this time, CMS has not indicated
whether it will follow the recommendations of the Medicare
Coverage Advisory Committee when making its Medicare
reimbursement coverage decision. However, if CMS does follow the
recommendations of the Medicare Coverage Advisory Committee, we
would expect the decision to be re-evaluated in the future if
and when additional evidence becomes available regarding
PETs clinical benefits in evaluating patients with
possible 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

23



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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, will assure
health care providers and other parties that they will not be
prosecuted under the Anti-Kickback Law. Although full compliance
with all applicable safe harbors ensures 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.

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 a number of 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 in 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.

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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.



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

In 1996 Congress passed the Health Insurance
Portability and Accountability Act (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
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 the uses and
disclosures of protected health information, and require 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 is
April 14, 2003. Prior to the compliance date, it is
expected that HHS will release several guidance documents
addressing questions or concerns raised by the privacy
regulations. 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 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. 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, the compliance date for these regulations could be
extended for one year by filing a compliance plan with HHS by
October 15, 2002. 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 have not been finalized. 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 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.

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Employees

As of September 30, 2002, we employed
directly and through our subsidiaries 699 people. Of these 699
people, 236 work in our PET scanner manufacturing business, 193
work in our radiopharmaceutical business, 44 work in our
detector materials business, 154 work in our services business
for scanners, cyclotrons, and other products, and the remaining
72 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.




Item 2.     Properties

We currently own 115,000 square feet of office,
research and development, manufacturing and warehouse space at
810 Innovation Drive in Knoxville, Tennessee, and 50,000 square
feet of production space at 3100 Stock Creek Boulevard in
Rockford, Tennessee. We are in the process of expanding our
facility at 810 Innovation Drive by more than 76,000 square
feet. We expect this expansion to be completed by January 2003.
We have entered into a lease for approximately 16,000 square
feet of office space located at 800 Innovation Drive in
Knoxville, Tennessee; a sub-lease for 5,600 square feet of
office space located at 800 Innovation Drive in Knoxville,
Tennessee; a lease for approximately 5,000 square feet of office
space at 835 Innovation Drive in Knoxville, Tennessee and a
lease for 10,000 square feet of warehouse space at 516 Cardin
Jennings Lane in Knoxville, Tennessee. Except for the space
located at 3100 Stock Creek Boulevard 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.

CTI PET Systems currently leases office, research
and development, manufacturing and warehouse space at 810
Innovation Drive in Knoxville, Tennessee from CTI. The board of
directors of CTI PET Systems has authorized CTI PET Systems to
enter into a new lease agreement with CTI for a period of ten
years through December 31, 2012. CTI PET Systems entered
into a lease for approximately 21,000 square feet of office and
warehouse space located at 203 Dunavant Drive, in Rockford,
Tennessee. CTI PET Systems currently subleases 1,501 square feet
of space in a medical facility in Knoxville, Tennessee, which is
used in research and development activities.

We currently lease space for 25 PETNET
radiopharmacies throughout the U.S., including metropolitan
areas such as New York, Chicago, Tampa, San Francisco, Los
Angeles, Phoenix, Dallas, Detroit and Nashville. Two of these
leased properties are locations for future radiopharmacies. We
operate 12 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 Mt. Vernon, United Kingdom.

We also have an office in Germany that houses a
sales manager for international sales and several engineers to
provide service and support for products sold in Europe. This
facility in Germany is 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 have set forth eight 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 are seeking $20 million in compensatory damages
on the breach of contract claims and $50 million in
aggregate compensatory and punitive damages on the tort claims.
Because our investigation with respect to the allegations
remains at a preliminary stage, an estimate of the possible loss
or range of loss, if any, cannot be made. Nevertheless, we
believe that the claims are without merit and intend to
vigorously defend this suit.

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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. General Electric obtained a second temporary
restraining order on December 5, 2002, again without notice
to us or our employee, ordering us and our employee to preserve
all information in paper or electronic form that was provided to
us by such employee or created or generated by us or any of our
employees based upon information provided by such former General
Electric employee. We have initiated an investigation into the
facts alleged by General Electric and have taken steps to comply
with the Courts orders. We intend to vigorously defend
this cause of action.

On September 19, 2002, General Electric
filed a complaint against Thomas J. Hook and Joseph Sardano, who
were former employees of General Electric and are now employed
by us, in the United States District Court, Eastern District of
Wisconsin, civil case no. 02-C-929. The complaint alleges
threatened or actual misappropriation of trade secrets, breach
of contract and unfair competition. We have not been named as a
defendant in that action. The defendants have answered the
complaint, have denied liability and intend to vigorously defend
this cause of action.

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, 2002.




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
the quarters ended June 30, 2002 and September 30,
2002.

|                   |  |      |       |     |  |   |       | 
|------------------ |  | ---- | ----- | --- |  | - | ----- | 
|Quarter Ended      |  | High |       | Low
|                   |  |      |       |    
|June 30, 2002      |  | $    | 23.45 |     |  | $ | 17.35 | 
|September 30, 2002 |  | $    | 25.94 |     |  | $ | 13.53 | 

Holders

The number of record holders of the
Companys Common Stock at December 2, 2002 was 197,
excluding beneficial owners of shares registered in nominee or
street name.

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.

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##### Table of Contents



Securities Authorized for Issuance Under
Equity Compensation Plans

The following table summarizes our equity
compensation plans as of September 30, 2002:

|                                                           |  |                     |           |                   |  |                      |      |  |  |  |           | 
|---------------------------------------------------------- |  | ------------------- | --------- | ----------------- |  | -------------------- | ---- |  |  |  | --------- | 
|                                                           |  |                     |           |                   |  | 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         |  |                     | 5,478,651 |                   |  | $                    | 6.36 |  |  |  | 1,705,478 | 
|Equity compensation plans not approved by
    stockholders |  |                     | 482,664   | (1)               |  | $                    | 4.95 |  |  |  |          | 
|                                                           |  |                     |           |                   |  |                      |      |  |  |  |           | 
|Total                                                      |  |                     | 5,961,315 |                   |  | $                    | 6.25 |  |  |  | 1,705,478 | 
|                                                           |  |                     |           |                   |  |                      |      |  |  |  |           | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes warrants to acquire 76,000 shares issued
    in connection with the execution of a consulting agreement and
    406,664 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 quarter ended September 30, 2002,
we had no sales of unregistered securities. Sales of
unregistered securities made by us in the quarter ended
June 30, 2002 have been disclosed in our 10-Q filed on
August 14, 2002. During the quarters ended
December 31, 2002 and March 31, 2002, we had the
following sales of unregistered securities:

In March 2002, in reliance upon Section 4(2)
of the Securities Act, we issued 21,440 shares of our common
stock to one of our employees at $4.69 per share in lieu of a
bonus for fiscal year 2002.

In March 2002, in reliance upon Section 4(2)
of the Securities Act, one of our shareholders exercised, on a
cashless basis, warrants to purchase 2,447,181 shares of our
outstanding common stock resulting in a net issuance of
2,446,563 shares of our common stock at an aggregate exercise
price valued at $3,431.76.

Use of Offering Proceeds

The Registration Statement on Form S-1 (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 $16,042,600, was approximately $171,386,894. As of
September 30, 2002, $10,214,521 of the net offering
proceeds had been used to redeem all of our Series A
Redeemable Preferred Stock, including all accrued dividends,
$342,644 of the net offering proceeds had been used to redeem
1,191,165 shares of our common stock, and approximately
$62,000,000 of the net offering proceeds had been used to
decrease our outstanding balance under our credit facility and
approximately $14,503,000 had been used to extinguish capital
lease obligations. 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,                  
|                                                   |                                              |                                                   
|                                                   |                                              | 2002                                               |         | 2001       |   | 2000 |         | 1999       |  | 1998
|                                                   |                                              |                                                    |         |            |   |      |         |            |  |     
|                                                   |                                              |                                                   
|                                                   |                                              | (In thousands, except share and per share amounts)
|Consolidated Statement of Operations
    Data:     |                                              |                                                    |         |            |   |      |         |            |  |      |         |            |  |   |        |            |  |   |        |           
|Net sales and revenue                              |                                              | $                                                  | 258,395 |            |   | $    | 188,877 |            |  | $    | 124,026 |            |  | $ | 88,247 |            |  | $ | 57,388 |           
|Costs and expenses:                                |                                              |                                                    |         |            |   |      |         |            |  |      |         |            |  |   |        |            |  |   |        |           
|                                                   | Cost of sales                                |                                                    |         | 150,654    |   |      |         | 110,249    |  |      |         | 68,372     |  |   |        | 52,711     |  |   |        | 32,169     |  
|                                                   | Selling, general and administrative expenses |                                                    |         | 35,766     |   |      |         | 29,433     |  |      |         | 21,751     |  |   |        | 15,430     |  |   |        | 10,330     |  
|                                                   | Research and development                     |                                                    |         | 21,658     |   |      |         | 18,985     |  |      |         | 14,845     |  |   |        | 10,605     |  |   |        | 8,520      |  
|                                                   | Stock-based compensation expense             |                                                    |         | 12,250     |   |      |         | 538        |  |      |         | 503        |  |   |        |           |  |   |        | 1,892      |  
|Income from operations                             |                                              |                                                    | 38,067  |            |   |      | 29,672  |            |  |      | 18,555  |            |  |   | 9,501  |            |  |   | 4,477  |           
|Warrant liability mark to market expense           |                                              |                                                    | 8,902   |            |   |      | 3,921   |            |  |      | 3,174   |            |  |   |       |            |  |   |       |           
|Interest expense, net                              |                                              |                                                    | 4,148   |            |   |      | 3,767   |            |  |      | 2,300   |            |  |   | 1,029  |            |  |   | 491    |           
|Provision for income taxes                         |                                              |                                                    | 15,074  |            |   |      | 9,930   |            |  |      | 3,875   |            |  |   | 1,465  |            |  |   | 456    |           
|Minority interest expense, net of taxes            |                                              |                                                    | 12,969  |            |   |      | 6,366   |            |  |      | 4,453   |            |  |   | 3,035  |            |  |   | 2,297  |           
|Extraordinary loss on early extinguishment of debt |                                              |                                                    | 819     |            |   |      |        |            |  |      |        |            |  |   |       |            |  |   |       |           
|                                                   | Net income (loss)                            |                                                    |         | (3,419     | ) |      |         | 6,116      |  |      |         | 4,378      |  |   |        | 3,482      |  |   |        | (1,214     | )
|Earnings (loss) per common share:                  |                                              |                                                    |         |            |   |      |         |            |  |      |         |            |  |   |        |            |  |   |        |           
|                                                   | Basic                                        |                                                    | $       | (0.25      | ) |      | $       | 0.15       |  |      | $       | 0.10       |  |   | $      | 0.13       |  |   | $      | (0.04      | )
|                                                   | Diluted                                      |                                                    | $       | (0.25      | ) |      | $       | 0.13       |  |      | $       | 0.09       |  |   | $      | 0.11       |  |   | $      | (0.04      | )
|Weighted average shares outstanding:               |                                              |                                                    |         |            |   |      |         |            |  |      |         |            |  |   |        |            |  |   |        |           
|                                                   | Basic                                        |                                                    |         | 32,497,070 |   |      |         | 27,860,086 |  |      |         | 25,243,051 |  |   |        | 27,269,253 |  |   |        | 27,990,136 |  
|                                                   | Diluted                                      |                                                    |         | 32,497,070 |   |      |         | 31,340,041 |  |      |         | 28,440,078 |  |   |        | 30,309,014 |  |   |        | 27,990,136 |  

|                                       |  |                     |         |      |  |      |         |      |  |      |         |  |  |   |        |  |  |   |        | 
|-------------------------------------- |  | ------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------ |  |  | - | ------ | 
|                                       |  |                    
|                                       |  | As of September 30,
|                                       |  |                    
|                                       |  | 2002                |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                       |  |                     |         |      |  |      |         |      |  |     
|                                       |  |                    
|                                       |  | (In thousands)     
|Balance Sheet Data:                    |  |                     |         |      |  |      |         |      |  |      |         |  |  |   |        |  |  |   |        | 
|Total assets                           |  | $                   | 351,709 |      |  | $    | 207,781 |      |  | $    | 143,041 |  |  | $ | 92,345 |  |  | $ | 61,142 | 
|Long-term debt and capital leases      |  |                     | 26,730  |      |  |      | 73,122  |      |  |      | 36,878  |  |  |   | 3,102  |  |  |   | 6,352  | 
|Redeemable preferred stock             |  |                     |        |      |  |      | 7,740   |      |  |      | 7,397   |  |  |   | 7,084  |  |  |   |       | 
|Convertible redeemable preferred stock |  |                     |        |      |  |      | 5,040   |      |  |      | 4,230   |  |  |   | 3,542  |  |  |   |       | 
|Stockholders equity                   |  |                     | 219,489 |      |  |      | 24,157  |      |  |      | 8,110   |  |  |   | 11,217 |  |  |   | 7,981  | 

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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 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 Factors
Affecting Operations and Future Results. 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 Consolidated Financial Data and
Item 8  Consolidated 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 a 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 CTI PET Systems 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 CTI PET Systems. 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.



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

We operate in four segments for financial
reporting purposes: CTI PET Systems; 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.



| |                
| | ---------------
| | CTI PET Systems

Our CTI PET Systems 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 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 CTI PET Systems and Siemens owns
the remaining 49.9%.

From 1987 until April 2001, the products of CTI
PET Systems were distributed exclusively by Siemens. Under this
distribution agreement, CTI PET Systems 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 CTI PET Systems by commencing direct
distribution and by pursuing additional third-party distributor
agreements. In November 2001 we

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added Hitachi Medical Systems America, Inc. as a
third-party distributor of CTI PET Systems products.
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 CTI PET Systems have
historically ranged in customer price from $800,000 to
$2.5 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 35 PETNET
radiopharmacies in the U.S. and 1 radiopharmacy in the
United Kingdom. Twelve 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 36 radiopharmacies PETNET
operates also include four 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 four radiopharmaceutical production and distribution
facilities.



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

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

Advanced Crystal Technology, Inc. manufactures
bismuth germanate, or BGO, the primary detector material used in
the current generation of PET scanners. Our CTI Detector
Materials division has exclusive rights to the development and
manufacturing of a next generation detector material called
lutetium oxyorthosilicate, or LSO. We acquired these exclusive
rights from Schlumberger Technology Corporation 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
CTI Detector Materials in order to meet an expected increase in
demand for detector materials as the PET market continues to
grow.



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

Our CTI Services segment includes:



| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | CTIs division that distributes and installs
    PET scanners manufactured by CTI PET Systems;               
|
| |  | 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 German subsidiary that distributes and
    services our products in Europe; and                        
|
| |  | CTIs 50% ownership interest in a
    radiopharmacy joint venture in Turkey, which we do not
    consolidate.

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| |                                        
| | ---------------------------------------
| | 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 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 CTI PET Systems and, therefore, is
eliminated in consolidation for financial reporting purposes.
Revenue for cyclotron systems is recognized upon successful
installation and customer acceptance. Installation is deemed
essential to the functionality of the machines and we alone
provide this service for our cyclotrons. 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 36 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 distribution, 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 allocated to product development;                                   
|
| |  | legal costs associated with filing of patents and
    regulatory matters; and
|
| |  | research grants and consulting fees to various
    third parties.            

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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,
|                                                  |                           |                         
|                                                  |                           | 2002                     |   | 2001  |       | 2000
|                                                  |                           |                          |   |       |       |     
|Revenues:                                         |                           |                          |   |       |       |      |   |       |       |  |   |      
|                                                  | CTI PET Systems           |                          | $ | 189.0 |       |      | $ | 133.6 |       |  | $ | 86.2  |      
|                                                  | PETNET                    |                          |   | 55.6  |       |      |   | 35.6  |       |  |   | 20.5  |      
|                                                  | Detector materials        |                          |   | 29.2  |       |      |   | 18.4  |       |  |   | 10.7  |      
|                                                  | CTI Services              |                          |   | 65.6  |       |      |   | 41.7  |       |  |   | 33.3  |      
|                                                  | Intercompany eliminations |                          |   | (81.0 | )     |      |   | (40.4 | )     |  |   | (26.7 | )    
|                                                  |                           |                          |   |       |       |      |   |       |       |  |   |      
|                                                  |                           | Total                    |   |       | 258.4 |      |   |       | 188.9 |  |   |       | 124.0 | 
|                                                  |                           |                          |   |       |       |      |   |       |       |  |   |      
|Cost of revenues:                                 |                           |                          |   |       |       |      |   |       |       |  |   |      
|                                                  | CTI PET Systems           |                          |   | 118.8 |       |      |   | 79.2  |       |  |   | 46.2  |      
|                                                  | PETNET                    |                          |   | 40.3  |       |      |   | 27.0  |       |  |   | 15.2  |      
|                                                  | Detector materials        |                          |   | 18.4  |       |      |   | 11.5  |       |  |   | 6.4   |      
|                                                  | CTI Services              |                          |   | 48.2  |       |      |   | 30.4  |       |  |   | 21.6  |      
|                                                  | Intercompany eliminations |                          |   | (75.1 | )     |      |   | (37.8 | )     |  |   | (21.0 | )    
|                                                  |                           |                          |   |       |       |      |   |       |       |  |   |      
|                                                  |                           | Total                    |   |       | 150.6 |      |   |       | 110.3 |  |   |       | 68.4  | 
|                                                  |                           |                          |   |       |       |      |   |       |       |  |   |      
|Selling, general and administrative
    expenses: |                           |                          |   |       |       |      |   |       |       |  |   |      
|                                                  | CTI PET Systems           |                          |   | 10.8  |       |      |   | 18.6  |       |  |   | 13.6  |      
|                                                  | PETNET                    |                          |   | 9.9   |       |      |   | 5.0   |       |  |   | 3.2   |      
|                                                  | Detector materials        |                          |   | 1.2   |       |      |   | 0.8   |       |  |   | 0.4   |      
|                                                  | CTI Services              |                          |   | 12.8  |       |      |   | 4.9   |       |  |   | 3.8   |      
|                                                  | Corporate and Other       |                          |   | 1.1   |       |      |   | 0.1   |       |  |   | 0.7   |      
|                                                  |                           |                          |   |       |       |      |   |       |       |  |   |      
|                                                  |                           | Total                    |   |       | 35.8  |      |   |       | 29.4  |  |   |       | 21.7  | 
|                                                  |                           |                          |   |       |       |      |   |       |       |  |   |      
|Research and development expenses:                |                           |                          |   |       |       |      |   |       |       |  |   |      
|                                                  | CTI PET Systems           |                          |   | 15.7  |       |      |   | 14.6  |       |  |   | 11.2  |      
|                                                  | PETNET                    |                          |   | 3.2   |       |      |   | 1.7   |       |  |   | 1.0   |      
|                                                  | Detector materials        |                          |   | 1.0   |       |      |   | 0.5   |       |  |   | 0.5   |      
|                                                  | CTI Services              |                          |   | 1.8   |       |      |   | 2.2   |       |  |   | 2.2   |      
|                                                  |                           |                          |   |       |       |      |   |       |       |  |   |      
|                                                  |                           | Total                    |   |       | 21.7  |      |   |       | 19.0  |  |   |       | 14.9  | 
|                                                  |                           |                          |   |       |       |      |   |       |       |  |   |      
|Stock-based compensation:                         |                           |                          |   |       |       |      |   |       |       |  |   |      
|                                                  | CTI PET Systems           |                          |   | 3.9   |       |      |   | 0.4   |       |  |   | 0.5   |      
|                                                  | PETNET                    |                          |   | 1.4   |       |      |   |      |       |  |   |      |      
|                                                  | Detector materials        |                          |   | 1.6   |       |      |   |      |       |  |   |      |      
|                                                  | CTI Services              |                          |   | 2.3   |       |      |   | 0.1   |       |  |   |      |      
|                                                  | Corporate and Other       |                          |   | 3.0   |       |      |   |      |       |  |   |      |      
|                                                  |                           |                          |   |       |       |      |   |       |       |  |   |      
|                                                  |                           | Total                    |   |       | 12.2  |      |   |       | 0.5   |  |   |       | 0.5   | 
|                                                  |                           |                          |   |       |       |      |   |       |       |  |   |      

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|                               |                           |                          |   |      |      |      |   |      |      |  |   |      |      | 
|------------------------------ | ------------------------- | ------------------------ | - | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                               |                           |                         
|                               |                           | Year Ended September 30,
|                               |                           |                         
|                               |                           | 2002                     |   | 2001 |      | 2000
|                               |                           |                          |   |      |      |     
|Income (loss) from operations: |                           |                          |   |      |      |      |   |      |      |  |   |     
|                               | CTI PET Systems           |                          | $ | 39.8 |      |      | $ | 20.8 |      |  | $ | 14.7 |     
|                               | PETNET                    |                          |   | 0.8  |      |      |   | 1.9  |      |  |   | 1.1  |     
|                               | Detector materials        |                          |   | 7.0  |      |      |   | 5.6  |      |  |   | 3.4  |     
|                               | CTI Services              |                          |   | 0.5  |      |      |   | 4.1  |      |  |   | 5.7  |     
|                               | Corporate and Other       |                          |   | (4.1 | )    |      |   | (0.1 | )    |  |   | (0.7 | )   
|                               | Intercompany eliminations |                          |   | (5.9 | )    |      |   | (2.6 | )    |  |   | (5.7 | )   
|                               |                           |                          |   |      |      |      |   |      |      |  |   |     
|                               |                           | Total                    |   |      | 38.1 |      |   |      | 29.7 |  |   |      | 18.5 | 
|                               |                           |                          |   |      |      |      |   |      |      |  |   |     

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,
|                               |                           |                         
|                               |                           | 2002                     |  | 2001  |       | 2000
|                               |                           |                          |  |       |       |     
|Revenues:                      |                           |                          |  |       |       |      |  |       |       |   |  |      
|                               | CTI PET Systems           |                          |  | 73.1  | %     |      |  | 70.7  | %     |   |  | 69.5  | %    
|                               | PETNET                    |                          |  | 21.5  |       |      |  | 18.9  |       |   |  | 16.5  |      
|                               | Detector materials        |                          |  | 11.3  |       |      |  | 9.7   |       |   |  | 8.6   |      
|                               | CTI Services              |                          |  | 25.4  |       |      |  | 22.1  |       |   |  | 26.9  |      
|                               | Intercompany eliminations |                          |  | (31.3 | )     |      |  | (21.4 | )     |   |  | (21.5 | )    
|                               |                           |                          |  |       |       |      |  |       |       |   |  |      
|                               |                           | Total                    |  |       | 100.0 | %    |  |       | 100.0 | % |  |       | 100.0 | %
|                               |                           |                          |  |       |       |      |  |       |       |   |  |      
|Income (loss) from operations: |                           |                          |  |       |       |      |  |       |       |   |  |      
|                               | CTI PET Systems           |                          |  | 104.5 | %     |      |  | 70.0  | %     |   |  | 79.5  | %    
|                               | PETNET                    |                          |  | 2.1   |       |      |  | 6.4   |       |   |  | 5.9   |      
|                               | Detector materials        |                          |  | 18.4  |       |      |  | 18.9  |       |   |  | 18.4  |      
|                               | CTI Services              |                          |  | 1.3   |       |      |  | 13.8  |       |   |  | 30.8  |      
|                               | Corporate and Other       |                          |  | (10.8 | )     |      |  | (0.3  | )     |   |  | (3.8  | )    
|                               | Intercompany eliminations |                          |  | (15.5 | )     |      |  | (8.8  | )     |   |  | (30.8 | )    
|                               |                           |                          |  |       |       |      |  |       |       |   |  |      
|                               |                           | Total                    |  |       | 100.0 | %    |  |       | 100.0 | % |  |       | 100.0 | %
|                               |                           |                          |  |       |       |      |  |       |       |   |  |      

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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,
|                    |                                     |                         
|                    |                                     | 2002                     |  | 2001  |   | 2000
|                    |                                     |                          |  |       |   |     
|CTI PET Systems:    |                                     |                          |  |       |   |      |  |       |   |  |  |      
|                    | Revenues                            |                          |  | 100.0 | % |      |  | 100.0 | % |  |  | 100.0 | %
|                    | Cost of revenues                    |                          |  | 62.8  |   |      |  | 59.3  |   |  |  | 53.6  |  
|                    | Selling, general and administrative |                          |  | 5.7   |   |      |  | 13.9  |   |  |  | 15.8  |  
|                    | Research and development            |                          |  | 8.3   |   |      |  | 10.9  |   |  |  | 13.0  |  
|                    | Stock-based compensation            |                          |  | 2.1   |   |      |  | 0.3   |   |  |  | 0.6   |  
|                    |                                     |                          |  |       |   |      |  |       |   |  |  |      
|                    | Income from operations              |                          |  | 21.1  |   |      |  | 15.6  |   |  |  | 17.0  |  
|                    |                                     |                          |  |       |   |      |  |       |   |  |  |      
|PETNET:             |                                     |                          |  |       |   |      |  |       |   |  |  |      
|                    | Revenues                            |                          |  | 100.0 |   |      |  | 100.0 |   |  |  | 100.0 |  
|                    | Cost of revenues                    |                          |  | 72.5  |   |      |  | 75.8  |   |  |  | 74.1  |  
|                    | Selling, general and administrative |                          |  | 17.8  |   |      |  | 14.1  |   |  |  | 15.6  |  
|                    | Research and development            |                          |  | 5.8   |   |      |  | 4.8   |   |  |  | 4.9   |  
|                    | Stock-based compensation            |                          |  | 2.5   |   |      |  |      |   |  |  |      |  
|                    |                                     |                          |  |       |   |      |  |       |   |  |  |      
|                    | Income from operations              |                          |  | 1.4   |   |      |  | 5.3   |   |  |  | 5.4   |  
|                    |                                     |                          |  |       |   |      |  |       |   |  |  |      
|Detector materials: |                                     |                          |  |       |   |      |  |       |   |  |  |      
|                    | Revenues                            |                          |  | 100.0 |   |      |  | 100.0 |   |  |  | 100.0 |  
|                    | Cost of revenues                    |                          |  | 63.0  |   |      |  | 62.5  |   |  |  | 59.8  |  
|                    | Selling, general and administrative |                          |  | 4.1   |   |      |  | 4.3   |   |  |  | 3.7   |  
|                    | Research and development            |                          |  | 3.4   |   |      |  | 2.7   |   |  |  | 4.7   |  
|                    | Stock-based compensation            |                          |  | 5.5   |   |      |  |      |   |  |  |      |  
|                    |                                     |                          |  |       |   |      |  |       |   |  |  |      
|                    | Income from operations              |                          |  | 24.0  |   |      |  | 30.5  |   |  |  | 31.8  |  
|                    |                                     |                          |  |       |   |      |  |       |   |  |  |      
|CTI Services:       |                                     |                          |  |       |   |      |  |       |   |  |  |      
|                    | Revenues                            |                          |  | 100.0 |   |      |  | 100.0 |   |  |  | 100.0 |  
|                    | Cost of revenues                    |                          |  | 73.5  |   |      |  | 72.9  |   |  |  | 64.9  |  
|                    | Selling, general and administrative |                          |  | 19.5  |   |      |  | 11.8  |   |  |  | 11.4  |  
|                    | Research and development            |                          |  | 2.7   |   |      |  | 5.3   |   |  |  | 6.6   |  
|                    | Stock-based compensation            |                          |  | 3.5   |   |      |  | 0.2   |   |  |  |      |  
|                    |                                     |                          |  |       |   |      |  |       |   |  |  |      
|                    | Income from operations              |                          |  | 0.8   |   |      |  | 9.8   |   |  |  | 17.1  |  
|                    |                                     |                          |  |       |   |      |  |       |   |  |  |      



| |                                                                            
| | ---------------------------------------------------------------------------
| | 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.

CTI PET Systems.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%

35



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and 5.0% of total CTI PET Systems 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 less than 1.0% and none of
total PETNET revenues for the years ended September 30,
2002 and 2001, respectively.

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 CTI PET Systems 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 CTI
PET Systems.



| |                 
| | ----------------
| | 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.

CTI PET Systems.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

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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 $35.8 million, an
increase of $6.4 million, or 21.8%, from $29.4 million for
2001. Selling, general and administrative expenses for the year
ended September 30, 2002 were 13.9% of revenues compared to
15.6% for 2001.

CTI PET Systems.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 CTI PET Systems 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 $9.9 million, an increase of
$4.9 million, or 98.0%, from $5.0 million for 2001.
The increase was primarily due to additional sales, general and
administrative personnel. PETNET also incurred increased
marketing expenses to support a PET education program for
referring physicians. Selling, general and administrative
expenses for 2002 were 17.8% of revenues compared to 14.1% in
2001.

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, 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.

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| |                                  
| | ---------------------------------
| | 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.

CTI PET Systems.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. CTI
PET Systems 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 CTI PET
Systems 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.

CTI PET Systems.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.

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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 $38.1 million, an increase of
$8.4 million, or 28.3%, from $29.7 million for 2001.
The increase, which resulted primarily from growth in revenues,
was reduced by increased stock-based compensation expense in
2002. Income from operations for the year ended
September 30, 2002 was 14.7% of revenues compared to 15.7%
for 2001. The decrease in income from operations as a percentage
of revenues resulted primarily from increased stock-based
compensation in 2002.

CTI PET Systems.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 from
operations for the year ended September 30, 2002 was
$0.8 million, a decrease of $1.1 million, or 57.9%,
from $1.9 million for 2001. Income from operations for the
year ended September 30, 2002 was 1.4% of revenues compared
to 5.3% for 2001. These decreases were caused primarily by
increased stock-based compensation expense 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 30.4% 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 CTI PET Systems
scanners.

Corporate and Other.The loss from operations for the year ended September 30,
2002 was $4.1 million, an increase of $4.0 million
from a loss of $0.1 million for 2001. The significant
increase in loss from operations resulted from increased
stock-based compensation expense and warrant liability mark to
market expenses in 2002.

Intercompany
Eliminations.Intercompany
eliminations in consolidation for the years ended
September 30, 2002 and 2001 reduced operating income by
$5.9 million and $2.6 million, respectively. The increase
in the impact of the eliminations was primarily due to the
increase in the number of scanners sold by CTI PET Systems to
CTI Services, cyclotrons sold by CTI Services to PETNET, and
detector materials sold by Detector Materials to CTI PET
Systems. The allocation of stock-based compensation expense to
CTI PET Systems in the fourth quarter of 2002 resulted in a
reduction in CTI PET Systems 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.

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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 59.3% 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 are not tax deductible.



| |                   
| | ------------------
| | Minority Interests

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 CTI
PET Systems. Pursuant to the CTI PET Systems 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.



| |                                                         
| | --------------------------------------------------------
| | Extraordinary Loss from Early Extinguishment
    of Debt

The extraordinary loss from early extinguishments
of debt for the year ended September 30, 2002 was
$0.8 million, compared to none in 2001. The loss was due to
penalties incurred to repay certain PETNET capital lease
obligations prior to maturity.



| |                                                                            
| | ---------------------------------------------------------------------------
| | Year Ended September 30, 2001 Compared
    to Year Ended September 30, 2000



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

Revenues for the year ended September 30,
2001 were $188.9 million, an increase of
$64.9 million, or 52.3%, from $124.0 million in 2000.

CTI PET Systems.Revenues for the year ended September 30, 2001 were
$133.6 million, an increase of $47.4 million, or
55.0%, from $86.2 million in 2000. The increase in revenues
was driven primarily by an increase in unit sales of scanners
from 61 units in 2000 to 88 units in 2001 and, to a lesser
extent, by an increase in sales of parts and services. The
increase in revenues was also due in part to an increase in
average unit price primarily due to the introduction in 2001 of
our higher priced LSO-based scanners. The increase in average
unit price was partially offset by sales of units to third-party
distributors under the new multiple distributor arrangement.
Intersegment revenues accounted for 5.0% and none of total CTI
PET Systems revenues for the years ended September 30, 2001
and 2000, respectively. Intersegment revenues increased as a
percentage of revenues as a result of sales to CTI Services
under the new multiple distributor arrangement which was
implemented in April 2001.

PETNET.Revenues for
the year ended September 30, 2001 were $35.6 million, an
increase of $15.1 million, or 73.7%, from
$20.5 million in 2000. The increase in revenue was due to
the growth of dose shipments driven by our opening of new PETNET
radiopharmacies as well as the continued increase in PET
utilization and an increased number of indications that were
approved for reimbursement. PETNET delivered 64,600 doses,
excluding doses sold to hosts and doses sold by unconsolidated
radiopharmacies,

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during the year ended September 30, 2001 as
compared to 29,100 doses in 2000. The increase in doses was
partially offset by a decline in average revenue per dose.
Intersegment revenues accounted for none of total PETNET
revenues for the years ended September 30, 2001 and 2000.


Detector Materials.Revenues for the year ended September 30, 2001 were
$18.4 million, an increase of $7.7 million, or 72.0%,
from $10.7 million in 2000. Intersegment revenues accounted
for 90.2% and 85.7% of total detector material revenue for 2001
and 2000, respectively. The growth in revenues, and the increase
in intersegment revenues as a percentage of revenues, was
primarily due to growth in intercompany sales of LSO detector
material to CTI PET Systems in conjunction with the launch of
LSO scanner products in July 2001.

CTI Services.Revenues for the year ended September 30, 2001 were
$41.7 million, an increase of $8.4 million, or 25.2%,
from $33.3 million in 2000. The increase in revenues was
primarily due to the direct distribution of PET scanners by CTI
purchased from CTI PET Systems. Intersegment revenues accounted
for 41.1% and 52.6% of total revenues of CTI Services for the
years ended September 30, 2001 and 2000, respectively.
Intersegment revenues decreased as a percentage of revenues due
to an increase in third party sales under the new multiple
distributor arrangement.

Intercompany
Eliminations.Intercompany revenues
that were eliminated in consolidation for the year ended
September 30, 2001 were $40.4 million, an increase of
$13.7 million, or 51.3%, from $26.7 million in 2000.
The increase in revenue eliminations was primarily due to the
direct distribution of PET scanners by CTI which were purchased
from CTI PET Systems and the increase in detector materials sold
to CTI PET Systems.



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

Cost of revenues for the year ended
September 30, 2001 was $110.3 million, an increase of
$41.9 million, or 61.3%, from $68.4 million for 2000.
Cost of revenues for the year ended September 30, 2001 was
58.4% of revenues compared to 55.2% for 2000.

CTI PET Systems.Cost of revenues for the year ended September 30, 2001 was
$79.2 million, an increase of $33.0 million, or 71.4%,
from $46.2 million for 2000. Cost of revenues for the year
ended September 30, 2001 increased to 59.3% of revenues
compared to 53.6% of revenues for 2000. The increase in cost of
revenues as a percentage of revenues is primarily due to lower
gross margins on units shipped by third-party distributors under
our new multiple distributor arrangement and higher initial
costs of the new LSO scanner.

PETNET.Cost of
revenues for the year ended September 30, 2001 was $27.0
million, an increase of $11.8 million, or 77.6%, from
$15.2 million in 2000. Cost of revenues for the year ended
September 30, 2001 increased to 75.8% of revenues compared
to 74.1% in 2000. The increase in cost of revenues was due to
the increased sales volume as well as the increase in the number
of radiopharmacies.

Detector Materials.Cost of revenues for the year ended September 30, 2001 was
$11.5 million, an increase of $5.1 million, or 79.7%,
from $6.4 million for 2000. Cost of revenues for the year
ended September 30, 2001 increased to 62.5% of revenues
compared to 59.8% of revenues for 2000. This increase was
primarily due to the increase in LSO detector material sales,
which have a lower margin than BGO detector material sales.

CTI Services.Cost
of revenues for the year ended September 30, 2001 was
$30.4 million, an increase of $8.8 million, or 40.7%,
from $21.6 million for 2000. Cost of revenues for the year
ended September 30, 2001 increased to 72.9% of revenues
compared to 64.9% of revenues for 2000. This increase on a
percentage basis was primarily due to commencing direct
distribution sales of PET scanners in 2001, 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, 2001 were $37.8 million, an increase of
$16.8 million, or 80.0%, from $21.0 million in 2000.
Cost of revenues eliminated for the year ended
September 30, 2001 increased to

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93.6% of revenues eliminated compared to 78.7% of
revenues for 2000. The increase in cost of revenues eliminations
as a percentage of revenues was primarily due to the
intercompany profit elimination on a larger volume of cyclotrons
sold by CTI to PETNET in 2000.




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

Selling, general and administrative expenses for
the year ended September 30, 2001 were $29.4 million, an
increase of $7.7 million, or 35.5%, from $21.7 million
for 2000. Selling, general and administrative expenses for the
year ended September 30, 2001 were 15.6% of revenues
compared to 17.5% for 2000.

CTI PET Systems.Selling, general and administrative expenses increased
$5.0 million, or 36.8%, to $18.6 million in 2001 from
$13.6 million in 2000. The increase in selling, general and
administrative expenses was primarily due to the hiring of
additional personnel to support the growth in our business.
Selling, general and administrative expenses for the year ended
September 30, 2001 were 13.9% of revenues compared to 15.8%
for 2000.

PETNET.Selling,
general and administrative expenses for the year ended
September 30, 2001 were $5.0 million compared to
$3.2 million for 2000. The increase of $1.8 million,
or 56.3%, is due in large part to additional selling and
administrative personnel. Selling, general and administration
expenses for the year ended September 30, 2001 were 14.1%
of revenues compared to 15.6% in 2000.

Detector Materials.Selling, general and administrative expenses for the year ended
September 30, 2001 were $0.8 million, an increase of
$0.4 million, or 100%, from $0.4 million for 2000. As
a percentage of revenues, selling, general and administrative
expenses were 4.3% and 3.7% for the years ended
September 30, 2001 and 2000, respectively.

CTI Services.Selling, general and administrative expenses for the year ended
September 30, 2001 were $4.9 million, an increase of
$1.1 million, or 28.9%, from $3.8 million for 2000.
The increase was caused by additional corporate and other costs
to support revenue growth. As a percentage of revenues, selling,
general and administrative expenses for the year ended
September 30, 2001 was 11.8% compared to 11.4% for 2000.

Corporate and Other.Selling, general and administrative expenses not allocated to
our financial reporting segments for the year ended
September 30, 2001 were $0.1 million, a decrease of
$0.6, or 85.7%, from $0.7 million in 2000.



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

Research and development expenses for the year
ended September 30, 2001 were $19.0 million, an
increase of $4.1 million, or 27.5%, from $14.9 million
for 2000. Research and development expenses for the year ended
September 30, 2001 were 10.1% of revenues compared to 12.0%
for 2000.

CTI PET Systems.Research and development expenses for the year ended
September 30, 2001 were $14.6 million, an increase of
$3.4 million, or 30.4%, from $11.2 million in 2000.
CTI PET Systems continues to invest in new scanner technology,
with the increases in 2001 primarily devoted to PET/CT and LSO
scanner developments. Research and development expenses for the
year ended September 30, 2001 were 10.9% of revenues
compared to 13.0% in 2000.

PETNET.Research and
development expenses for the year ended September 30, 2001 were
$1.7 million compared to $1.0 million for 2000. The
increase of $0.7 million, or 70.0%, was due to the addition
of regulatory, research and development personnel in 2001.
Research and development expenses for the year ended
September 30, 2001 were 4.8% of revenues compared to 4.9%
in 2000.

Detector Materials.Research and development expenses for the year ended
September 30, 2001 and 2000 were $0.5 million for each
period. As a percentage of total revenues, research and
development expenses for the year ended September 30, 2001
decreased to 2.7% from 4.7% for 2000.

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CTI Services.Research and development expenses for each of the years ended
September 30, 2001 and 2000 were $2.2 million.
Research and development expenses for the year ended
September 30, 2001 were 5.3% of revenues compared to 6.6%
for 2000.



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

Stock-based compensation expense for each of the
years ended September 30, 2001 and 2000 was
$0.5 million. This expense is due to the issuance of stock
options with an exercise price below the fair market value of
our common stock on the grant date.

CTI PET Systems.Stock-based compensation expense for
the year ended September 30, 2001 was $0.4 million, a
decrease of $0.1 million, or 20.0%, from $0.5 million
in 2000. Stock-based compensation expense for the year ended
September 30, 2001 was 0.3% of revenues compared to 0.6% in
2000.

CTI Services.Stock-based compensation expense for
the year ended September 30, 2001 was $0.1 million,
compared to none in 2000. Stock-based compensation expense for
the year ended September 30, 2001 was 0.2% of revenues.



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

Income from operations for the year ended
September 30, 2001 was $29.7 million, an increase of
$11.2 million, or 60.5%, from $18.5 million for 2000.
Income from operations for the year ended September 30,
2001 was 15.7% of revenues compared to 14.9% for 2000.

CTI PET Systems.Income from operations for the year
ended September 30, 2001 was $20.8 million, an
increase of $6.1 million, or 41.5%, from $14.7 million
for 2000. Income from operations for the year ended
September 30, 2001 was 15.6% of revenues compared to 17.0%
for 2000.

PETNET.Income from
operations for the year ended September 30, 2001 was
$1.9 million, an increase of $0.8 million, or 72.7%,
from $1.1 million for 2000. Income from operations for the
year ended September 30, 2001 was 5.3% of revenues compared
to 5.4% for 2000.

Detector Materials.Income from operations for the year
ended September 30, 2001 was $5.6 million, an increase of
$2.2 million, or 64.7%, from $3.4 million for 2000.
Income from operations for the year ended September 30,
2001 was 30.5% of revenues compared to 31.8% for 2000.

CTI Services.Income
from operations for the year ended September 30, 2001 was
$4.1 million, a decrease of $1.6 million, or 28.1%,
from $5.7 million for 2000. Income from operations for the
year ended September 30, 2001 was 9.8% of revenues compared
to 17.1% for 2000.

Intercompany Eliminations.Intercompany eliminations in
consolidation for the years ended September 30, 2001 and
2000 reduced operating income by $2.6 million and
$5.7 million, respectively. The decrease in the impact of
the eliminations was primarily due to the decrease in the number
of cyclotrons sold by CTI to PETNET in 2001. This was offset
somewhat by an increase in inventory levels of detector
materials sold to CTI PET Systems.



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

The warrant liability mark to market expense for
the year ended September 30, 2001 was $3.9 million
compared to $3.2 million in 2000.



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

Interest expense for the year ended
September 30, 2001 was $3.8 million compared to
$2.3 million for 2000. The increase of $1.5 million
between the two periods was primarily due to the additional
capital leases incurred to finance the PETNET expansion and the
growth in working capital needs that was funded by the line of
credit.

43



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

The effective tax rate for the years ended
September 30, 2001 and 2000 was 44.3% and 30.5%,
respectively. The effective rate was higher in 2001 than the
statutory rate due to the warrant liability mark to market
expense of $3.9 million which is not tax deductible. In 2000,
there was also a warrant liability mark to market expense of
$3.2 million, however, this was offset by a reduction in
the valuation allowance of $1.4 million and tax credits
utilized of $0.9 million.



| |                   
| | ------------------
| | Minority Interests

Minority interest expense for the year ended
September 30, 2001 was $6.4 million compared to
$4.5 million for 2000. The increase was due to the increase
in the net income of CTI PET Systems.

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, 2002. 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) considered
necessary for a fair presentation have been included. This data
should be read together with our consolidated financial
statements and the notes to these 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,
|                                                |                        | 1999                                         |                          | 2000     |     | 2000     |      | 2000      |      | 2000     |      | 2001     |      | 2001     |      | 2001      |      | 2001     |      | 2002     |      | 2002     |      | 2002     
|                                                |                        |                                              |                          |          |     |          |      |           |      |          |      |          |      |          |      |           |      |          |      |          |      |          |      |          
|                                                |                        |                                             
|                                                |                        | (In millions)                               
|Consolidated Statements of Operations
    Data: |                        |                                              |                          |          |     |          |      |           |      |          |      |          |      |          |      |           |      |          |      |          |      |          |      |           |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |     
|                                                | Revenues               |                                              | $                        | 19.3     |     |          | $    | 29.9      |      |          | $    | 29.3     |      |          | $    | 45.5      |      |          | $    | 34.9     |      |          | $    | 40.4      |      |      | $    | 38.1 |      |      | $    | 75.5 |      |      | $    | 47.6 |      |      | $    | 55.2 |      |      | $    | 69.0 |      |      | $    | 86.6 |     
|Cost of Revenues                                |                        |                                              | 10.0                     |          |     |          | 16.9 |           |      |          | 15.5 |          |      |          | 26.0 |           |      |          | 20.5 |          |      |          | 22.8 |           |      |      | 22.5 |      |      |      | 44.5 |      |      |      | 28.5 |      |      |      | 32.5 |      |      |      | 41.1 |      |      |      | 48.6 |     
|                                                |                        |                                              |                          |          |     |          |      |           |      |          |      |          |      |          |      |           |      |          |      |          |      |          |      |           |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |     
|                                                |                        | Gross Margin                                 |                          |          | 9.3 |          |      |           | 13.0 |          |      |          | 13.8 |          |      |           | 19.5 |          |      |          | 14.4 |          |      |           | 17.6 |      |      |      | 15.6 |      |      |      | 31.0 |      |      |      | 19.1 |      |      |      | 22.7 |      |      |      | 27.9 |      |      |      | 38.0 |     
|Operating expenses:                             |                        |                                              |                          |          |     |          |      |           |      |          |      |          |      |          |      |           |      |          |      |          |      |          |      |           |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |     
|                                                |                        | Selling, general and administrative expenses |                          |          | 3.9 |          |      |           | 5.5  |          |      |          | 5.3  |          |      |           | 7.0  |          |      |          | 5.8  |          |      |           | 6.4  |      |      |      | 7.7  |      |      |      | 9.5  |      |      |      | 7.2  |      |      |      | 8.5  |      |      |      | 8.9  |      |      |      | 11.2 |     
|                                                |                        | Research and development expenses            |                          |          | 3.0 |          |      |           | 3.7  |          |      |          | 3.2  |          |      |           | 5.0  |          |      |          | 4.0  |          |      |           | 3.7  |      |      |      | 4.8  |      |      |      | 6.5  |      |      |      | 4.6  |      |      |      | 4.8  |      |      |      | 5.9  |      |      |      | 6.3  |     
|                                                |                        | Stock-based compensation expense             |                          |          | 0.5 |          |      |           |     |          |      |          |     |          |      |           |     |          |      |          | 0.4  |          |      |           |     |      |      |      |     |      |      |      | 0.1  |      |      |      | 0.1  |      |      |      | 8.1  |      |      |      | 3.5  |      |      |      | 0.5  |     
|                                                |                        |                                              |                          |          |     |          |      |           |      |          |      |          |      |          |      |           |      |          |      |          |      |          |      |           |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |     
|                                                |                        |                                              | Total operating expenses |          |     | 7.4      |      |           |      | 9.2      |      |          |      | 8.5      |      |           |      | 12.0     |      |          |      | 10.2     |      |           |      | 10.1 |      |      |      | 12.5 |      |      |      | 16.1 |      |      |      | 11.9 |      |      |      | 21.4 |      |      |      | 18.3 |      |      |      | 18.0 | 
|                                                |                        |                                              |                          |          |     |          |      |           |      |          |      |          |      |          |      |           |      |          |      |          |      |          |      |           |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |     
|                                                | Income from operations |                                              | $                        | 1.9      |     |          | $    | 3.8       |      |          | $    | 5.3      |      |          | $    | 7.5       |      |          | $    | 4.2      |      |          | $    | 7.5       |      |      | $    | 3.1  |      |      | $    | 14.9 |      |      | $    | 7.2  |      |      | $    | 1.3  |      |      | $    | 9.6  |      |      | $    | 20.0 |     
|                                                |                        |                                              |                          |          |     |          |      |           |      |          |      |          |      |          |      |           |      |          |      |          |      |          |      |           |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |      |     

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. Our principal liquidity requirements are to
service our debt and meet our working capital and capital
expenditure needs.

Our working capital and capital expenditure needs
have increased in order to support the growth in our business
and due to the seasonality of our revenues. For example, from
September 30, 2001 to September 30, 2002, our
inventories increased from $47.1 million to
$69.3 million and our property and equipment
(net) increased from $47.3 million to
$77.7 million.

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 CTI PET Systems 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

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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 CTI PET Systems is principally limited
to the accounts receivable and inventory of CTI PET Systems.


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,
2002, 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 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 3 to 1
through September 30, 2002, and 2.5 to 1 thereafter; 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 have used capital leases to
finance PETNET cyclotrons and detector material equipment in the
amounts of $11.9 million and $14.5 million for the
years ended September 30, 2002 and 2001, 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.



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

The following table discloses aggregate
information about our contractual obligations and the periods in
which payments are due as of September 30, 2002;

|                             |                                    |                        |        |           |  |           |       |           |  |       |        |        |  |   |       |       |  |   |       |       | 
|---------------------------- | ---------------------------------- | ---------------------- | ------ | --------- |  | --------- | ----- | --------- |  | ----- | ------ | ------ |  | - | ----- | ----- |  | - | ----- | ----- | 
|                             |                                    |                       
|                             |                                    | 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               |                                    | $                      | 17,477 |           |  | $         | 1,109 |           |  | $     | 12,168 |        |  | $ | 1,400 |       |  | $ | 2,800 |      
|Capital lease obligations    |                                    |                        | 16,806 |           |  |           | 4,340 |           |  |       | 6,665  |        |  |   | 4,402 |       |  |   | 1,399 |      
|Operating leases             |                                    |                        | 27,591 |           |  |           | 7,701 |           |  |       | 12,312 |        |  |   | 3,855 |       |  |   | 3,723 |      
|                             |                                    |                        |        |           |  |           |       |           |  |       |        |        |  |   |       |       |  |   |       |      
|                             | Total contractual cash obligations |                        | $      | 61,874    |  |           | $     | 13,150    |  |       | $      | 31,145 |  |   | $     | 9,657 |  |   | $     | 7,922 | 
|                             |                                    |                        |        |           |  |           |       |           |  |       |        |        |  |   |       |       |  |   |       |      

In addition to the cash obligations listed above,
we guarantee lease obligations on behalf of our unconsolidated
radiopharmacies of $2.7 million at September 30, 2002.
These lease obligations generally have a term of seven years and
commenced in 2000.

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



| |                                                                            
| | ---------------------------------------------------------------------------
| | 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 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.



| |                                                                            
| | ---------------------------------------------------------------------------
| | Year Ended September 30, 2001 Compared to
    Year Ended September 30, 2000

Net cash used in operating activities for the
year 2001 was $10.9 million compared to net cash used in
2000 of $10.6 million. Net cash used in operating
activities in both periods was primarily due to growth in
working capital to support revenue growth.

Net cash used in investing activities during 2001
was $11.6 million compared to $7.9 million in 2000. In
2001, investing activities consisted primarily of facility
expansion, PETNET radiopharmacy expansion and increases in other
assets used in detector materials production. In 2000, investing
activities consisted primarily of facility expansion, PETNET
radiopharmacy expansion and other capital purchases.

Net cash provided by financing activities during
2001 was $22.8 million compared to $14.8 million in
2000. This cash came principally from increases in our credit
facility and other new bank debt.

Non-cash investing and financing activities for
equipment financed by capital leases and the acquisition of our
primary facility with a bank loan for the years ended 2001 and
2000 were $14.5 million and $13.7 million,
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.

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| |                    
| | -------------------
| | 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 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. All revenues from cyclotron systems sales
are recognized upon installation and acceptance. Installation is
deemed essential to the functionality of cyclotrons. Significant
judgment is involved in determining whether or not installation
services are essential to the functionality of the scanning
equipment and cyclotrons. The timing of revenue recognition in
our financial statements would vary if our determinations of
whether installation is deemed essential to functionality were
different. 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 Assetswhich required us to perform an
initial impairment review of our goodwill at that date and will
require us to perform impairment reviews thereafter, at least
once annually. The transitional impairment test requires us to:
(1) identify our reporting units; (2) determine the
carrying value of each reporting unit by assigning assets and
liabilities, including existing goodwill and intangible assets,
to those reporting units; and (3) determine the fair value
of each reporting unit. We conducted the transitional impairment
test and it did not result in any impairment charges. While we
will 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.



| |                         
| | ------------------------
| | 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 CTI PET Systems.
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 CTI PET Systems 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 CTI PET Systems. Accordingly, CTI PET Systems is
consolidated in our financial statements. If we did not
consolidate CTI PET Systems, our revenues would decrease by
$154.5 million, $101.9 million and $72.2 million
for 2002, 2001 and 2000, respectively. However, net income would
remain unchanged.

PETNET owns a 90% interest in a radiopharmacy in
Denver. Under the terms of the Denver radiopharmacy operating
agreement, PETNET has control over all significant operating
decisions. The Denver radiopharmacy is consolidated in our
financial statements.

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

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control over significant operating decisions. We
have invested in four radiopharmacies, which are accounted for
under the equity method.


Recent Accounting Pronouncements



| |                      
| | ---------------------
| | Business Combinations

In July 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 141, Business Combinations, which establishes
financial accounting and reporting for business combinations and
supersedes Accounting Principles Board Opinion No. 16,
Business Combinationsand Statement of Financial
Accounting Standards No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises.
Statement of Financial Accounting Standards No. 141
requires that all business combinations be accounted for using
one method, the purchase method. The provisions of this
Statement apply to all business combinations initiated after
June 30, 2001. We adopted Statement of Financial Accounting
Standards No. 141 during the first quarter of fiscal year
2002, and this adoption had no impact on our financial
statements.



| |         
| | --------
| | Goodwill

In July 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 142 (SFAS 142), Goodwill and Other Intangible
Assets,which establishes financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes
Accounting Principal Board Opinion No. 17, Intangible
Assets. SFAS 142 addresses how intangible assets that are
acquired individually or with a group of other assets (but not
those acquired in a business combination) should be accounted
for in financial statements upon their acquisition, and after
they have been initially recognized in the financial statements.
The provisions of this Statement are effective for fiscal years
beginning after December 15, 2001 with early adoption
permitted for companies with fiscal years beginning after March
15, 2001. We elected to early adopt SFAS 142 during the first
quarter of fiscal year 2002. Upon adoption of SFAS 142, we
performed an impairment test of goodwill and determined that no
impairment of the recorded goodwill existed. Under SFAS 142,
goodwill will be tested for impairment at least annually and
more frequently if an event occurs which indicates that goodwill
may be impaired.



| |                 
| | ----------------
| | Asset Retirement

In August 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 143 (SFAS 143), Accounting for Asset
Retirement Obligations,which is effective for fiscal years
beginning after June 15, 2002. This Statement addresses
financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the
associated asset retirement costs SFAS 143 requires, among other
things, that the retirement obligations be recognized when they
are incurred and displayed as liabilities on the balance sheet.
In addition, the assets retirement costs are to be
capitalized as part of the assets carrying amount and
subsequently allocated to expense over the assets useful
life. We believe that the adoption of SFAS 143 will not have a
significant impact on our financial statements.



| |                          
| | -------------------------
| | Accounting for Impairment

In October 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 144 (SFAS 144), Accounting for the
Impairment or Disposal of Long-Lived Assets,which is
effective for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. This
Statement develops one accounting model for long-lived assets
that are to be disposed of by sale, as well as addressing the
principal implementation issues. We believe that the adoption of
SFAS 144 will not have a significant impact on our financial
statements.

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| |                                     
| | ------------------------------------
| | Vendor to Customer
    Consideration

In November 2001, the Financial Accounting
Standards Board reached a consensus on Emerging Issues Task
Force Issue 01-09, Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendors
Products,which is a codification of Emerging Issues Task
Force 00-14, 00-22 and 00-25. This issue presumes consideration
from a vendor to a customer or reseller of the vendors
products to be a reduction of the selling prices of the
vendors products and, therefore, should be characterized
as a reduction of revenue when recognized in the vendors
income statement and could lead to negative revenue under
certain circumstances. Revenue reduction is required unless
consideration relates to a separate identifiable benefit and the
benefits fair value can be established. The Company
adopted Emerging Issues Task Force 01-09 for the quarter ended
March 31, 2002 with no significant effect on its financial
statements.



| |                            
| | ---------------------------
| | Sale Leaseback Transactions

In April 2002, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting
Standards No. 145, (SFAS 145) Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections,which is effective
for transactions occurring after May 15, 2002 and fiscal years
beginning after May 15, 2002. SFAS 145 rescinds FASB
Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt,and an amendment of that Statement,
FASB Statement No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirementsand amends FASB Statement
No. 13, Accounting for Leases,to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. The adoption of SFAS 145 will
require CTI to reclassify the extraordinary loss on early
extinguishments of debt to other (income) expense in our
future comparative financial statements.



| |                                                      
| | -----------------------------------------------------
| | Costs Associated with Exit or Disposal
    Activities

In June 2002, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standard
No. 146 (SFAS 146) Accounting for Costs Associated with
Exit or Disposal Activities, which is effective for exit or
disposal activities that are initiated after December 31,
2002, with early application encouraged. SFAS 146 addresses
financial accounting and reporting for the costs associated with
exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Costs to Exit and
Activity (Including Certain Costs Incurred in a
Restructuring). SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized
when the liability is incurred, and establishes that fair value
is the objective for initial measurement of the liability. The
Company believes that the adoption of SFAS 146 will not have a
significant impact on the Companys financial statements.



| |                                                                   
| | ------------------------------------------------------------------
| | Accounting for Revenue Arrangements with
    Multiple Deliverables

In November 2002, the Financial Accounting
Standards Board reached a consensus on Emerging Issues Task
Force Issue 00-21 (the Issue), Accounting for Revenue
Arrangements with Multiple Deliverables.The guidance in
this Issue is effective for revenue arrangements entered into in
fiscal years beginning after June 15, 2003. This Issue
addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple
revenue-generating activities. Specifically, this Issue
addresses how to determine whether an arrangement involving
multiple deliverables contains more than one earnings process
and, if it does, how to divide the arrangement into separate
units of accounting consistent with the identified earning
processes for revenue recognition purposes. This Issue also
addresses how arrangement consideration should be measured and
allocated to the separate units of accounting in the
arrangement. The Company is evaluating the effect of this Issue
on its financial statements.

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| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Guarantors Accounting and Disclosure
    Requirements for Guarantees, Including Indirect Guarantees of
    Indebtedness of Others

On November 25, 2002, the Financial
Accounting Standards Board (FASB) issued FASB
Interpretation No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57, and 107 and
Rescission of FASB Interpretation No. 34. FIN 45 clarifies
the requirements of FASB Statement No. 5, Accounting for
Contingencies (FAS 5), relating to the guarantors
accounting for, and disclosure of, the issuance of certain types
of guarantees. FIN 45 requires that upon issuance of a
guarantee, the entity (i.e., the guarantor) must recognize a
liability for the fair value of the obligation it assumes under
that guarantee. The Board believes that, in current practice,
many entities might not be recognizing that liability, believing
that GAAP does not require recognition, particularly when the
entity does not receive separately identifiable consideration
(i.e., a premium) for issuing the guarantee. Many guarantees are
embedded in purchase or sales agreements, service contracts,
joint venture agreements, or other commercial agreements and the
guarantor in many such arrangements does not receive a
separately identifiable upfront payment for issuing the
guarantee. FIN 45 is intended to improve the comparability
of financial reporting by requiring identical accounting for
guarantees issued with a separately identified premium and
guarantees issued without a separately identified premium.
FIN 45s provisions for initial recognition and
measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002,
irrespective of the guarantors fiscal year-end. The
guarantors previous accounting for guarantees that were
issued before the date of FIN 45s initial application may
not be revised or restated to reflect the effect of the
recognition and measurement provisions of FIN 45. The
Company is evaluating the effect of this Issue on its 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. In our
radiopharmaceutical business, we compete with for-profit
corporations, such as 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

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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 of Health and Human Services Centers
for Medicare and Medicaid Services (CMS), the government agency
that administers 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, which was not specific to our products, CMS
recently reviewed and made no change to the reimbursement rate
for certain common hospital outpatient PET procedures. 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, CTI PET Systems, Siemens
    will acquire a large portion of our revenues, operations and
    assets.

For years ended September 30, 2002, 2001 and
2000, approximately 73.1%, 70.7%, and 69.5%, respectively, of
our consolidated revenues were derived from the sale of PET
equipment manufactured by our 50.1% owned subsidiary, CTI PET
Systems. Siemens Medical Solutions USA, Inc. owns the remaining
49.9% of CTI PET Systems 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 CTI PET Systems, if and
when CTI PET Systems achieves specified unit sales volumes.
Siemens right to exercise this option is contingent upon
CTI PET Systems 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 CTI PET Systems beginning on December 9,
1987. As of September 30, 2002, the cumulative total number
of units sold by CTI PET Systems was 522 and CTI PET Systems
would need to have sold a cumulative total of 907 units to

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achieve the required cumulative sales level for
the option to be exercisable. After 2002 the cumulative unit
sales requirement increases by 74 units each nine months.
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 CTI
PET Systems to 80%, Siemens could use that controlling ownership
interest to cause CTI PET Systems to engage in a transaction the
effect of which would be a purchase by Siemens of our remaining
20% ownership interest in CTI PET Systems. Accordingly, the
Siemens option effectively gives Siemens the ability to acquire
100% of CTI PET Systems.


In any event, we would continue to have a right
to distribute PET and PET/CT products manufactured by CTI PET
Systems until at least 2010 pursuant to the terms of a
distribution agreement between us and CTI PET Systems. 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 CTI PET Systems 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 development of
PET scanners. As of September 30, 2002, approximately 25%
of our total assets were attributable to CTI PET Systems.
Accordingly, if we fail to further diversify our business beyond
that which is conducted by CTI PET Systems, 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 CTI PET Systems.



| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we cannot develop CTI as a recognized
    distributor of ECAT® scanners, we will be unable to compete
    effectively as a distributor of scanners.

Prior to April 2001 all of CTI PET Systems
ECAT® scanners were sold with the name Siemens located on
the face of the system. As a result, CTI is not recognized
widely in the PET industry as a distributor of ECAT®
scanners. Pursuant to our distribution agreement with CTI PET
Systems, the CTI name and logo will now appear on the face of
each ECAT® scanner sold directly by us. For the year ended
September 30, 2002, approximately 10.4% of the PET scanners
sold by CTI PET Systems were sold by us in our capacity as a
direct distributor. If we are unable to quickly develop
awareness in the market of the CTI name, brand and logo, our
ability to compete as a distributor of scanners will be limited
and our revenues, financial condition and future growth will
suffer.



| |                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. For example, for
the years ended September 30, 2002, 2001 and 2000 sales
through Siemens constituted 50%, 64%, and 67% 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.

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| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 production;                                                                                                                                   
|
| |  | 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 compete 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 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, 2002 we have 27 issued U.S.
patents and 17 patent applications pending before the U.S.
Patent and Trademark Office. We also have patents issued and
pending in Europe, Canada and Japan. 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.

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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, 15 of our issued patents are held in
the name of CTI PET Systems. If Siemens exercises its right to
purchase a majority interest in CTI PET Systems, 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 CTI PET Systems
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 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 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 two to six 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 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.

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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
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 regulation 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 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 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.



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | Proposed FDA regulations could impact our
    radiopharmaceutical development and manufacturing procedures in
    the future.

Our PET radiopharmaceutical products currently
are produced and sold through our PETNET radiopharmacies, each
of which operates under an applicable state pharmacy license and
compounds PET radiopharmaceuticals in response to the order of a
licensed physician. The production of PET radiopharmaceuticals
traditionally has been regulated by state and local authorities
responsible for regulating the practices of medicine and
pharmacy. Thus, PET products have not been subject to new drug
approval procedures and current good manufacturing practice
requirements.

The Food and Drug Administration Modernization
Act of 1997 (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 or abbreviated new drug
applications and adherence to current good manufacturing
practice requirements for PET products (under the Federal Food,
Drug and Cosmetic Act) two years after the agency finalizes
appropriate new drug approval procedures and current good
manufacturing practice requirements. FDA has issued specific
approval procedures for some PET products for specific
indications for use, including

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F-18-fluorodeoxyglucose, or FDG, the PET
radiopharmaceutical principally produced and distributed by our
PETNET radiopharmacies. Because the 1997 Act prohibits FDA from
requiring the submission of new drug applications or abbreviated
new drug applications for PET products until two years after the
agency finalizes appropriate new drug approval procedures and
current good manufacturing practice requirements for PET
products. The submission 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 approved PET products. FDA has said, however,
that it expects the standards for determining the safety and
effectiveness set forth in FDA regulations for in vivo
radiopharmaceuticals used for diagnosis and monitoring to apply
to PET products. FDA has only recently issued preliminary draft
proposed regulations for the current good manufacturing practice
requirements.


Under the 1997 Act, FDA cannot require the
submission of new drug application or abbreviated new drug
application for any PET product that complies 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 product,
whichever occurs later. The public comment period for the
preliminary draft proposed current good manufacturing practice
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 products. 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 2003. If so, FDA authority and the proposed new
drug approval procedures and current good manufacturing practice
requirements would not take effect until sometime near the end
of calendar year 2005.

Once the requirements take effect, we could incur
significant costs and spend considerable time obtaining FDA
approval for newly developed radiopharmaceuticals or 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 business, financial
condition, and results of operations. With regard to FDAs
proposed current good manufacturing practice requirements for
PET products, we cannot predict with certainty the precise
effects that these requirements might have 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, cyclotrons and radiopharmaceutical
business require the use of radioactive materials. While
virtually all of this radioactive material has a short
half-life, meaning it quickly breaks down into inert, or
non-radioactive substances, storage, use, transportation and
disposal of these materials presents the risk of accidental
environmental contamination and physical injury. We are subject
to federal, state and local regulations governing storage,
handling, transportation 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 procedures for storing, handling, transporting and disposing
of these hazardous materials comply in all material respects
with the standards prescribed by law and regulation, we cannot
completely eliminate the risk of accidental contamination or
injury from those hazardous materials. Although we currently
maintain insurance coverage for these risks, in the event of an
accident, we could be held liable for any damages that exceed
the limits or fall outside the coverage of our insurance. We may
not be able to continue maintaining insurance against these
risks on acceptable terms, or at all. We could incur significant
costs and diversion of management attention in order to comply
with current or future and regulations governing radioactive
material



| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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

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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 are currently in the early stages of
incorporating the new LSO detector material technology into our
PET and PET/CT scanners. We will incur significant expenses over
the next several years in order to further develop this new LSO
detector material technology. In addition, we anticipate that
our expenses will also 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;                                                                       
|
| |  | 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 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;                                                                                 

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| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;                                   
|
| |  | 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.



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

We conduct business globally. International sales
accounted for approximately 23%, 23% and 25%, respectively, of
sales in the years ended September 30, 2002, 2001 and 2000,
respectively. 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 continue to have
access to our international supplies or that we will be able to
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:



| |   |                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulty 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.

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| |                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 a significant portion 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. Further, to supplement our own
crystal production operations, a single supplier manufactures a
substantial amount of our LSO detector requirements. Some of our
suppliers are not obligated to continue to supply us. For some
of these raw 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 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 for our services, 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 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).

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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 modify our operations with respect to the
handling of patient information. Implementing these
modifications may prove costly. 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, certificate 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 PETNET radiopharmacy 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.

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| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | 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 which 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.



| |                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 57.0% of our common stock
as of December 2, 2002. 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.

We consummated the initial public offering of our
common stock on June 21, 2002. Accordingly, there has only
been a public market for shares of our common stock for a
limited period of time. An active public trading market may not
develop or, if developed, may not be sustained. Further, we
expect

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that the market price of our common stock may
fluctuate substantially. The market price for the common stock
may be affected by a number of factors, including:




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



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | The sales of a substantial number of shares
    of our common stock may adversely affect the market price for
    our common stock.

Our initial public offering in June 2002 created
a public market for our common stock for the first time in our
companys history. Many of our stockholders who acquired
shares before our initial public offering now have the
opportunity to sell such shares in the public market. Many of
these stockholders have held their shares for a long time and
may desire to sell some or all of their shares in the near
future. Sales of a substantial number of shares of our common
stock in the public market or the market perception that these
sales may occur, could significantly and negatively affect the
market price for our common stock.




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 2002, 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, 2002, we had cash and
cash equivalents of $84.6 million and marketable securities
of $6.7 million, which consisted of highly liquid money
market instruments with maturities greater than 90 days.
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.

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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.

|                                |                       |      |   |        |   |            |   |        |   |  |   |        |  
|------------------------------- | --------------------- | ---- | - | ------ | - | ---------- | - | ------ | - |  | - | ------ | -
|                                |                       |      |   |        |   | 9/30/02   
|                                |                       | 2003 |   | Total  |   | Fair Value
|                                |                       |      |   |        |   |           
|Assets:                         |                       |      |   |        |   |            |   |        |   |  |   |       
|Cash equivalents:               |                       |      |   |        |   |            |   |        |   |  |   |       
|                                | Fixed rate            |      | $ | 79,814 |   |            | $ | 79,814 |   |  | $ | 79,814 |  
|                                | Average interest rate |      |   | 1.78   | % |            |   | 1.78   | % |  |   | 1.78   | %
|                                | Variable rate         |      | $ | 2,030  |   |            | $ | 2,030  |   |  | $ | 2,030  |  
|                                | Average interest rate |      |   | 1.54   | % |            |   | 1.54   | % |  |   | 1.54   | %
|Available for sale investments: |                       |      |   |        |   |            |   |        |   |  |   |       
|                                | Fixed rate            |      | $ | 6,704  |   |            | $ | 6,704  |   |  | $ | 6,704  |  
|                                | Average interest rate |      |   | 1.70   | % |            |   | 1.70   | % |  |   | 1.70   | %

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, 2002. The
Company experienced an immaterial amount of transaction gains
and losses for the year ended September 30, 2002. The
Company is also exposed to foreign exchange rate fluctuations as
the financial results of its German subsidiary 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. The net effect
of foreign exchange rate fluctuations on the Company during the
year ended September 30, 2002 was not material.

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.




Item
8.     Financial Statements and
Supplementary Data

The consolidated financial statements appear on
pages F-1 through F-31.




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

Not applicable




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 to be filed
with the Securities and Exchange Commission and 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 to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on
Form 10-K by this reference.

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Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The information required by this Item 12
will be contained in the section entitled Beneficial
Security Ownership of the Companys definitive proxy
statement to be filed with the Securities and Exchange
Commission and 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 to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on
Form 10-K by this reference.




Item 14.     Controls
and Procedures

Within 90 days prior to the filing of this
report, 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 date that evaluation was completed
(Evaluation Date), the Companys Chief Executive Officer
and Chief Financial Officer concluded that the Company maintains
disclosure controls and procedures that provide reasonable
assurance that information required to be disclosed in the
Companys reports under the Securities Exchange Act of 1934
(Exchange Act) 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 significant changes in the
Companys internal controls or in other factors that could
significantly affect these controls subsequent to the Evaluation
Date, including any corrective actions with regard to
significant deficiencies and materials weaknesses.

64



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##### Table of Contents








|         |                                                                                  
|-------- | ---------------------------------------------------------------------------------
|Item 15. | Exhibits, Consolidated Financial Statement
    Schedules, and Reports on Form 8-K

|    |  |                                                                                                                                                                       |  |                                                                                                              |  |  |            | 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  |  | ---------- | 
|(a) |  | (1)                                                                                                                                                                   |  | Financial Statements:                                                                                       
|   
|    |  | The following consolidated financial statements
    of the Company and Report of PricewaterhouseCoopers LLP
    Independent Accountants, are included in this report:
|   
|    |  | Page                                                                                                                                                                 
|    |  |                                                                                                                                                                      
|    |  |                                                                                                                                                                       |  | Report of Independent Accountants                                                                            |  |  | F-1        | 
|    |  |                                                                                                                                                                       |  | Consolidated Balance Sheets as of
    September 30, 2002 and 2001                                            |  |  | F-2        | 
|    |  |                                                                                                                                                                       |  | Consolidated Statements of Operations for the
    Years Ended September 30, 2002, 2001, and 2000             |  |  | F-3        | 
|    |  |                                                                                                                                                                       |  | Consolidated Statements of Shareholders
    Equity for the Years Ended September 30, 2002, 2001 and 2000    |  |  | F-4        | 
|    |  |                                                                                                                                                                       |  | Consolidated Statements of Cash Flows for the
    Years Ended September 30, 2002, 2001 and 2000              |  |  | F-5        | 
|    |  |                                                                                                                                                                       |  | Notes to Consolidated Financial Statements                                                                   |  |  | F-6  F-30 | 
|   
|    |  | (2)                                                                                                                                                                   |  | Financial Statement Schedule:                                                                               
|   
|    |  |                                                                                                                                                                       |  | Schedule II. Valuation and Qualifying
    Accounts  Years Ended September 30, 2002, 2001
    and 2000.      |  |  | F-31       | 
|   
|    |  | (3)                                                                                                                                                                   |  | Exhibits:                                                                                                   
|   
|    |  |                                                                                                                                                                       |  | The Exhibits listed in the Index of Exhibits
    appearing at pages 69-72 are included in this annual report |  |  |            | 

(b)     Reports on
Form 8-K:



| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | The Company did not file any reports on
    Form 8-K during the quarter ended September 30, 2002.

(c)     Exhibits:



| |                         
| | ------------------------
| | See Item 14(a)(3) above.

(d)     Financial
Statement Schedules:



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

65



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this Report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized in the
City of Knoxville, State of Tennessee, on the 19th day of
December 2002.



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



| |     |                             
| | --- | ----------------------------
| | By: | /s/ TERRY D. DOUGLASS, PH.D.

| |                                    
| | -----------------------------------
| |                                    
| | Terry D. Douglass, Ph.D.           
| | Chairman of the Board and President

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Annual Report on Form 10-K has
been signed by the following persons in the capacities and on
the dates indicated.

|                                                     |  |                                                                                                        |  |                   |  | 
|---------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | ----------------- |  | 
|                                                     |  |                                                                                                        |  |                  
|Signature                                            |  | Title                                                                                                  |  | Date             
|                                                     |  |                                                                                                        |  |                  
|                                                    
|/s/ TERRY D. DOUGLASS, PH.D.Terry D. Douglass, Ph.D. |  | Chairman of the Board,
    President and Director
    (Principal Executive Officer)                    |  | December 19, 2002
|                                                    
|/s/ DAVID N. GILLDavid N. Gill                       |  | Senior Vice President and
    Chief Financial Officer
    (Principal Financial and Accounting Officer) |  | December 19, 2002
|                                                    
|/s/ FREDERICK W. EUBANK IIFrederick W. Eubank II     |  | Director                                                                                               |  | December 19, 2002
|                                                    
|Bernd Haetzel                                        |  | Director                                                                                               |  | December   , 2002
|                                                    
|/s/ LEROY HOOD, M.D., PH.D.Leroy Hood, M.D., Ph.D.   |  | Director                                                                                               |  | December 19, 2002
|                                                    
|/s/ WILLIAM W. MCINNESWilliam W. McInnes             |  | Director                                                                                               |  | December 19, 2002
|                                                    
|/s/ RONALD NUTT, PH.D.Ronald Nutt, Ph.D.             |  | Director                                                                                               |  | December 19, 2002
|                                                    
|/s/ MICHAEL PHELPS, PH.D.Michael Phelps, Ph.D.       |  | Director                                                                                               |  | December 19, 2002

66



---



##### Table of Contents






CERTIFICATION

I, Terry D. Douglass, President and Chief
Executive Officer of CTI Molecular Imaging, Inc., certify that:

1. I have reviewed this annual report on
Form 10-K of CTI Molecular Imaging, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statement made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of the
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                    
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and that the audit
committee of the registrants board of directors (or
persons performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |     |                             
| | --- | ----------------------------
| | By: | /s/ TERRY D. DOUGLASS, PH.D.

| |                                          
| | -----------------------------------------
| |                                          
| | Terry D. Douglass, Ph.D.                 
| | President and Chief Executive
    Officer

Date: December 19, 2002

67



---



##### Table of Contents



CERTIFICATION

I, David N. Gill, Senior Vice President and Chief
Financial Officer of CTI Molecular Imaging, Inc., certify that:

1. I have reviewed this annual report on
Form 10-K of CTI Molecular Imaging, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statement made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of the
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                    
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and that the audit
committee of the registrants board of directors (or
persons performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |     |                  
| | --- | -----------------
| | By: | /s/ DAVID N. GILL

| |                                                      
| | -----------------------------------------------------
| |                                                      
| | David N. Gill                                        
| | Senior Vice President and Chief Financial
    Officer

Date: December 19, 2002

68



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##### Table of Contents



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, File
    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, File 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, File
    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, File 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, File 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, File
    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, File
    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, File
    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, File
    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, File
    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, File 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 CTI PET Systems, Inc. and
    PHOTONIS, filed as Exhibit 10.13 to the Companys
    Registration Statement on Form S-1, File
    No. 333-85714, and incorporated herein by reference (The
    Company has been granted confidential treatment with respect to
    certain portions of this Exhibit).                                                              

69



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|        |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | -- | ---- |  | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 10 | .9   |  |            |  | Master Purchase Agreement, dated
    September 1, 1999, between CTI PET Systems, Inc. and
    Hamamatsu Corporation, filed as Exhibit 10.14 to the
    Companys Registration Statement on Form S-1, File
    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, File
    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, File 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, File 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, File 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, File 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, File 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, File 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, File 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, File 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  |  |            |  | 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, File No. 333-85714, and incorporated
    herein by reference.                                                                                                                                                                  
|        | 10 | .22  |  |            |  | Change in Control Agreement, dated May 15,
    2002, between CTI, Inc. and Fred Stuvek, filed as
    Exhibit 10.43 to the Companys Registration Statement
    on Form S-1, File No. 333-85714, and incorporated
    herein by reference.                                                                                                                                                                 

70



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|        |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                                                                              
|------- | -- | ---- |  | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 10 | .23  |  |            |  | Change in Control Agreement, dated May 15,
    2002, between CTI, Inc. and Mark Rhoads, filed as
    Exhibit 10.45 to the Companys Registration Statement
    on Form S-1, File No. 333-85714, and incorporated
    herein by reference.                                                                                                                                    
|        | 10 | .24* |  |            |  | Change in Control Agreement, dated
    December 17, 2002, between CTI Molecular Imaging, Inc. and
    Thomas J. Hook.                                                                                                                                                                                                                                                        
|        | 10 | .25* |  |            |  | Change in Control Agreement, dated
    December 17, 2002, between CTI Molecular Imaging, Inc. and
    R. Gregory Brophy.                                                                                                                                                                                                                                                     
|        | 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, File
    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,
    File No. 333-85714, and incorporated herein by reference.                                                                                                                                             
|        | 10 | .28  |  |            |  | Letter Agreement, dated February 15, 2000,
    between P.E.T.Net Pharmaceutical Services, Inc. and Mark S.
    Rhoads, filed as Exhibit 10.19 to the Companys
    Registration Statement on Form S-1, File
    No. 333-85714, and incorporated herein by reference.                                                                                                         
|        | 10 | .29* |  |            |  | Letter Agreement, dated July 19, 2002
    between CTI Molecular Imaging, Inc. and Thomas J. Hook.                                                                                                                                                                                                                                                                            
|        | 10 | .30* |  |            |  | Letter Agreement, dated August 02, 2002
    between CTI Molecular Imaging, Inc. and R. Gregory Brophy.                                                                                                                                                                                                                                                                       
|        | 10 | .31  |  |            |  | CTI, Inc. 1998 Restated Incentive Stock Option
    Plan, filed as Exhibit 10.11 to the Companys
    Registration Statement on Form S-1, File
    No. 333-85714, and incorporated herein by reference.                                                                                                                                                                       
|        | 10 | .32  |  |            |  | 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, File No. 333-85714, and
    incorporated herein by reference.                                                                                                                
|        | 10 | .33  |  |            |  | 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 | .34* |  |            |  | Form of Incentive Stock Option Agreement under
    the CTI Molecular Imaging, Inc. 2002 Long-Term Incentive Plan.                                                                                                                                                                                                                                                            
|        | 10 | .35* |  |            |  | Form of Restricted Stock Agreement under the CTI
    Molecular Imaging, Inc. 2002 Long-Term Incentive Plan.                                                                                                                                                                                                                                                                  
|        | 10 | .36  |  |            |  | CTI Molecular Imaging, Inc. 2002 Employee Stock
    Purchase Plan, filed as Exhibit 10.17 to the Companys
    Registration Statement on Form S-1, File
    No. 333-85714, and incorporated herein by reference.                                                                                                                                                             
|        | 10 | .37  |  |            |  | 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, File No. 333-85714, and incorporated
    herein by reference.
|        | 10 | .38  |  |            |  | 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, File No. 333-85714, and
    incorporated herein by reference.                                                                                                            
|        | 10 | .39  |  |            |  | 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, File No. 333-85714, and
    incorporated herein by reference.                                                                                                               
|        | 10 | .40  |  |            |  | 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,
    File No. 333-85714, and incorporated herein by reference.                                                                                                                                             

71



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|        |    |      |  |             |  |                                                                                                                                                                                                                                                                        
|------- | -- | ---- |  | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 10 | .41  |  |            |  | 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, File No. 333-85714, and incorporated
    herein by reference.                            
|        | 10 | .42  |  |            |  | Shareholder Agreement, dated March 5, 2001,
    between CTI, Inc. and Fred Stuvek, filed as Exhibit 10.39 to the
    Companys Registration Statement on Form S-1, File
    No. 333-85714, and incorporated herein by reference.                                       
|        | 10 | .43  |  |            |  | Shareholder Agreement, dated August 26,
    1999, between CTI, Inc. and Michael K. Templin, filed as
    Exhibit 10.38 to the Companys Registration Statement
    on Form S-1, File No. 333-85714, and incorporated
    herein by reference.                          
|        | 10 | .44  |  |            |  | 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, File
    No. 333-85714, and incorporated herein by reference.
|        | 10 | .45  |  |            |  | 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, File No. 333-85714, and incorporated
    herein by reference.            
|        | 10 | .46  |  |            |  | 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, File No. 333-85714, and incorporated
    herein by reference.            
|        | 10 | .47  |  |            |  | 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,
    File No. 333-85714, and incorporated herein by reference.                                
|        | 10 | .48  |  |            |  | 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, File No. 333-85714, and incorporated
    herein by reference.                 
|        | 10 | .49  |  |            |  | 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, File No. 333-85714, and incorporated
    herein by reference.                 
|        | 10 | .50* |  |            |  | Separation Agreement, General Release of Claims,
    Covenant Not to Sue, dated November 6, 2002, by and among
    Fred Stuvek, Jr. and CTI Molecular Imaging, Inc.                                                                                                    
|        | 21 | .1*  |  |            |  | Subsidiaries of the Company.                                                                                                                                                                                                                                           
|        | 23 | .1*  |  |            |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                 
|        | 99 | .1*  |  |            |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                                                                        
|        | 99 | .2*  |  |            |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                                                                        



---



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

72



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##### Table of Contents





REPORT OF INDEPENDENT ACCOUNTANTS

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, 2002
and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended
September 30, 2002, 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.

PricewaterhouseCoopers LLP

November 15, 2002

Atlanta, Georgia


F-1



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             |                            |                                                                            |         |         |         |        |        |        |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | -------------------------------------------------------------------------- | ------- | ------- | ------- | ------ | ------ | ------ | ------- | 
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             |                           
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             | September 30,             
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             |                           
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             | 2002                       |                                                                            | 2001   
|(In thousands, except share and per share data)                                                                                                                                                              |                                                                                                                                                                                                                                             |                            |                                                                            |        
|ASSETS                                                                                                                                                                                                      
|Current assets:                                                                                                                                                                                              |                                                                                                                                                                                                                                             |                            |                                                                            |         |         |         |        |       
|                                                                                                                                                                                                             | Cash and cash equivalents                                                                                                                                                                                                                   |                            | $                                                                          | 84,553  |         |         | $      | 1,827  |       
|                                                                                                                                                                                                             | Marketable securities                                                                                                                                                                                                                       |                            |                                                                            | 6,704   |         |         |        |       |       
|                                                                                                                                                                                                             | Accounts receivable  trade, less
    allowance for doubtful accounts of $1,576 and $596 at
    September 30, 2002 and 2001, respectively                                                                                                   |                            |                                                                            | 33,817  |         |         |        | 35,543 |       
|                                                                                                                                                                                                             | Accounts receivable  related party,
    less allowance for doubtful accounts of $242 and $161 at
    September 30, 2002 and 2001, respectively                                                                                             |                            |                                                                            | 39,918  |         |         |        | 41,424 |       
|                                                                                                                                                                                                             | Inventories                                                                                                                                                                                                                                 |                            |                                                                            | 69,295  |         |         |        | 47,080 |       
|                                                                                                                                                                                                             | Deferred tax asset                                                                                                                                                                                                                          |                            |                                                                            | 9,827   |         |         |        | 6,360  |       
|                                                                                                                                                                                                             | Prepaid expenses and other current assets                                                                                                                                                                                                   |                            |                                                                            | 6,112   |         |         |        | 6,619  |       
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             |                            |                                                                            |         |         |         |        |       
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             |                            | Total current assets                                                       |         |         | 250,226 |        |        |        | 138,853 | 
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             |                            |                                                                            |         |         |         |        |       
|Property and equipment, net                                                                                                                                                                                  |                                                                                                                                                                                                                                             |                            | 77,667                                                                     |         |         |         | 47,319 |       
|Deferred tax asset                                                                                                                                                                                           |                                                                                                                                                                                                                                             |                            | 187                                                                        |         |         |         | 2,700  |       
|Goodwill                                                                                                                                                                                                     |                                                                                                                                                                                                                                             |                            | 12,385                                                                     |         |         |         | 11,865 |       
|Other assets                                                                                                                                                                                                 |                                                                                                                                                                                                                                             |                            | 11,244                                                                     |         |         |         | 7,044  |       
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             |                            |                                                                            |         |         |         |        |       
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             |                            | Total assets                                                               |         | $       | 351,709 |        |        | $      | 207,781 | 
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             |                            |                                                                            |         |         |         |        |       
|LIABILITIES, REDEEMABLE PREFERRED STOCK AND
    SHAREHOLDERS EQUITY                                                                                                                                        
|Current liabilities:                                                                                                                                                                                         |                                                                                                                                                                                                                                             |                            |                                                                            |         |         |         |        |       
|                                                                                                                                                                                                             | Cash management clearing                                                                                                                                                                                                                    |                            | $                                                                          | 2,121   |         |         | $      | 3,893  |       
|                                                                                                                                                                                                             | Accounts payable                                                                                                                                                                                                                            |                            |                                                                            | 26,591  |         |         |        | 15,039 |       
|                                                                                                                                                                                                             | Current maturities of long-term debt and capital
    lease obligations                                                                                                                                                                      |                            |                                                                            | 4,008   |         |         |        | 4,914  |       
|                                                                                                                                                                                                             | Accrued payroll and benefits                                                                                                                                                                                                                |                            |                                                                            | 12,914  |         |         |        | 8,797  |       
|                                                                                                                                                                                                             | Customer advances  trade                                                                                                                                                                                                                   |                            |                                                                            | 16,487  |         |         |        | 16,868 |       
|                                                                                                                                                                                                             | Customer advances  related party                                                                                                                                                                                                           |                            |                                                                            | 1,214   |         |         |        | 5,241  |       
|                                                                                                                                                                                                             | Accrued warranty expense                                                                                                                                                                                                                    |                            |                                                                            | 3,740   |         |         |        | 3,433  |       
|                                                                                                                                                                                                             | Income taxes payable                                                                                                                                                                                                                        |                            |                                                                            | 5,680   |         |         |        | 3,845  |       
|                                                                                                                                                                                                             | Other accrued expenses                                                                                                                                                                                                                      |                            |                                                                            | 1,211   |         |         |        | 2,161  |       
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             |                            |                                                                            |         |         |         |        |       
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             |                            | Total current liabilities                                                  |         |         | 73,966  |        |        |        | 64,191  | 
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             |                            |                                                                            |         |         |         |        |       
|Deferred revenues                                                                                                                                                                                            |                                                                                                                                                                                                                                             |                            | 1,420                                                                      |         |         |         | 749    |       
|Warrant liability                                                                                                                                                                                            |                                                                                                                                                                                                                                             |                            |                                                                           |         |         |         | 11,470 |       
|Long-term debt and capital lease obligations,
    less current maturities                                                                                                                                    |                                                                                                                                                                                                                                             |                            | 26,730                                                                     |         |         |         | 73,122 |       
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             |                            |                                                                            |         |         |         |        |       
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             |                            | Total liabilities                                                          |         |         | 102,116 |        |        |        | 149,532 | 
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             |                            |                                                                            |         |         |         |        |       
|Commitments and contingencies (Note 5)                                                                                                                                                                       |                                                                                                                                                                                                                                             |                            |                                                                            |         |         |         |        |       
|Minority interest                                                                                                                                                                                            |                                                                                                                                                                                                                                             |                            | 30,104                                                                     |         |         |         | 21,312 |       
|Redeemable preferred stock, redeemed for $10,000
    on June 26, 2002; no shares issued or outstanding at
    September 30, 2002; 400,000 shares issued and outstanding
    at September 30, 2001            |                                                                                                                                                                                                                                             |                            |                                                                           |         |         |         | 7,740  |       
|Convertible redeemable preferred stock, converted
    for $6,780 on June 26, 2002 no shares issued or outstanding
    at September 30, 2002; 200,000 shares issued and
    outstanding at September 30, 2001 |                                                                                                                                                                                                                                             |                            |                                                                           |         |         |         | 5,040  |       
|Shareholders equity:                                                                                                                                                                                        |                                                                                                                                                                                                                                             |                            |                                                                            |         |         |         |        |       
|                                                                                                                                                                                                             | Preferred stock, Series C, $.01 par value,
    50,000 shares authorized, no shares issued or outstanding at
    September 30, 2002 and September 30, 2001                                                                                   |                            |                                                                            |        |         |         |        |       |       
|                                                                                                                                                                                                             | Common stock, $.01 par value; 500,000,000 shares
    authorized, 44,048,117 shares issued and 42,216,152 shares
    outstanding at September 30, 2002; 30,699,569 shares issued
    and 30,059,569 shares outstanding at September 30, 2001 |                            |                                                                            | 440     |         |         |        | 307    |       
|                                                                                                                                                                                                             | Additional paid-in capital                                                                                                                                                                                                                  |                            |                                                                            | 226,910 |         |         |        | 20,462 |       
|                                                                                                                                                                                                             | Retained earnings                                                                                                                                                                                                                           |                            |                                                                            | 644     |         |         |        | 4,063  |       
|                                                                                                                                                                                                             | Unearned compensation                                                                                                                                                                                                                       |                            |                                                                            | (7,526  | )       |         |        |       |       
|                                                                                                                                                                                                             | Other comprehensive income  currency
    translation adjustment                                                                                                                                                                            |                            |                                                                            | (16     | )       |         |        | (54    | )     
|                                                                                                                                                                                                             | Treasury stock, at cost, 1,831,965 shares at
    September 30, 2002; 640,000 shares at September 30,
    2001                                                                                                                               |                            |                                                                            | (963    | )       |         |        | (621   | )     
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             |                            |                                                                            |         |         |         |        |       
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             | Total shareholders equity |                                                                            |         | 219,489 |         |        |        | 24,157 |        
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             |                            |                                                                            |         |         |         |        |       
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             |                            | Total liabilities, redeemable preferred stock and
    shareholders equity |         | $       | 351,709 |        |        | $      | 207,781 | 
|                                                                                                                                                                                                             |                                                                                                                                                                                                                                             |                            |                                                                            |         |         |         |        |       

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,
|                                                                                      |                                                           |                         
|                                                                                      |                                                           | 2002                     |         | 2001       |         | 2000
|(In thousands, except share and per share data)                                       |                                                           |                          |         |            |         |     
|Revenues(1)                                                                           |                                                           | $                        | 258,395 |            |         | $    | 188,877 |            |        | $ | 124,026 |           
|Cost of revenues(2)(3)                                                                |                                                           |                          | 150,654 |            |         |      | 110,249 |            |        |   | 68,372  |           
|                                                                                      |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|                                                                                      |                                                           | Gross margin             |         |            | 107,741 |      |         |            | 78,628 |   |         |            | 55,654 | 
|                                                                                      |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|Operating expenses:                                                                   |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|                                                                                      | Selling, general and administrative expenses(3)           |                          |         | 35,766     |         |      |         | 29,433     |        |   |         | 21,751     |       
|                                                                                      | Research and development expenses(3)                      |                          |         | 21,658     |         |      |         | 18,985     |        |   |         | 14,845     |       
|                                                                                      | Stock-based compensation expense                          |                          |         | 12,250     |         |      |         | 538        |        |   |         | 503        |       
|                                                                                      |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|                                                                                      |                                                           | Total operating expenses |         |            | 69,674  |      |         |            | 48,956 |   |         |            | 37,099 | 
|                                                                                      |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|Income from operations                                                                |                                                           |                          | 38,067  |            |         |      | 29,672  |            |        |   | 18,555  |           
|Warrant liability mark to market expense                                              |                                                           |                          | 8,902   |            |         |      | 3,921   |            |        |   | 3,174   |           
|Interest expense, net                                                                 |                                                           |                          | 4,148   |            |         |      | 3,767   |            |        |   | 2,300   |           
|Other (income) expense                                                                |                                                           |                          | (426    | )          |         |      | (428    | )          |        |   | 375     |           
|                                                                                      |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|Income before income taxes and minority interest                                      |                                                           |                          | 25,443  |            |         |      | 22,412  |            |        |   | 12,706  |           
|                                                                                      |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|Provision (benefit) for income taxes:                                                 |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|                                                                                      | Current                                                   |                          |         | 16,028     |         |      |         | 8,847      |        |   |         | 6,726      |       
|                                                                                      | Deferred                                                  |                          |         | (954       | )       |      |         | 1,083      |        |   |         | (2,851     | )     
|                                                                                      |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|                                                                                      |                                                           |                          | 15,074  |            |         |      | 9,930   |            |        |   | 3,875   |           
|                                                                                      |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|Income before minority interest                                                       |                                                           |                          | 10,369  |            |         |      | 12,482  |            |        |   | 8,831   |           
|Amount applicable to minority interest, net of
    taxes                              |                                                           |                          | 12,969  |            |         |      | 6,366   |            |        |   | 4,453   |           
|                                                                                      |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|Income (loss) before extraordinary item                                               |                                                           |                          | (2,600  | )          |         |      | 6,116   |            |        |   | 4,378   |           
|Extraordinary loss from extinguishment of debt,
    net of taxes of $484              |                                                           |                          | 819     |            |         |      |        |            |        |   |        |           
|                                                                                      |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|Net income (loss)                                                                     |                                                           |                          | (3,419  | )          |         |      | 6,116   |            |        |   | 4,378   |           
|                                                                                      |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|Accretion of preferred stocks                                                         |                                                           |                          | 3,544   |            |         |      | 653     |            |        |   | 500     |           
|Dividends on preferred stocks                                                         |                                                           |                          | 1,120   |            |         |      | 1,400   |            |        |   | 1,404   |           
|                                                                                      |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|                                                                                      | Net income (loss) attributable to common
    shareholders |                          | $       | (8,083     | )       |      | $       | 4,063      |        |   | $       | 2,474      |       
|                                                                                      |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|Earnings (loss) per share before
    extraordinary loss (Note 2):                     |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|                                                                                      | Basic                                                     |                          | $       | (0.22      | )       |      | $       | 0.15       |        |   | $       | 0.10       |       
|                                                                                      | Diluted                                                   |                          | $       | (0.22      | )       |      | $       | 0.13       |        |   | $       | 0.09       |       
|Earnings (loss) per share on extraordinary
    loss from early extinguishment of debt |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|                                                                                      | Basic                                                     |                          | $       | (0.03      | )       |      | $       |           |        |   | $       |           |       
|                                                                                      | Diluted                                                   |                          | $       | (0.03      | )       |      | $       |           |        |   | $       |           |       
|Earnings (loss) per share (Note 2):                                                   |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|                                                                                      | Basic                                                     |                          | $       | (0.25      | )       |      | $       | 0.15       |        |   | $       | 0.10       |       
|                                                                                      | Diluted                                                   |                          | $       | (0.25      | )       |      | $       | 0.13       |        |   | $       | 0.09       |       
|Weighted average shares (Note 2):                                                     |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|                                                                                      | Basic                                                     |                          |         | 32,497,070 |         |      |         | 27,860,086 |        |   |         | 25,243,051 |       
|                                                                                      | Diluted                                                   |                          |         | 32,497,070 |         |      |         | 31,340,041 |        |   |         | 28,440,078 |       
|                                                                                     
|(1) Includes revenues through related parties                                         |                                                           | $                        | 128,233 |            |         | $    | 120,730 |            |        | $ | 83,217  |           
|(2) Includes cost of revenues through
    related parties                             |                                                           | $                        | 75,209  |            |         | $    | 60,609  |            |        | $ | 45,091  |           
|(3) Excludes stock-based compensation
    expense as follows:                         |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|                                                                                      | Cost of revenues                                          |                          | $       | 1,026      |         |      | $       |           |        |   | $       |           |       
|                                                                                      | Selling, general and administrative expenses              |                          |         | 9,578      |         |      |         | 533        |        |   |         | 503        |       
|                                                                                      | Research and development expenses                         |                          |         | 1,646      |         |      |         | 5          |        |   |         |           |       
|                                                                                      |                                                           |                          |         |            |         |      |         |            |        |   |         |           
|                                                                                      |                                                           | $                        | 12,250  |            |         | $    | 538     |            |        | $ | 503     |           
|                                                                                      |                                                           |                          |         |            |         |      |         |            |        |   |         |           

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                                    |            |            |   | (Accumulated |     |          |   |              |         |               |   |         
|                               |                                                                                   |                                                 |            | Additional |   | Deficit)     |     |          |   | 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, 1999 |                                                                                   |                                                 | 30,036,544 |            |   | $            | 301 |          |   | $            | 15,272  |               |   | $        | (3,640 | )             |   | $ |       |        |   | $ | (95  | )    |   | $ | (621 | )    |   | $ | 11,217  |        
|                               | Issued common stock upon exercise of stock options                                |                                                 |            | 104,512    |   |              |     | 1        |   |              |         | 261           |   |          |        |              |   |   |        |       |   |   |      |     |   |   |      |     |   |   |         | 262     |  
|                               | Purchase and retirement of common stock                                           |                                                 |            | (2,617,862 | ) |              |     | (27      | ) |              |         | (6,138        | ) |          |        |              |   |   |        |       |   |   |      |     |   |   |      |     |   |   |         | (6,165  | )
|                               | Issuance of common stock                                                          |                                                 |            | 12,620     |   |              |     |         |   |              |         | 35            |   |          |        |              |   |   |        |       |   |   |      |     |   |   |      |     |   |   |         | 35      |  
|                               | Extension of life of options to purchase shares
    of common stock (Note 9)      |                                                 |            |           |   |              |     |         |   |              |         | 503           |   |          |        |              |   |   |        |       |   |   |      |     |   |   |      |     |   |   |         | 503     |  
|                               | Translation adjustment from foreign functional
    currency to reporting currency |                                                 |            |           |   |              |     |         |   |              |         |              |   |          |        |              |   |   |        |       |   |   |      | (216 | ) |   |      |     |   |   |         | (216    | )
|                               | Net Income                                                                        |                                                 |            |           |   |              |     |         |   |              |         |              |   |          |        | 4,378         |   |   |        |       |   |   |      |     |   |   |      |     |   |   |         | 4,378   |  
|                               | Dividends accrual on convertible redeemable
    preferred stock                   |                                                 |            |           |   |              |     |         |   |              |         |              |   |          |        | (502          | ) |   |        |       |   |   |      |     |   |   |      |     |   |   |         | (502    | )
|                               | Dividends paid on redeemable preferred stock                                      |                                                 |            |           |   |              |     |         |   |              |         | (666          | ) |          |        | (236          | ) |   |        |       |   |   |      |     |   |   |      |     |   |   |         | (902    | )
|                               | Accretion of redeemable preferred stock                                           |                                                 |            |           |   |              |     |         |   |              |         | (313          | ) |          |        |              |   |   |        |       |   |   |      |     |   |   |      |     |   |   |         | (313    | )
|                               | Accretion of convertible redeemable preferred
    stock                           |                                                 |            |           |   |              |     |         |   |              |         | (187          | ) |          |        |              |   |   |        |       |   |   |      |     |   |   |      |     |   |   |         | (187    | )
|                               |                                                                                   |                                                 |            |            |   |              |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |      |      |   |   |      |      |   |   |         |        
|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 accrual on convertible redeemable
    preferred stock                   |                                                 |            |           |   |              |     |         |   |              |         |              |   |          |        | (500          | ) |   |        |       |   |   |      |     |   |   |      |     |   |   |         | (500    | )
|                               | Dividends paid on redeemable preferred stock                                      |                                                 |            |           |   |              |     |         |   |              |         |              |   |          |        | (900          | ) |   |        |       |   |   |      |     |   |   |      |     |   |   |         | (900    | )
|                               | Accretion of redeemable preferred stock                                           |                                                 |            |           |   |              |     |         |   |              |         |              |   |          |        | (343          | ) |   |        |       |   |   |      |     |   |   |      |     |   |   |         | (343    | )
|                               | Accretion of convertible redeemable preferred
    stock                           |                                                 |            |           |   |              |     |         |   |              |         |              |   |          |        | (310          | ) |   |        |       |   |   |      |     |   |   |      |     |   |   |         | (310    | )
|                               |                                                                                   |                                                 |            |            |   |              |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |      |      |   |   |      |      |   |   |         |        
|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 as incentive compensation                                     |                                                 |            | 21,440     |   |              |     |         |   |              |         | 100           |   |          |        |              |   |   |        |       |   |   |      |     |   |   |      |     |   |   |         | 100     |  
|                               | Issued restricted common stock                                                    |                                                 |            | 216,395    |   |              |     | 2        |   |              |         | 3,731         |   |          |        |              |   |   |        | (3,724 | ) |   |      |     |   |   |      |     |   |   |         | 9       |  
|                               | Purchase of common stock                                                          |                                                 |            |           |   |              |     |         |   |              |         |              |   |          |        |              |   |   |        |       |   |   |      |     |   |   |      | (342 | ) |   |         | (342    | )
|                               | Purchase and retirement of common stock                                           |                                                 |            | (3,054,500 | ) |              |     | (30      | ) |              |         | (12,219       | ) |          |        |              |   |   |        |       |   |   |      |     |   |   |      |     |   |   |         | (12,249 | )
|                               | Proceeds from initial public offering                                             |                                                 |            | 11,048,000 |   |              |     | 110      |   |              |         | 171,387       |   |          |        |               |   |   |        |        |   |   |      |      |   |   |      |      |   |   |         | 171,497 |  
|                               | Conversion of convertible 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  |  
|                               | Issued warrants to purchase common stock in
    exchange for consulting services  |                                                 |            |           |   |              |     |         |   |              |         | 267           |   |          |        |              |   |   |        | (253   | ) |   |      |     |   |   |      |     |   |   |         | 14      |  
|                               | 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 on convertible redeemable
    preferred stock                   |                                                 |            |           |   |              |     |         |   |              |         | (457          | ) |          |        |              |   |   |        |       |   |   |      |     |   |   |      |     |   |   |         | (457    | )
|                               | Dividends paid on redeemable preferred stock                                      |                                                 |            |           |   |              |     |         |   |              |         | (663          | ) |          |        |              |   |   |        |       |   |   |      |     |   |   |      |     |   |   |         | (663    | )
|                               | Accretion of redeemable preferred stock                                           |                                                 |            |           |   |              |     |         |   |              |         | (2,261        | ) |          |        |              |   |   |        |       |   |   |      |     |   |   |      |     |   |   |         | (2,261  | )
|                               | Accretion of convertible redeemable preferred
    stock                           |                                                 |            |           |   |              |     |         |   |              |         | (1,283        | ) |          |        |              |   |   |        |       |   |   |      |     |   |   |      |     |   |   |         | (1,283  | )
|                               |                                                                                   |                                                 |            |            |   |              |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |      |      |   |   |      |      |   |   |         |        
|Balances at September 30, 2002 |                                                                                   |                                                 | 44,048,117 |            |   | $            | 440 |          |   | $            | 226,910 |               |   | $        | 644    |               |   | $ | (7,526 | )      |   | $ | (16  | )    |   | $ | (963 | )    |   | $ | 219,489 |        
|                               |                                                                                   |                                                 |            |            |   |              |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |      |      |   |   |      |      |   |   |         |        

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

F-4



---



##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                                           |                                                                                                    |                                                                                                 |                                           |                                                         |        |         |         |         |       |         |         |         |        |         |         |  
|-------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------------- | ------ | ------- | ------- | ------- | ----- | ------- | ------- | ------- | ------ | ------- | ------- | -
|                                                                                                                           |                                                                                                    |                                                                                                
|                                                                                                                           |                                                                                                    | Year Ended September 30,                                                                       
|                                                                                                                           |                                                                                                    |                                                                                                
|                                                                                                                           |                                                                                                    | 2002                                                                                            |                                           | 2001                                                    |        | 2000   
|(In thousands, except share and per share data)                                                                            |                                                                                                    |                                                                                                 |                                           |                                                         |        |        
|Cash flows provided by (used in) operating
    activities:                                                                 |                                                                                                    |                                                                                                 |                                           |                                                         |        |         |         |         |       |         |         |        
|                                                                                                                           | Net (loss) income                                                                                  |                                                                                                 | $                                         | (3,419                                                  | )      |         | $       | 6,116   |       |         | $       | 4,378   |       
|                                                                                                                           |                                                                                                    | Adjustments to reconcile net income to net cash
    provided by (used in) operating activities: |                                           |                                                         |        |         |         |         |       |         |         |         |        |        
|                                                                                                                           |                                                                                                    | Minority interest in income of subsidiaries                                                     |                                           |                                                         | 8,834  |         |         |         | 6,366 |         |         |         | 4,453  |        
|                                                                                                                           |                                                                                                    | Depreciation and amortization                                                                   |                                           |                                                         | 7,098  |         |         |         | 4,465 |         |         |         | 3,782  |        
|                                                                                                                           |                                                                                                    | Deferred tax (benefit) provision                                                                |                                           |                                                         | (954   | )       |         |         | 1,083 |         |         |         | (2,851 | )      
|                                                                                                                           |                                                                                                    | Provision for bad debts                                                                         |                                           |                                                         | 1,061  |         |         |         | 406   |         |         |         | 111    |        
|                                                                                                                           |                                                                                                    | Equity in (income) losses of equity investees                                                   |                                           |                                                         | (268   | )       |         |         | (757  | )       |         |         | 162    |        
|                                                                                                                           |                                                                                                    | Stock-based compensation expense                                                                |                                           |                                                         | 12,250 |         |         |         | 538   |         |         |         | 503    |        
|                                                                                                                           |                                                                                                    | Provision to mark to market warrant liability                                                   |                                           |                                                         | 8,901  |         |         |         | 3,921 |         |         |         | 3,174  |        
|                                                                                                                           |                                                                                                    | Loss on disposal of machinery and equipment                                                     |                                           |                                                         | 252    |         |         |         | 41    |         |         |         |       |        
|                                                                                                                           |                                                                                                    | Changes in operating assets and liabilities, net
    of effects of acquisition of businesses    |                                           |                                                         |        |         |         |         |       |         |         |         |        |        
|                                                                                                                           |                                                                                                    |                                                                                                 | Accounts receivable                       |                                                         |        | 2,171   |         |         |       | (25,434 | )       |         |        | (23,189 | )      
|                                                                                                                           |                                                                                                    |                                                                                                 | Inventories                               |                                                         |        | (22,215 | )       |         |       | (6,751  | )       |         |        | (10,769 | )      
|                                                                                                                           |                                                                                                    |                                                                                                 | Other receivables                         |                                                         |        | 465     |         |         |       | (1,378  | )       |         |        |        |        
|                                                                                                                           |                                                                                                    |                                                                                                 | Prepaid expenses and other current assets |                                                         |        | 302     |         |         |       | (2,939  | )       |         |        | (1,516  | )      
|                                                                                                                           |                                                                                                    |                                                                                                 | Accounts payable                          |                                                         |        | 15,343  |         |         |       | 3,521   |         |         |        | 4,181   |        
|                                                                                                                           |                                                                                                    |                                                                                                 | Accrued payroll and benefits              |                                                         |        | 4,117   |         |         |       | 3,446   |         |         |        | 1,606   |        
|                                                                                                                           |                                                                                                    |                                                                                                 | Customer advances                         |                                                         |        | (4,407  | )       |         |       | 662     |         |         |        | 585     |        
|                                                                                                                           |                                                                                                    |                                                                                                 | Accrued warranty expense                  |                                                         |        | 307     |         |         |       | 1,629   |         |         |        | (174    | )      
|                                                                                                                           |                                                                                                    |                                                                                                 | Income taxes payable                      |                                                         |        | 2,158   |         |         |       | (2,833  | )       |         |        | 3,208   |        
|                                                                                                                           |                                                                                                    |                                                                                                 | Other accrued expenses                    |                                                         |        | (949    | )       |         |       | (2,986  | )       |         |        | 1,709   |        
|                                                                                                                           |                                                                                                    |                                                                                                 |                                           |                                                         |        |         |         |         |       |         |         |        
|                                                                                                                           |                                                                                                    |                                                                                                 |                                           | Net cash provided by (used in) operating
    activities |        |         | 31,047  |         |       |         | (10,884 | )       |        |         | (10,647 | )
|                                                                                                                           |                                                                                                    |                                                                                                 |                                           |                                                         |        |         |         |         |       |         |         |        
|Cash flows used in investing activities:                                                                                   |                                                                                                    |                                                                                                 |                                           |                                                         |        |         |         |         |       |         |         |        
|                                                                                                                           | Proceeds from the sale of machinery and equipment                                                  |                                                                                                 |                                           |                                                        |        |         |         | 665     |       |         |         |        |       
|                                                                                                                           | Purchase of marketable securities                                                                  |                                                                                                 |                                           | (6,704                                                  | )      |         |         |        |       |         |         |        |       
|                                                                                                                           | Additions to property and equipment                                                                |                                                                                                 |                                           | (29,433                                                 | )      |         |         | (10,362 | )     |         |         | (6,275  | )     
|                                                                                                                           | Additions to other assets                                                                          |                                                                                                 |                                           | (4,209                                                  | )      |         |         | (1,923  | )     |         |         | (1,604  | )     
|                                                                                                                           |                                                                                                    |                                                                                                 |                                           |                                                         |        |         |         |         |       |         |         |        
|                                                                                                                           |                                                                                                    |                                                                                                 |                                           | Net cash used in investing activities                   |        |         | (40,346 | )       |       |         | (11,620 | )       |        |         | (7,879  | )
|                                                                                                                           |                                                                                                    |                                                                                                 |                                           |                                                         |        |         |         |         |       |         |         |        
|Cash flows provided by financing activities:                                                                               |                                                                                                    |                                                                                                 |                                           |                                                         |        |         |         |         |       |         |         |        
|                                                                                                                           | (Decrease) increase in cash management clearing                                                    |                                                                                                 |                                           | (1,772                                                  | )      |         |         | (552    | )     |         |         | 4,445   |       
|                                                                                                                           | Proceeds from exercise of stock options                                                            |                                                                                                 |                                           | 4,735                                                   |        |         |         | 65      |       |         |         | 262     |       
|                                                                                                                           | Repurchase common stock                                                                            |                                                                                                 |                                           | (12,249                                                 | )      |         |         | (1,086  | )     |         |         | (6,166  | )     
|                                                                                                                           | Proceeds from issuance of common stock, net                                                        |                                                                                                 |                                           | 171,497                                                 |        |         |         |        |       |         |         | 35      |       
|                                                                                                                           | Purchase of treasury stock                                                                         |                                                                                                 |                                           | (342                                                    | )      |         |         |        |       |         |         |        |       
|                                                                                                                           | Redemption of preferred stock                                                                      |                                                                                                 |                                           | (10,000                                                 | )      |         |         |        |       |         |         |        |       
|                                                                                                                           | Issuance of long-term debt                                                                         |                                                                                                 |                                           | 5,364                                                   |        |         |         | 3,128   |       |         |         | 2,983   |       
|                                                                                                                           | Payment of dividends on preferred stock                                                            |                                                                                                 |                                           | (663                                                    | )      |         |         | (900    | )     |         |         | (902    | )     
|                                                                                                                           | Unused proceeds from bond issue                                                                    |                                                                                                 |                                           |                                                        |        |         |         | 2,060   |       |         |         | (2,060  | )     
|                                                                                                                           | Principal payments of long-term debt and capital
    lease obligations                             |                                                                                                 |                                           | (20,795                                                 | )      |         |         | (3,594  | )     |         |         | (2,689  | )     
|                                                                                                                           | Draws on line of credit                                                                            |                                                                                                 |                                           | 148,367                                                 |        |         |         | 105,470 |       |         |         | 76,437  |       
|                                                                                                                           | Payments under line of credit                                                                      |                                                                                                 |                                           | (192,155                                                | )      |         |         | (81,814 | )     |         |         | (57,571 | )     
|                                                                                                                           |                                                                                                    |                                                                                                 |                                           |                                                         |        |         |         |         |       |         |         |        
|                                                                                                                           |                                                                                                    |                                                                                                 |                                           | Net cash provided by financing activities               |        |         | 91,987  |         |       |         | 22,777  |         |        |         | 14,774  |  
|                                                                                                                           |                                                                                                    |                                                                                                 |                                           |                                                         |        |         |         |         |       |         |         |        
|Effect of foreign currency exchange rates on cash
    and cash equivalents                                                 |                                                                                                    |                                                                                                 | 38                                        |                                                         |        |         | 257     |         |       |         | (216    | )      
|                                                                                                                           |                                                                                                    |                                                                                                 |                                           |                                                         |        |         |         |         |       |         |         |        
|Net increase (decrease) in cash and cash
    equivalents                                                                   |                                                                                                    |                                                                                                 | 82,726                                    |                                                         |        |         | 530     |         |       |         | (3,968  | )      
|Cash and cash equivalents, beginning of year                                                                               |                                                                                                    |                                                                                                 | 1,827                                     |                                                         |        |         | 1,297   |         |       |         | 5,265   |        
|                                                                                                                           |                                                                                                    |                                                                                                 |                                           |                                                         |        |         |         |         |       |         |         |        
|Cash and cash equivalents, end of year                                                                                     |                                                                                                    | $                                                                                               | 84,553                                    |                                                         |        | $       | 1,827   |         |       | $       | 1,297   |        
|                                                                                                                           |                                                                                                    |                                                                                                 |                                           |                                                         |        |         |         |         |       |         |         |        
|Interest paid (net of $170, $15 and $34
    capitalized in years ended September 30, 2002, 2001 and
    2000, respectively |                                                                                                    | $                                                                                               | 5,394                                     |                                                         |        | $       | 3,871   |         |       | $       | 2,452   |        
|Income taxes paid                                                                                                          |                                                                                                    |                                                                                                 | 14,047                                    |                                                         |        |         | 11,949  |         |       |         | 3,788   |        
|Non cash investing and financing activities:                                                                               |                                                                                                    |                                                                                                 |                                           |                                                         |        |         |         |         |       |         |         |        
|                                                                                                                           | Equipment and other assets purchased with capital
    lease obligations                            |                                                                                                 |                                           | 8,453                                                   |        |         |         | 14,523  |       |         |         | 8,763   |       
|                                                                                                                           | Issuance of debt for property and equipment                                                        |                                                                                                 |                                           |                                                        |        |         |         |        |       |         |         | 4,929   |       
|                                                                                                                           | Issuance of 3,193,024 shares of common stock to
    purchase remaining minority interest in PETNET |                                                                                                 |                                           |                                                        |        |         |         | 11,469  |       |         |         |        |       
|                                                                                                                           | Issuance of shares of common stock upon exercise
    of warrants                                   |                                                                                                 |                                           | 20,380                                                  |        |         |         |        |       |         |         |        |       
|                                                                                                                           | Issuance of common stock upon conversion of
    convertible redeemable preferred stock             |                                                                                                 |                                           | 6,780                                                   |        |         |         |        |       |         |         |        |       

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

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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), namely CTI Services, Inc.
(Services), Advanced Crystal Technology, Inc. (ACT), CTI GmbH
(GmbH), PETNET Pharmaceuticals, Inc. (PETNET), and CTI PET
Systems, Inc. (CTI PET Systems). All of the subsidiaries are
wholly owned except for CTI PET Systems in which CTI owns 50.1%.
The balance of CTI PET Systems 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. CTI PET
Systems manages the development, production and sale of the
ECAT® line of PET scanners. PETNET develops, produces and
distributes radiopharmaceuticals. ACT and CTIs
unincorporated division, CTI Detector Materials, develop and
manufacture detector materials used in PET scanners. Other
products and services include 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 CTI PET Systems 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 CTI PET Systems.
Under the terms of the CTI PET Systems 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 CTI PET Systems 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 CTI
PET Systems who was selected or nominated by Siemens has any
substantive participating or veto rights with regard to
significant operating, budget, capital and other decisions. CTI
PET Systems is consolidated in the Companys financial
statements.

PETNET owns a 90% interest in a
radiopharmaceutical distribution center in Denver. Under the
terms of the Denver distribution center operating agreement,
PETNET has control over all significant operating decisions. The
Denver distribution center is consolidated in the Companys
financial statements.

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 five radiopharmacies which are accounted for under
the equity method.

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

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CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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, telephone 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 of 2001, 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
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 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 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. Under the Companys new 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 cyclotron
system sales, all revenue is recognized upon installation and
customer acceptance as installation is deemed essential to the
functionality of cyclotrons.

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.

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CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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, CTI
PET Systems sales of scanners are made through
distribution agreements with CTI, Siemens and other entities.
The Companys sales through and to Siemens represented 50%,
64% and 67% of consolidated sales for 2002, 2001 and 2000,
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 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 amortization
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
The excess of acquisition costs over the fair value of net
assets acquired is recorded as goodwill and, prior to adoption
of SFAS No. 142 (SFAS 142), Goodwill and Other
Intangibles,was amortized using the straight-line method
over periods not exceeding twenty years.

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 $2,121 and $3,893 at September 30, 2002 and 2001,
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.

Stock-Based
Compensation As permitted
by SFAS No. 123 (SFAS 123), CTI has chosen to apply APB
Opinion No. 25, Accounting for Stock Issued to Employees(APB 25) and related interpretations in accounting for its
plans. The pro forma disclosures of the impact of SFAS 123
are described in Note 9 of the financial statements.

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Warrants
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. CTI makes
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 2001 and 2000 financial
statements have been reclassified to conform to the 2002
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 numerator and denominator used in the calculation of
historical basic and diluted earnings per share follows:

|             |                                                                                            |                          |   |            |   |      |   |            |           |  |   |            |           | 
|------------ | ------------------------------------------------------------------------------------------ | ------------------------ | - | ---------- | - | ---- | - | ---------- | --------- |  | - | ---------- | --------- | 
|             |                                                                                            |                         
|             |                                                                                            | Year Ended September 30,
|             |                                                                                            |                         
|             |                                                                                            | 2002                     |   | 2001       |   | 2000
|             |                                                                                            |                          |   |            |   |     
|Numerator:   |                                                                                            |                          |   |            |   |      |   |            |           |  |   |           
|             | Net income (loss) available to common
    shareholders  basic and diluted                 |                          | $ | (8,083     | ) |      | $ | 4,063      |           |  | $ | 2,474      |          
|             |                                                                                            |                          |   |            |   |      |   |            |           |  |   |           
|Denominator: |                                                                                            |                          |   |            |   |      |   |            |           |  |   |           
|             | Weighted-average number of common shares
    outstanding                                   |                          |   | 32,497,070 |   |      |   | 27,860,086 |           |  |   | 25,243,051 |          
|             |                                                                                            |                          |   |            |   |      |   |            |           |  |   |           
|             | Dilutive potential common shares relating to:                                              |                          |   |            |   |      |   |            |           |  |   |            |          
|             |                                                                                            | Restricted stock         |   |            |  |      |   |            | 1,973,715 |  |   |            | 1,970,150 | 
|             |                                                                                            | Options and warrants     |   |            |  |      |   |            | 1,506,240 |  |   |            | 1,226,877 | 
|             |                                                                                            |                          |   |            |   |      |   |            |           |  |   |           
|             | Dilutive potential common shares used in
    computing diluted net income per share        |                          |   |           |   |      |   | 3,479,955  |           |  |   | 3,197,027  |          
|             |                                                                                            |                          |   |            |   |      |   |            |           |  |   |           
|             | Total weighted-average number of shares used in
    computing diluted net income per share |                          |   | 32,497,070 |   |      |   | 31,340,041 |           |  |   | 28,440,078 |          
|             |                                                                                            |                          |   |            |   |      |   |            |           |  |   |           

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

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

years ended September 30, 2002, 2001 and
2000 because including them would have had an antidilutive
effect:

|                                       |  |                          |           |      |  |      |           |  |  |  |           | 
|-------------------------------------- |  | ------------------------ | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                                       |  |                         
|                                       |  | Year Ended September 30,
|                                       |  |                         
|                                       |  | 2002                     |           | 2001 |  | 2000
|                                       |  |                          |           |      |  |     
|Warrants                               |  |                          | 1,220,238 |      |  |      | 2,447,181 |  |  |  | 2,196,326 | 
|Convertible redeemable preferred stock |  |                          | 918,795   |      |  |      | 1,280,000 |  |  |  | 1,280,000 | 
|Restricted stock                       |  |                          | 1,245,850 |      |  |      |          |  |  |  |          | 
|Options                                |  |                          | 3,495,025 |      |  |      | 43,411    |  |  |  | 21,893    | 
|                                       |  |                          |           |      |  |      |           |  |  |  |           | 
|                                       |  |                          | 6,879,908 |      |  |      | 3,770,592 |  |  |  | 3,498,219 | 
|                                       |  |                          |           |      |  |      |           |  |  |  |           | 

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, 2002, 2001 and 2000 the Company
recorded a foreign currency translation adjustment to recognize
the changes in stockholders equity arising from converting
the accounts of GmbH from its foreign functional currency to the
Companys United States dollar reporting currency.



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

Business
Combinations In July 2001,
the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, (SFAS 141), Business Combinations,which
establishes financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, Business
Combinationsand SFAS No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises. SFAS
141 requires that all business combinations be accounted for
using the purchase method. The provisions of SFAS 141 apply to
all business combinations initiated after June 30, 2001.
The Company adopted SFAS 141 on July 1, 2001, and this
adoption had no impact on the Companys financial
statements.

Goodwill
In July 2001, the FASB issued SFAS No. 142 (SFAS 142),
which establishes financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, Intangible Assets. SFAS 142
addresses how intangible assets that are acquired individually
or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial
statements upon their acquisition, and after they have been
initially recognized in the financial statements. The provisions
of SFAS 142 are effective for fiscal years beginning after
December 15, 2001 with early adoption permitted for
companies with fiscal years beginning after March 15, 2001.
The Company elected to early adopt SFAS 142 during the first
quarter of fiscal year 2002. Upon adoption of SFAS 142, the
Company performed an impairment test of its recorded goodwill
and determined that no impairment existed. Under SFAS 142,
goodwill will be tested for impairment at least annually and
more frequently if an event occurs which indicates that it may
be impaired.

Asset
Retirement In August 2001,
the FASB issued SFAS No. 143, (SFAS 143),
Accounting for Asset Retirement Obligations, which is
effective for fiscal years beginning after June 15, 2002.
SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs.
SFAS 143 requires, among other things, that the retirement
obligations be recognized when they are incurred and displayed
as liabilities on the balance

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CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

sheet. In addition, the assets retirement
costs are to be capitalized as part of the assets carrying
amount and subsequently allocated to expense over the
assets useful life. The Company believes that the adoption
of SFAS 143 will not have a significant impact on the
Companys financial statements.

Accounting for
Impairment In October
2001, the FASB issued SFAS No. 144, (SFAS 144),
Accounting for the Impairment or Disposal of Long-Lived
Assets,which is effective for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal
years. SFAS 144 develops an accounting model for long-lived
assets that are to be disposed of by sale, as well as addressing
the principal implementation issues. The Company believes that
the adoption of SFAS 144 will not have a significant impact
on the Companys financial statements.

Vendor to Customer
Consideration In November
2001, the FASB reached a consensus on EITF Issue 01-09,
Accounting for Consideration Given by a Vendor to a Customer
or a Reseller of the Vendors Products, which is a
codification of EITF 00-14, 00-22 and 00-25. This issue
presumes consideration from a vendor to a customer or reseller
of the vendors products to be a reduction of the selling
prices of the vendors products and, therefore, should be
characterized as a reduction of revenue when recognized in the
vendors income statement and could lead to negative
revenue under certain circumstances. Revenue reduction is
required unless consideration relates to a separate identifiable
benefit and the benefits fair value can be established.
The Company adopted this EITF for the quarter ended
March 31, 2002 with no significant effect on its financial
statements.

Sale Leaseback
Transactions In April
2002, the FASB issued SFAS No. 145, (SFAS 145)
Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections, which is effective for transactions occurring
after May 15, 2002 and fiscal years beginning after
May 15, 2002. SFAS 145 rescinds FASB Statement
No. 4, Reporting Gains and Losses from Extinguishment of
Debt, and an amendment of that Statement, FASB Statement
No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirementsand amends FASB Statement
No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions, as well as, amends other existing
authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. The adoption of SFAS 145 will
require CTI to reclassify the extraordinary loss on early
extinguishments of debt to other (income) expense in our
future comparative financial statements.

Costs Associated with Exit or Disposal
Activities In June 2002,
the FASB issued Statement of Financial Accounting Standard
No. 146 (SFAS 146) Accounting for Costs Associated
with Exit or Disposal Activities, which is effective for
exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged.
SFAS 146 addresses financial accounting and reporting for
the costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Costs to Exit and Activity (Including Certain Costs
Incurred in a Restructuring). SFAS 146 requires that a
liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, and
established that fair value is the objective for initial
measurement of the liability. The Company believes that the
adoption of SAFS 146 will not have a significant impact on
the Companys financial statements.

Accounting for Revenue Arrangements with
Multiple Deliverables In
November 2002, the Financial Accounting Standards Board reached
a consensus on Emerging Issues Task Force Issue 00-21 (the
Issue), Accounting for Revenue Arrangements with Multiple
Deliverables.The guidance in this Issue is effective for
revenue arrangements entered into in fiscal years beginning
after June 15, 2003. This Issue addresses certain aspects
of the accounting by a vendor for arrangements under which it
will perform multiple revenue-generating activities.
Specifically, this Issue addresses how to determine whether an
arrangement involving multiple deliverables contains more than
one earnings process and, if it does, how to divide the

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

arrangement into separate units of accounting
consistent with the identified earning processes for revenue
recognition purposes. This Issue also addresses how arrangement
consideration should be measured and allocated to the separate
units of accounting in the arrangement. The Company is
evaluating the effect of this Issue on its financial statements.

Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others On
November 25, 2002, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57,
and 107 and Rescission of FASB Interpretation No. 34.
FIN 45 clarifies the requirements of FASB Statement
No. 5, Accounting for Contingencies (FAS 5), relating
to the guarantors accounting for, and disclosure of, the
issuance of certain types of guarantees. FIN 45 requires
that upon issuance of a guarantee, the entity (i.e., the
guarantor) must recognize a liability for the fair value of the
obligation it assumes under that guarantee. The Board believes
that, in current practice, many entities might not be
recognizing that liability, believing that GAAP does not require
recognition, particularly when the entity does not receive
separately identifiable consideration (i.e., a premium) for
issuing the guarantee. As noted above, many guarantees are
embedded in purchase or sales agreements, service contracts,
joint venture agreements, or other commercial agreements and the
guarantor in many such arrangements does not receive a
separately identifiable upfront payment for issuing the
guarantee. FIN 45 is intended to improve the comparability
of financial reporting by requiring identical accounting for
guarantees issued with a separately identified premium and
guarantees issued without a separately identified premium.
FIN 45s provisions for initial recognition and
measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002,
irrespective of the guarantors fiscal year-end. The
guarantors previous accounting for guarantees that were
issued before the date of FIN 45s initial application
may not be revised or restated to reflect the effect of the
recognition and measurement provisions of FIN 45. The
Company is evaluating the effect of this Issue on its financial
statements.

3.     Inventories

Inventories consist of the following:

|                |  |               |        |      |  |   |        | 
|--------------- |  | ------------- | ------ | ---- |  | - | ------ | 
|                |  |              
|                |  | September 30,
|                |  |              
|                |  | 2002          |        | 2001
|                |  |               |        |     
|Component parts |  | $             | 13,020 |      |  | $ | 13,545 | 
|Work in process |  |               | 12,331 |      |  |   | 10,992 | 
|Finished goods  |  |               | 43,944 |      |  |   | 22,543 | 
|                |  |               |        |      |  |   |        | 
|                |  | $             | 69,295 |      |  | $ | 47,080 | 
|                |  |               |        |      |  |   |        | 

Cyclotrons, which were delivered but not yet
accepted by the customers, included in inventories as finished
goods in the consolidated balance sheets for the years ended
September 30, 2002 and 2001 totaled $5,978 and $6,910,
respectively.

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

4.     Property and
Equipment

Property and equipment consist of the following:

|                                    |  |               |         |      |  |   |         |  
|----------------------------------- |  | ------------- | ------- | ---- |  | - | ------- | -
|                                    |  |              
|                                    |  | September 30,
|                                    |  |              
|                                    |  | 2002          |         | 2001
|                                    |  |               |         |     
|Land                                |  | $             | 2,044   |      |  | $ | 2,044   |  
|Buildings                           |  |               | 9,417   |      |  |   | 9,608   |  
|Building and leasehold improvements |  |               | 15,739  |      |  |   | 6,406   |  
|Machinery and equipment             |  |               | 54,994  |      |  |   | 33,118  |  
|Less accumulated depreciation       |  |               | (21,709 | )    |  |   | (14,859 | )
|Assets under construction           |  |               | 17,182  |      |  |   | 11,002  |  
|                                    |  |               |         |      |  |   |         |  
|Property and equipment, net         |  | $             | 77,667  |      |  | $ | 47,319  |  
|                                    |  |               |         |      |  |   |         |  

Depreciation expense for the years ended
September 30, 2002, 2001 and 2000 was $6,960, $3,619 and
$3,173, respectively.

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, 2002:

|                             |  |           |        | 
|---------------------------- |  | --------- | ------ | 
|                             |  | Operating
|                             |  | Leases   
|                             |  |          
|2003                         |  | $         | 7,701  | 
|2004                         |  |           | 7,296  | 
|2005                         |  |           | 5,016  | 
|2006                         |  |           | 2,522  | 
|2007                         |  |           | 1,333  | 
|Thereafter                   |  |           | 3,723  | 
|                             |  |           |        | 
|Total minimum lease payments |  | $         | 27,591 | 
|                             |  |           |        | 

Rental expense for the years ended
September 30, 2002, 2001 and 2000 was $2,676, $1,777 and
$1,373, respectively.

CTI and PETNET guarantee lease obligations on
behalf of unconsolidated investees in amounts totaling $673 and
$2,051, respectively, at September 30, 2002. The lease
obligations expire in 2009.

The Company has an exclusive patent and
technology license to manufacture and use materials and products
containing LSO (lutetium oxyorthosilicate). The Company pays an
annual royalty based on a percentage of the manufacturing cost
of materials sold. The royalty amounts paid were $429, $221, and
$79, for the years ending September 30, 2002, 2001, and
2000, 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

F-13



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Center. Research fees were $507 for the year
ended September 30, 2002. 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 have set forth eight 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 are seeking $20 million in compensatory damages
on the breach of contract claims and $50 million in
aggregate compensatory and punitive damages on the tort claims.
Because the investigation with respect to the allegations is at
a preliminary stage an estimate of the possible loss or range of
loss, if any, cannot be made. Nevertheless, CTI believes that
the claims are without merit and intends to vigorously defend
this suit.

In November 2002, PETNET agreed to settle a claim
asserted by a competitor that PETNET had failed to fulfill
certain royalty payment obligations under license agreements.
The settlement amount, $425, was accrued as a loss in the
consolidated financial statements as of and for the year ended
September 30, 2002.

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. Because our investigation with respect to the
allegations is at a preliminary stage, an estimate of the
possible loss or range of loss, if any, cannot be made.
Nevertheless, we deny liability and intend to vigorously defend
this suit.

On September 19, 2002, General Electric
filed a complaint against two former employees of General
Electric who are now employed by us in the United States
District Court, Eastern District of Wisconsin, civil case no.
02-C-929. The complaint alleges threatened or actual
misappropriation of trade secrets, breach of contract and unfair
competition. We have not been named as a defendant in that
action. The defendants have answered the complaint, and have
denied liability.

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

On September 30, 2002 CTI executed, and all
of its subsidiaries guaranteed, an amended and restated
syndicated revolving credit facility (the Syndicated Facility)
with a group of banks. The modifications to the original $90,000
syndicated facility executed on March 14, 2002, primarily
included increasing the total credit available to $125,000,
decreasing the banks lending margin, reducing certain
restrictive covenants, and extending the maturity. Borrowing
under the Syndicated Facility is collateralized by all property
and interests in property, presently owned or hereafter acquired
or presently existing or hereafter created by the Borrower or
the Guarantors, including any and all proceeds thereof, in which
a security interest is now or hereinafter granted; provided,
however, that all real property of the Borrower encumbered with
an existing mortgage, as of March 14, 2002, is excluded;
and provided further that the property and interests of CTI

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

PET Systems are limited to the inventory and
accounts receivable and all proceeds therefrom of CTI PET
Systems. 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 (3.32% at September 30, 2002). 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, 2002.

Industrial Revenue
Bonds In 1988 ACT 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 ACT. 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 March 14, 2004. The
Series 1988 Bonds are due in August 2008.

On August 1, 2000, ACT 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 ACT
manufacturing plant in Blount County, Tennessee. At
September 30, 2002 and 2001, the remaining balances were
$2,300 and $3,000, respectively. The remaining $2,300 balance of
the Series 2000 Bonds is supported by an irrevocable letter
of credit agreement that expires March 14, 2004. The Series
2000 Bonds are due in August 2010. In May 2002, ACT 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 1.90% to
2.00% at September 30, 2002 and 2.15% to 2.45% at
September 30, 2001, respectively).

Notes
Payable At
September 30, 2002, CTI may borrow up to $7,900 under the
terms of a construction loan agreement with a bank. Interest is
at LIBOR plus 1.00% to 2.00% after a modification executed in
July 2002 (3.32% at September 30, 2002) payable monthly.
Prior to the execution of the modification in July 2002,
interest was at LIBOR plus 1.25% to 2.25% (5.25% at
September 30, 2001) payable monthly. The outstanding
balance on this construction loan agreement was $7,228 and
$1,864 at September 30, 2002 and September 30, 2001,
respectively. The loan matures on October 15, 2003.

During 2000, CTI entered into a mortgage loan
agreement to purchase its current office space, which had
previously been leased. CTI is required to make principal and
interest payments totaling $720 per year through 2005. The debt
bears interest at LIBOR plus 1.00% to 2.00% after a modification
executed in July 2002, resulting in a rate of 3.32% at
September 30, 2002. Prior to the execution of the
modification in July 2002 and at September 30, 2001,
interest was at a fixed rate of 8.15%. The outstanding balance
on this mortgage loan was $3,949 and $4,325 at
September 30, 2002 and 2001, respectively.

F-15



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Annual maturities of long-term debt at
September 30, 2002, are as follows:

|           |       |   |       |        | 
|---------- | ----- | - | ----- | ------ | 
|2003       |       | $ | 1,109 |       
|2004       |       |   | 8,372 |       
|2005       |       |   | 3,796 |       
|2006       |       |   | 700   |       
|2007       |       |   | 700   |       
|Thereafter |       |   | 2,800 |       
|           |       |   |       |       
|           | Total |   | $     | 17,477 | 
|           |       |   |       |       

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

|                         |  |      |        |      |  |   |        |  
|------------------------ |  | ---- | ------ | ---- |  | - | ------ | -
|                         |  | 2002 |        | 2001
|                         |  |      |        |     
|Machinery and equipment  |  | $    | 18,220 |      |  | $ | 23,318 |  
|Accumulated amortization |  |      | (4,150 | )    |  |   | (2,875 | )
|Other assets             |  |      | 416    |      |  |   | 1,750  |  
|                         |  |      |        |      |  |   |        |  
|                         |  | $    | 14,486 |      |  | $ | 22,193 |  
|                         |  |      |        |      |  |   |        |  

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, 2002:

|                                             |  |         |        |  
|-------------------------------------------- |  | ------- | ------ | -
|                                             |  | Capital
|                                             |  | Leases 
|                                             |  |        
|2003                                         |  | $       | 4,340  |  
|2004                                         |  |         | 3,693  |  
|2005                                         |  |         | 2,972  |  
|2006                                         |  |         | 2,203  |  
|2007                                         |  |         | 2,199  |  
|Thereafter                                   |  |         | 1,399  |  
|                                             |  |         |        |  
|Total minimum lease payments                 |  |         | 16,806 |  
|Amounts representing interest                |  |         | (3,545 | )
|                                             |  |         |        |  
|Present value of net minimum payments        |  |         | 13,261 |  
|Current portion of capital lease obligations |  |         | (2,899 | )
|                                             |  |         |        |  
|Capital lease obligations, long-term         |  | $       | 10,362 |  
|                                             |  |         |        |  

PETNET extinguished capital lease obligations
totaling $14,503 in September 2002, prior to maturity, resulting
in an extraordinary loss on early extinguishments of debt of
$819, net of income taxes.

7.     Income
Taxes

The Company files a consolidated federal tax
return that includes CTI, PETNET, Services and ACT. CTI PET
Systems files a separate federal return and GmbH files a German
return. At September 30, 2002, the Company had tax credit
carryforwards of $517, which begin to expire in the year 2013,
that are available to reduce future federal income taxes. At
September 30, 2002, the Company also had state net
operating loss carry forwards of $344, which begin to expire in
the year 2010, that are available to reduce future state income
taxes.

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

|                                     |                                              |      |       |        |   |   |       |       |  
|------------------------------------ | -------------------------------------------- | ---- | ----- | ------ | - | - | ----- | ----- | -
|                                     |                                              | 2002 |       | 2001  
|                                     |                                              |      |       |       
|Current deferred tax assets:         |                                              |      |       |        |   |   |       |      
|                                     | Accrued vacation                             |      | $     | 574    |   |   | $     | 612   |  
|                                     | Installation reserve                         |      |       | 322    |   |   |       | 104   |  
|                                     | Inventory capitalization                     |      |       | 315    |   |   |       | 200   |  
|                                     | Allowance for doubtful accounts              |      |       | 816    |   |   |       | 294   |  
|                                     | Inventory obsolescence reserves              |      |       | 1,133  |   |   |       | 851   |  
|                                     | Accrued bonuses                              |      |       | 259    |   |   |       |      |  
|                                     | Warranty reserves                            |      |       | 1,026  |   |   |       | 1,263 |  
|                                     | Deferred revenue                             |      |       | 2,545  |   |   |       | 2,127 |  
|                                     | Research and development credit carryforward |      |       |       |   |   |       | 276   |  
|                                     | Alternative minimum tax credit carryforward  |      |       |       |   |   |       | 138   |  
|                                     | Stock-based compensation                     |      |       | 2,341  |   |   |       | 163   |  
|                                     | Other accrued expenses                       |      |       | 496    |   |   |       | 332   |  
|                                     |                                              |      |       |        |   |   |       |      
|Net current deferred tax asset       |                                              | $    | 9,827 |        |   | $ | 6,360 |      
|                                     |                                              |      |       |        |   |   |       |      
|Noncurrent deferred tax assets:      |                                              |      |       |        |   |   |       |      
|                                     | Deferred revenue                             |      | $     | 2,213  |   |   | $     | 2,176 |  
|                                     | Amortization                                 |      |       | 217    |   |   |       | 414   |  
|                                     | Stock-based compensation                     |      |       |       |   |   |       | 932   |  
|                                     | Research and development credit carryforward |      |       | 495    |   |   |       |      |  
|                                     | Alternative minimum tax credit carryforward  |      |       | 22     |   |   |       |      |  
|                                     | Net operating loss carryforward              |      |       | 344    |   |   |       |      |  
|Noncurrent deferred tax liabilities: |                                              |      |       |        |   |   |       |      
|                                     | Depreciation                                 |      |       | (2,932 | ) |   |       | (822  | )
|                                     | Other noncurrent liabilities                 |      |       | (172   | ) |   |       |      |  
|                                     |                                              |      |       |        |   |   |       |      
|Net noncurrent deferred tax asset    |                                              | $    | 187   |        |   | $ | 2,700 |      
|                                     |                                              |      |       |        |   |   |       |      

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-17



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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:

|                                 |  |      |        |      |  |      |       |   |  |   |        |  
|-------------------------------- |  | ---- | ------ | ---- |  | ---- | ----- | - |  | - | ------ | -
|                                 |  | 2002 |        | 2001 |  | 2000
|                                 |  |      |        |      |  |     
|Federal tax                      |  | $    | 8,905  |      |  | $    | 7,844 |   |  | $ | 4,447  |  
|State tax                        |  |      | 425    |      |  |      | 874   |   |  |   | 496    |  
|Change in valuation allowance    |  |      |       |      |  |      |      |   |  |   | (1,443 | )
|Research and development credits |  |      |       |      |  |      | (583  | ) |  |   | (885   | )
|Extraterritorial income benefit  |  |      | (522   | )    |  |      |      |   |  |   |       |  
|Warrant liability mark to market |  |      | 3,405  |      |  |      | 1,525 |   |  |   | 1,235  |  
|Stock-based compensation         |  |      | 3,364  |      |  |      |      |   |  |   |       |  
|Other permanent differences      |  |      | (503   | )    |  |      | 270   |   |  |   | 25     |  
|                                 |  |      |        |      |  |      |       |   |  |   |        |  
|Provision for income taxes       |  | $    | 15,074 |      |  | $    | 9,930 |   |  | $ | 3,875  |  
|                                 |  |      |        |      |  |      |       |   |  |   |        |  

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 $1,886, $890 and $762 for the years ended
September 30, 2002, 2001 and 2000, 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-18



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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, 1999            |  |             | 1,864,666 |          |  | $          | 2.83  |             |  |          |      |  |  |  | 1,322,125 |  |  | $ | 2.83 | 
|Options granted in 2000                  |  |             | 29,171    |          |  | $          | 3.35  |             |  | $        | 1.31 |  |  |  |           |  |  |   |      | 
|Options exercised in 2000                |  |             | (104,512  | )        |  | $          | 2.79  |             |  |          |      |  |  |  |           |  |  |   |      | 
|Options expired in 2000                  |  |             | (96,794   | )        |  | $          | 2.77  |             |  |          |      |  |  |  |           |  |  |   |      | 
|                                         |  |             |           |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |      | 
|Balance at September 30, 2000            |  |             | 1,692,531 |          |  | $          | 2.84  |             |  |          |      |  |  |  | 1,405,466 |  |  | $ | 2.84 | 
|Options granted in 2001                  |  |             | 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 | 
|                                         |  |             |           |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |      | 

The following table summarizes information about
incentive stock options at September 30, 2002:

|                         |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | -------- | ---- | --------- |  | -------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |           |                    
|                         |  | Options Outstanding |           | Options Exercisable
|                         |  |                     |           |                    
|                         |  | Number              |           | Average             |  | Average  |      | Number    |  | Average 
|Range of Exercise Prices |  | of Shares           |           | Life(1)             |  | Price(2) |      | of Shares |  | Price(2)
|                         |  |                     |           |                     |  |          |      |           |  |         
|$2.81                    |  |                     | 1,119,996 |                     |  |          | 3.04 |           |  | $        | 2.81  |  |  |  | 1,119,996 |  |  | $ | 2.81  | 
|$3.09 to $3.87           |  |                     | 588,769   |                     |  |          | 5.12 |           |  | $        | 3.41  |  |  |  | 576,409   |  |  | $ | 3.41  | 
|$4.69                    |  |                     | 831,072   |                     |  |          | 6.00 |           |  | $        | 4.69  |  |  |  | 509,240   |  |  | $ | 4.69  | 
|$5.56 to $6.12           |  |                     | 689,692   |                     |  |          | 6.50 |           |  | $        | 5.59  |  |  |  | 354,228   |  |  | $ | 5.62  | 
|$15.55                   |  |                     | 25,723    |                     |  |          | 9.82 |           |  | $        | 15.55 |  |  |  | 6,431     |  |  | $ | 15.55 | 
|$17.00                   |  |                     | 2,765     |                     |  |          | 9.68 |           |  | $        | 17.00 |  |  |  | 691       |  |  | $ | 17.00 | 
|$18.80                   |  |                     | 265       |                     |  |          | 9.88 |           |  | $        | 18.80 |  |  |  | 53        |  |  | $ | 18.80 | 
|$19.37 to $19.76         |  |                     | 25,404    |                     |  |          | 9.88 |           |  | $        | 19.68 |  |  |  | 1,032     |  |  | $ | 19.37 | 
|$22.40                   |  |                     | 13,392    |                     |  |          | 9.95 |           |  | $        | 22.40 |  |  |  | 4,464     |  |  | $ | 22.40 | 
|                         |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |           |  |  |   |       | 
|                         |  |                     | 3,297,078 |                     |  |          |      |           |  |          |       |  |  |  | 2,572,544 |  |  |   |       | 
|                         |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |           |  |  |   |       | 



---



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



| |                      
| | ---------------------
| | 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.

F-19



---



##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |      | 
|---------------------------------------- |  | ----------- | ---------- | -------- |  | ---------- | ----- | ----------- |  | -------- | ---- |  |  |  | --------- |  |  | - | ---- | 
|                                         |  |             |            |          |  | Weighted   |       |             |  |         
|                                         |  |             |            | Weighted |  | Average    |       |             |  | Weighted
|                                         |  |             |            | Average  |  | Grant Date |       |             |  | Average 
|                                         |  | Options     |            | Exercise |  | Fair       |       | Options     |  | Exercise
|                                         |  | Outstanding |            | Price    |  | Value      |       | Exercisable |  | Price   
|                                         |  |             |            |          |  |            |       |             |  |         
|Balance at September 30, 1999            |  |             | 986,080    |          |  | $          | 0.27  |             |  |          |      |  |  |  | 968,000   |  |  | $ | 0.26 | 
|Options granted in 2000                  |  |             | 100,518    |          |  | $          | 3.19  |             |  | $        | 1.42 |  |  |  |           |  |  |   |      | 
|Options exercised in 2000                |  |             |           |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |      | 
|Options expired in 2000                  |  |             | (160,000   | )        |  | $          | 0.16  |             |  |          |      |  |  |  |           |  |  |   |      | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |      | 
|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  |             |  |          |      |  |  |  |           |  |  |   |      | 
|Options expired in 2001                  |  |             |           |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |      | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |      | 
|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  |             |  |          |      |  |  |  |           |  |  |   |      | 
|Options expired in 2002                  |  |             |           |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |      | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |      | 
|Balance at September 30, 2002            |  |             | 2,588,237  |          |  | $          | 8.72  |             |  |          |      |  |  |  | 1,409,761 |  |  | $ | 4.72 | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |      | 

The following table summarizes information about
non-qualified stock options at September 30, 2002:

|                         |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | -------- | ---- | --------- |  | -------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |           |                    
|                         |  | Options Outstanding |           | Options Exercisable
|                         |  |                     |           |                    
|                         |  | Number              |           | Average             |  | Average  |      | Number    |  | Average 
|Range of Exercise Prices |  | of Shares           |           | Life(1)             |  | Price(2) |      | of Shares |  | Price(2)
|                         |  |                     |           |                     |  |          |      |           |  |         
|$0.16                    |  |                     | 522,294   |                     |  |          | 1.94 |           |  | $        | 0.16  |  |  |  | 522,294   |  |  | $ | 0.16  | 
|$2.81 to $3.09           |  |                     | 101,440   |                     |  |          | 2.76 |           |  | $        | 3.03  |  |  |  | 101,440   |  |  | $ | 3.03  | 
|$3.52 to $4.69           |  |                     | 537,168   |                     |  |          | 5.67 |           |  | $        | 4.15  |  |  |  | 280,100   |  |  | $ | 3.66  | 
|$5.56                    |  |                     | 418,485   |                     |  |          | 7.00 |           |  | $        | 5.56  |  |  |  | 289,370   |  |  | $ | 5.56  | 
|$15.55                   |  |                     | 574,277   |                     |  |          | 9.82 |           |  | $        | 15.55 |  |  |  | 143,569   |  |  | $ | 15.55 | 
|$17.00                   |  |                     | 44,118    |                     |  |          | 9.65 |           |  | $        | 17.00 |  |  |  | 44,118    |  |  | $ | 17.00 | 
|$19.76                   |  |                     | 303,847   |                     |  |          | 9.86 |           |  | $        | 19.76 |  |  |  |          |  |  |   |      | 
|$22.40                   |  |                     | 86,608    |                     |  |          | 9.95 |           |  | $        | 22.40 |  |  |  | 28,870    |  |  | $ | 22.40 | 
|                         |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |           |  |  |   |       | 
|                         |  |                     | 2,588,237 |                     |  |          |      |           |  |          |       |  |  |  | 1,409,761 |  |  |   |       | 
|                         |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |           |  |  |   |       | 



---



|    |                                                          
|--- | ---------------------------------------------------------
|(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)

Had compensation expense related to the
Companys outstanding options been 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:

|                           |      |             |   |           |   |  |   |        |  
|-------------------------- | ---- | ----------- | - | --------- | - |  | - | ------ | -
|                           |      | As Reported |   | Pro Forma
|                           |      |             |   |          
|Net income (loss):         |      |             |   |           |   |  |   |       
|                           | 2000 |             | $ | 4,378     |   |  | $ | 3,851  |  
|                           | 2001 |             | $ | 6,116     |   |  | $ | 5,384  |  
|                           | 2002 |             | $ | (3,419    | ) |  | $ | (5,708 | )
|Earnings (loss) per share: |      |             |   |           |   |  |   |       
|Basic:                     |      |             |   |           |   |  |   |       
|                           | 2000 |             | $ | 0.10      |   |  | $ | 0.07   |  
|                           | 2001 |             | $ | 0.15      |   |  | $ | 0.13   |  
|                           | 2002 |             | $ | (0.25     | ) |  | $ | (0.32  | )
|Diluted:                   |      |             |   |           |   |  |   |       
|                           | 2000 |             | $ | 0.09      |   |  | $ | 0.07   |  
|                           | 2001 |             | $ | 0.13      |   |  | $ | 0.10   |  
|                           | 2002 |             | $ | (0.25     | ) |  | $ | (0.32  | )

The fair value of each option is estimated using
the Black-Scholes option-pricing model using a risk-free
interest rate ranging from 2.94% to 4.74% in 2002, 4.10% to
6.60% in 2001 and 4.80% to 6.69% in 2000, an expected option
life of five years to ten years, volatility of 35% in 2002, 74%
in 2001 and 0% in 2000 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.



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

During the year ended September 30, 2002,
the Company issued options 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. In connection with the issuance of
options to purchase common stock, the Company 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 year ended
September 30, 2002, the Company amortized $723 to
stock-based compensation expense.

During the year ended September 30, 2002,
25,978 of the options to purchase common stock were issued to
non-employees that provided services to the Company in the past.
The fair value of these options of $93 was charged to
stock-based compensation expense, and was determined using the
Black-Scholes option-pricing model using a risk-free interest
rate of 6.85%, an expected life of seven years (the life of the
options), volatility of 75%, and no expected dividends.

During the year ended September 30, 2002,
the Company issued warrants to purchase common stock to a
consultant in exchange for receiving consulting services. The
fair value of the warrants of $14 was estimated using the
Black-Scholes option-pricing model using a risk-free interest
rate of 6.77%, and expected life of five years (the term of the
associated contract), volatility of 75%, and expected dividends
of $0.0. In connection with the issuance of these warrants to
purchase common stock, the Company recorded unearned
compensation of $253. The Company is amortizing the balance of
unearned compensation to stock-based compensation expense over
the term of the consulting contract. For the year ended
September 30, 2002, the Company amortized $25 to
stock-based compensation expense.

F-21



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

During the year ended September 30, 2002,
the Company issued 214,528 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 $3,724. The
Company is amortizing the balance to stock-based compensation
expense over the four year vesting periods during which the
restrictions expire. For the year ended September 30, 2002,
the Company amortized $144 to stock-based compensation expense.

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 CTI PET Systems in the fourth quarter of 2002
resulted in a reduction of CTI PET Systems 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 CTI PET
Systems. In April 2001, CTI PET Systems 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.

The following additional transactions occurred in
2002, 2001 and 2000, between the Company and Siemens, a CTI
shareholder, or its affiliates:



| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Companys sales through and to Siemens
    were $128,233, $120,730 and $83,217 in 2002, 2001 and 2000,
    respectively.               
|
| |  | Accounts receivable and customer advances
    received through Siemens totaled $39,918 and $1,214,
    respectively, at September 30, 2002.
|
| |  | Accounts receivable and customer advances
    received through Siemens totaled $41,429 and $5,241,
    respectively, at September 30, 2001.

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 CTI PET Systems. The exercise of this
put/call is contingent upon cumulative unit sales of ECAT®
scanners reaching a defined target level. At September 30,
2002 the cumulative total number of units sold by CTI PET
Systems was 522. By the end of 2002, CTI PET Systems would need
to have sold a cumulative total of 907 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.

F-22



---



##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The Company has four agreements with Concorde
Microsystems, Inc., a company partially owned and operated by
children of a CTI PET Systems officer and director who is also a
major shareholder in CTI.

In the MicroPET Agreement, CTI PET Systems
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 CTI PET Systems. 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,
CTI PET Systems 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 CTI PET
Systems. The MicroPET Agreement has a five-year term, but CTI
PET Systems 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, CTI PET Systems entered into a Patent and
Technology Sublicense Agreement. Pursuant to this Sublicense,
CTI PET Systems 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, CTI PET Systems
and Concorde entered into a Development and Exclusive Supply
Agreement pursuant to which CTI PET Systems engaged Concorde to
develop, manufacture and supply application specific integrated
circuits (commonly referred to as ASICS) used in the PET
scanners manufactured by CTI PET Systems. CTI PET Systems 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.
CTI PET Systems agreed that upon the successful development of
the ASICS, Concorde would be the exclusive supplier of the
ASICS. CTI PET Systems 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 the
agreement belongs to CTI PET Systems. 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 CTI
PET Systems or to design ASICS for any competitor of CTI PET
Systems. The agreement has a five-year term.

In connection with these agreements, CTI PET
Systems paid Concorde $459, $554 and $429 for the years ended
September 30, 2002, 2001, and 2000, respectively.

In September 2002, PETNET entered into an
agreement with Concorde Microsystems, Inc. (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. 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.

CTI acquired land 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

F-23



---



##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

land. CTI has also been granted a right of first
refusal to purchase an adjacent parcel from the same general
partnership.

11.     Business
Acquisitions

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 following pro forma information presents the
results of operations of the Company as if the purchase had been
completed as of October 1, 1999:

|                           |  |                    |         |           |  |   |         | 
|-------------------------- |  | ------------------ | ------- | --------- |  | - | ------- | 
|                           |  |                   
|                           |  | Year Ended        
|                           |  | September 30, 2000
|                           |  |                   
|                           |  | As Reported        |         | Pro Forma
|                           |  |                    |         |          
|Revenue                    |  | $                  | 124,026 |           |  | $ | 124,026 | 
|Net income                 |  |                    | 4,378   |           |  |   | 4,038   | 
|Basic earnings per share   |  | $                  | 0.10    |           |  | $ | 0.08    | 
|                           |  |                    |         |           |  |   |         | 
|Diluted earnings per share |  | $                  | 0.09    |           |  | $ | 0.08    | 
|                           |  |                    |         |           |  |   |         | 

Upon the adoption of SFAS 142 on
October 1, 2001, the Company ceased amortization of the
$11,865 carrying value of its goodwill. Amortization expense for
the years ended September 30, 2001 and 2000 was $689 and
$480, respectively. We do not anticipate incurring amortization
expense for the next five fiscal years.

At September 30, 2002 our intangible assets
consisted solely of goodwill, which consisted of the following:

|         |  |                |        |              |  |              |        |   |  |   |        | 
|-------- |  | -------------- | ------ | ------------ |  | ------------ | ------ | - |  | - | ------ | 
|         |  | Gross Carrying |        | Accumulated  |  | Net Carrying
|         |  | Value          |        | Amortization |  | Value       
|         |  |                |        |              |  |             
|         |  |               
|         |  | (In thousands)
|Goodwill |  | $              | 13,516 |              |  | $            | (1,131 | ) |  | $ | 12,385 | 

The changes in the carrying value of goodwill for
the year ended September 30, 2002 are as follows:

|                            |  |                |     |               |  |             |     |              |  |   |        |  |  |   |        | 
|--------------------------- |  | -------------- | --- | ------------- |  | ----------- | --- | ------------ |  | - | ------ |  |  | - | ------ | 
|                            |  | Detector       |     | Corporate and |  | Reconciling |     | Consolidated
|                            |  | Materials      |     | Other         |  | Items       |     | Total       
|                            |  |                |     |               |  |             |     |             
|                            |  |               
|                            |  | (In thousands)
|Balance, October 1, 2001    |  | $              |    |               |  | $           | 593 |              |  | $ | 11,272 |  |  | $ | 11,865 | 
|Goodwill acquired           |  |                | 520 |               |  |             |    |              |  |   |       |  |  |   | 520    | 
|                            |  |                |     |               |  |             |     |              |  |   |        |  |  |   |        | 
|Balance, September 30, 2002 |  | $              | 520 |               |  | $           | 593 |              |  | $ | 11,272 |  |  | $ | 12,385 | 
|                            |  |                |     |               |  |             |     |              |  |   |        |  |  |   |        | 

The Reconciling Items represent
goodwill purchased by CTI in its acquisition of PETNET.

F-24



---



##### 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 years ended
September 30, 2000 and 2001, reported net income and basic
and diluted earnings per share would have been as follows:

|                                                 |  |                    |        |      |  |      |       |  |  |   |       | 
|------------------------------------------------ |  | ------------------ | ------ | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                 |  |                   
|                                                 |  | For the Year Ended
|                                                 |  | September 30,     
|                                                 |  |                   
|                                                 |  | 2002               |        | 2001 |  | 2000
|                                                 |  |                    |        |      |  |     
|Income (loss) before extraordinary item          |  | $                  | (2,600 | )    |  | $    | 6,116 |  |  | $ | 4,378 | 
|Goodwill amortization                            |  |                    |       |      |  |      | 689   |  |  |   | 480   | 
|                                                 |  |                    |        |      |  |      |       |  |  |   |       | 
|Adjusted income (loss) before extraordinary item |  | $                  | (2,600 | )    |  | $    | 6,805 |  |  | $ | 4,858 | 
|                                                 |  |                    |        |      |  |      |       |  |  |   |       | 
|Reported net income (loss)                       |  | $                  | (3,419 | )    |  | $    | 6,116 |  |  | $ | 4,378 | 
|Goodwill amortization                            |  |                    |       |      |  |      | 689   |  |  |   | 480   | 
|                                                 |  |                    |        |      |  |      |       |  |  |   |       | 
|Adjusted net income                              |  | $                  | (3,419 | )    |  | $    | 6,805 |  |  | $ | 4,858 | 
|                                                 |  |                    |        |      |  |      |       |  |  |   |       | 
|Reported basic earnings per share                |  | $                  | (0.25  | )    |  | $    | 0.15  |  |  | $ | 0.10  | 
|Goodwill amortization                            |  | $                  |       |      |  |      | 0.02  |  |  |   | 0.02  | 
|                                                 |  |                    |        |      |  |      |       |  |  |   |       | 
|Adjusted basic earnings per share                |  | $                  | (0.25  | )    |  | $    | 0.17  |  |  | $ | 0.12  | 
|                                                 |  |                    |        |      |  |      |       |  |  |   |       | 
|Reported diluted earnings per share              |  | $                  | (0.25  | )    |  | $    | 0.13  |  |  | $ | 0.09  | 
|Goodwill amortization                            |  |                    |       |      |  |      | 0.02  |  |  |   | 0.02  | 
|                                                 |  |                    |        |      |  |      |       |  |  |   |       | 
|Adjusted diluted earnings per share              |  | $                  | (0.25  | )    |  | $    | 0.15  |  |  | $ | 0.11  | 
|                                                 |  |                    |        |      |  |      |       |  |  |   |       | 

12.     Preferred
Stock and Warrants

On September 30, 1999, CTI issued 400,000
shares of redeemable preferred stock, 200,000 shares of
convertible redeemable preferred stock and a warrant to purchase
2,196,326 common shares for gross proceeds of $15,000.

The redeemable preferred stock has a 9% dividend
rate that is payable quarterly in cash and must be redeemed on
September 30, 2006. It is also subject to mandatory
redemption upon written election of the holders of a majority of
the redeemable preferred stock upon the occurrence of one of the
following events: 1) initial public offering,
2) change of control or sale of substantially all of the
assets of the Company, or 3) failure to comply with a
leverage test. CTI is accreting the redeemable preferred stock
to the redemption amount of $10,000 using the effective interest
method. The accretion on the redeemable preferred stock in the
years ended September 30, 2002, 2001 and 2000 was $2,261,
$343 and $313, respectively.

The convertible redeemable preferred stock has a
10% dividend that accrues until the stock is converted or
redeemed. It is also subject to mandatory redemption upon the
written election of the holders of a majority of the shares of
convertible redeemable preferred stock upon the occurrence of
one of the following events: 1) an initial public offering, 2)
change of control or sale of substantially all of the assets of
the Company, or 3) failure to comply with a leverage test. On
September 30, 2005, the convertible redeemable preferred
stock is redeemable at the greater of the liquidation preference
plus accrued dividends or the fair market value of CTIs
common stock. The convertible redeemable preferred stock can be
converted into 1,280,000 shares of common stock. CTI is
accreting the convertible redeemable preferred stock to its
redemption amount using the effective interest method. The
accretion on the convertible redeemable preferred stock in the
years ended September 30, 2002, 2001 and 2000 was $1,283,
$310 and $187, 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

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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 redeemable preferred stock and
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. On March 31, 2002 an
agreement was reached with the purchaser to redeem all
redeemable preferred stock, to convert all convertible
redeemable preferred stock upon the closing of the
Companys initial public offering, and to eliminate the put
feature on the warrants, which had been exercised for 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
qualifies as a Liquidity Event (as defined in the warrant
agreement). The option called for a $1,000 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 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
restated 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.

F-26



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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.

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.

13.     Segments

The Company operates in four reportable business
segments based on differences in products and services: CTI PET
Systems, PETNET radiopharmaceuticals, Detector Materials, and
CTI Services. The CTI PET Systems segment designs, manufactures
and markets medical research and scanning equipment. The PETNET
radiopharmaceuticals segment manufactures and distributes
radiopharmaceuticals to customers. The Detector Materials
segment manufactures a scintillation component sold primarily to
the CTI PET Systems 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.;
however, the Company does have foreign operations for which
identifiable assets are immaterial.

F-27



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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, 2002, 2001 and 2000:

|                                       |  |         |         |        |  |           |        |          |  |           |        |             |  |              |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|-------------------------------------- |  | ------- | ------- | ------ |  | --------- | ------ | -------- |  | --------- | ------ | ----------- |  | ------------ | ------ |  |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                       |  | CTI PET |         |        |  | Detector  |        | CTI      |  | Corporate |        | Eliminating |  | Consolidated
|                                       |  | Systems |         | PETNET |  | Materials |        | Services |  | and Other |        | Entries     |  | Total       
|                                       |  |         |         |        |  |           |        |          |  |           |        |             |  |             
|Year Ended September 30, 2000          |  |         |         |        |  |           |        |          |  |           |        |             |  |              |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|External revenues                      |  | $       | 86,211  |        |  | $         | 20,503 |          |  | $         | 1,530  |             |  | $            | 15,782 |  |  | $ |       |   |  | $ |        |   |  | $ | 124,026 |  
|Intersegment revenues                  |  |         |        |        |  |           |       |          |  |           | 9,182  |             |  |              | 17,543 |  |  |   |       |   |  |   | (26,725 | ) |  |   |        |  
|Depreciation and amortization          |  |         | 748     |        |  |           | 1,196  |          |  |           | 753    |             |  |              | 356    |  |  |   | 981    |   |  |   | (252    | ) |  |   | 3,782   |  
|Stock-based compensation expense       |  |         | 503     |        |  |           |       |          |  |           |       |             |  |              |       |  |  |   |       |   |  |   |        |   |  |   | 503     |  
|Interest expense                       |  |         | 477     |        |  |           | 291    |          |  |           | 1,205  |             |  |              | 1,928  |  |  |   | (1,416 | ) |  |   |        |   |  |   | 2,485   |  
|Interest income                        |  |         | 2       |        |  |           | 157    |          |  |           | 192    |             |  |              | 305    |  |  |   | (471   | ) |  |   |        |   |  |   | 185     |  
|Equity in (income) losses of investees |  |         |        |        |  |           | 162    |          |  |           |       |             |  |              |       |  |  |   |       |   |  |   |        |   |  |   | 162     |  
|Income tax expense                     |  |         | 5,762   |        |  |           | 75     |          |  |           | 1,290  |             |  |              | 386    |  |  |   | (1,295 | ) |  |   | (2,343  | ) |  |   | 3,875   |  
|Minority interest expense              |  |         |        |        |  |           | (15    | )        |  |           |       |             |  |              |       |  |  |   |       |   |  |   | 4,468   |   |  |   | 4,453   |  
|Net income (loss)                      |  |         | 8,230   |        |  |           | 179    |          |  |           | 1,167  |             |  |              | 4,312  |  |  |   | (1,145 | ) |  |   | (8,365  | ) |  |   | 4,378   |  
|Total assets                           |  |         | 63,923  |        |  |           | 26,671 |          |  |           | 23,751 |             |  |              | 46,809 |  |  |   | 9,436  |   |  |   | (27,549 | ) |  |   | 143,041 |  
|Investment in equity method investees  |  |         |        |        |  |           | 792    |          |  |           |       |             |  |              |       |  |  |   |       |   |  |   | (70     | ) |  |   | 722     |  
|Capital expenditures                   |  |         | 2,601   |        |  |           | 13,573 |          |  |           | 1,851  |             |  |              | 407    |  |  |   | 4,806  |   |  |   | (5,017  | ) |  |   | 18,221  |  
|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 expense       |  |         | 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  |  

F-28



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                       |  |         |         |        |  |           |        |          |  |           |        |             |  |              |        |   |  |   |         |      |  |   |         |   |  |   |         |  
|-------------------------------------- |  | ------- | ------- | ------ |  | --------- | ------ | -------- |  | --------- | ------ | ----------- |  | ------------ | ------ | - |  | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                       |  | CTI PET |         |        |  | Detector  |        | CTI      |  | Corporate |        | Eliminating |  | Consolidated
|                                       |  | Systems |         | PETNET |  | Materials |        | Services |  | and Other |        | Entries     |  | Total       
|                                       |  |         |         |        |  |           |        |          |  |           |        |             |  |             
|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 expense       |  |         | 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  |  
|Extraordinary item                     |  |         |        |        |  |           | 819    |          |  |           |       |             |  |              |       |   |  |   |        |      |  |   |        |   |  |   | 819     |  
|Net income (loss)                      |  |         | 25,740  |        |  |           | (1,955 | )        |  |           | 3,659  |             |  |              | (373   | ) |  |   | (14,029 | )(1) |  |   | (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  |  



---



|    |                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Corporate and Other net loss consists of warrant
    liability mark to market of $8,902, stock-based compensation
    expense of $2,975 not attributable to the four segments, and
    income tax effects of $2,152.

Sales were distributed to the following locations:

|              |  |               |     |      |  |      |     |   |  |  |     |  
|------------- |  | ------------- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|              |  |              
|              |  | Year Ended   
|              |  | September 30,
|              |  |              
|              |  | 2002          |     | 2001 |  | 2000
|              |  |               |     |      |  |     
|United States |  |               | 77  | %    |  |      | 77  | % |  |  | 75  | %
|Foreign       |  |               | 23  | %    |  |      | 23  | % |  |  | 25  | %
|              |  |               |     |      |  |      |     |   |  |  |     |  
|              |  |               | 100 | %    |  |      | 100 | % |  |  | 100 | %
|              |  |               |     |      |  |      |     |   |  |  |     |  

No individual foreign country represents 10% or
more of the Companys total sales since 1999. Sales are
based on final destination of products sold.

F-29



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

14. Quarterly Financial Data
(unaudited)

|                           |  |              |        |           |  |          |        |               |  |   |        |  |  |   |        | 
|-------------------------- |  | ------------ | ------ | --------- |  | -------- | ------ | ------------- |  | - | ------ |  |  | - | ------ | 
|                           |  |             
|                           |  | 2000        
|                           |  |             
|                           |  | December 31, |        | March 31, |  | June 30, |        | September 30,
|                           |  | 1999         |        | 2000      |  | 2000     |        | 2000         
|                           |  |              |        |           |  |          |        |              
|Net revenues               |  | $            | 19,292 |           |  | $        | 29,856 |               |  | $ | 29,377 |  |  | $ | 45,501 | 
|Gross profit               |  |              | 9,337  |           |  |          | 13,003 |               |  |   | 13,878 |  |  |   | 19,436 | 
|Net income (loss)          |  |              | (3,587 | )         |  |          | 1,325  |               |  |   | 3,136  |  |  |   | 3,504  | 
|Basic earnings per share   |  |              | (0.15  | )         |  |          | 0.03   |               |  |   | 0.10   |  |  |   | 0.12   | 
|Diluted earnings per share |  |              | (0.15  | )         |  |          | 0.03   |               |  |   | 0.09   |  |  |   | 0.11   | 

|                           |  |              |        |           |  |          |        |               |  |   |        |  |  |   |        | 
|-------------------------- |  | ------------ | ------ | --------- |  | -------- | ------ | ------------- |  | - | ------ |  |  | - | ------ | 
|                           |  |             
|                           |  | 2001        
|                           |  |             
|                           |  | December 31, |        | March 31, |  | June 30, |        | September 30,
|                           |  | 2000         |        | 2001      |  | 2001     |        | 2001         
|                           |  |              |        |           |  |          |        |              
|Net revenues               |  | $            | 34,882 |           |  | $        | 40,431 |               |  | $ | 38,114 |  |  | $ | 75,450 | 
|Gross profit               |  |              | 14,392 |           |  |          | 17,641 |               |  |   | 15,632 |  |  |   | 30,963 | 
|Net income (loss)          |  |              | (18    | )         |  |          | (502   | )             |  |   | 1,186  |  |  |   | 5,450  | 
|Basic earnings per share   |  |              | (0.02  | )         |  |          | (0.03  | )             |  |   | 0.02   |  |  |   | 0.17   | 
|Diluted earnings per share |  |              | (0.02  | )         |  |          | (0.03  | )             |  |   | 0.02   |  |  |   | 0.15   | 

|                                                                        |  |              |        |           |  |          |         |               |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------- |  | ------------ | ------ | --------- |  | -------- | ------- | ------------- |  | - | ------ | - |  | - | ------ | -
|                                                                        |  |             
|                                                                        |  | 2002        
|                                                                        |  |             
|                                                                        |  | December 31, |        | March 31, |  | June 30, |         | September 30,
|                                                                        |  | 2001         |        | 2002      |  | 2002     |         | 2002         
|                                                                        |  |              |        |           |  |          |         |              
|Net revenues                                                            |  | $            | 47,557 |           |  | $        | 55,258  |               |  | $ | 69,044 |   |  | $ | 86,536 |  
|Gross profit                                                            |  |              | 19,137 |           |  |          | 22,716  |               |  |   | 27,924 |   |  |   | 37,964 |  
|Income (loss) before extraordinary item                                 |  |              | 5      |           |  |          | (11,844 | )             |  |   | 806    |   |  |   | 8,433  |  
|Extraordinary (loss) from extinguishment of debt,
    net of taxes $484 |  |              |       |           |  |          |        |               |  |   |       |   |  |   | (819   | )
|Net income (loss)                                                       |  |              | 5      |           |  |          | (11,844 | )             |  |   | 806    |   |  |   | 7,614  |  
|Basic earnings per share                                                |  |              | (0.02  | )         |  |          | (0.46   | )             |  |   | (0.07  | ) |  |   | 0.16   |  
|Diluted earnings per share                                              |  |              | (0.02  | )         |  |          | (0.46   | )             |  |   | (0.07  | ) |  |   | 0.17   |  

F-30



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES

SCHEDULE II.     FINANCIAL
STATEMENT SCHEDULES

Valuation and Qualifying Accounts and
Reserves


|                                                        |  |  |      |        |  |           |       |            |  |        |       |  |  |   |        |      |  |   |       | 
|------------------------------------------------------- |  |  | ---- | ------ |  | --------- | ----- | ---------- |  | ------ | ----- |  |  | - | ------ | ---- |  | - | ----- | 
|                                                        |  |  |      | Period |  | Additions |       | Deductions |  | Period
|                                                        |  |  |      |        |  |           |       |            |  |       
|Description                                             |  |  |      |        |  |           |       |            |  |        |       |  |  |   |        |      |  |   |       | 
|                                                        |  |  |      |        |  |           |       |            |  |        |       |  |  |   |        |      |  |   |       | 
|Accounts receivable allowance for doubtful
    accounts |  |  | 2000 |        |  | $         | 871   |            |  | $      | 111   |  |  | $ | (157   | )(i) |  | $ | 825   | 
|                                                        |  |  | 2001 |        |  |           | 825   |            |  |        | 406   |  |  |   | (474   | )(i) |  |   | 757   | 
|                                                        |  |  | 2002 |        |  |           | 757   |            |  |        | 1,061 |  |  |   |       | (i)  |  |   | 1,818 | 
|Valuation allowance for deferred tax assets             |  |  | 2000 |        |  | $         | 1,443 |            |  | $      |      |  |  | $ | (1,443 | )    |  | $ |      | 
|                                                        |  |  | 2001 |        |  |           |      |            |  |        |      |  |  |   |       |      |  |   |      | 
|                                                        |  |  | 2002 |        |  |           |      |            |  |        |      |  |  |   |       |      |  |   |      | 
|Inventory reserve for obsolescence                      |  |  | 2000 |        |  | $         | 1,124 |            |  | $      | 644   |  |  | $ | (237   | )    |  | $ | 1,531 | 
|                                                        |  |  | 2001 |        |  |           | 1,531 |            |  |        | 594   |  |  |   | (387   | )    |  |   | 1,738 | 
|                                                        |  |  | 2002 |        |  |           | 1,738 |            |  |        | 1,002 |  |  |   | (889   | )    |  |   | 1,851 | 
|Warranty reserves                                       |  |  | 2000 |        |  | $         | 1,979 |            |  | $      | 4,068 |  |  | $ | (4,242 | )    |  | $ | 1,805 | 
|                                                        |  |  | 2001 |        |  |           | 1,805 |            |  |        | 5,437 |  |  |   | (3,809 | )    |  |   | 3,433 | 
|                                                        |  |  | 2002 |        |  |           | 3,433 |            |  |        | 6,800 |  |  |   | (6,493 | )    |  |   | 3,740 | 



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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-31