##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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FORM 10-K



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|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|           |  | For the fiscal year ended September 30,
    2004                                                
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-49867



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CTI Molecular Imaging, Inc.

(Exact Name of Registrant as Specified in Its
Charter)


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

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

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

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

Common Stock, $0.01 par value

Series C Junior Participating Preferred
Stock Purchase Rights




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

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

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

The aggregate market value of common stock held
by non-affiliates of the registrant was $462,601,992 as of
March 31, 2004, based upon the last sale price of such
stock as reported on the Nasdaq National Market on that day
(assuming for purposes of this calculation, without conceding,
that all executive officers and directors are affiliates).

There were 46,925,900 shares of common stock
outstanding at December 1, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the registrants proxy statement
for its 2005 Annual Meeting of Stockholders are incorporated by
reference in Part III of this Form 10-K.



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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                                                                                                            |    |      | 28 | 
|Item 3.                                                    |  | Legal Proceedings                                                                                                     |    |      | 28 | 
|Item 4.                                                    |  | Submission of Matters to a
    Vote of Security Holders                                                               |    |      | 29 | 
|                                                          
|PART II                                                   
|Item 5.                                                    |  | Market for Registrants
    Common Equity, Related Stockholder Matters, and Issuer Purchases
    of Equity Securities |    |      | 29 | 
|Item 6.                                                    |  | Selected Financial Data                                                                                               |    |      | 31 | 
|Item 7.                                                    |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                             |    |      | 32 | 
|Item 7A.                                                   |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                        |    |      | 65 | 
|Item 8.                                                    |  | Financial Statements and
    Supplementary Data                                                                       |    |      | 66 | 
|Item 9.                                                    |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure                              |    |      | 66 | 
|Item 9A.                                                   |  | Controls and Procedures                                                                                               |    |      | 66 | 
|Item 9B.                                                   |  | Other Information                                                                                                     |    |      | 66 | 
|                                                          
|PART III                                                  
|Item 10.                                                   |  | Directors and Executive
    Officers of the Registrant                                                                |    |      | 66 | 
|Item 11.                                                   |  | Executive Compensation                                                                                                |    |      | 66 | 
|Item 12.                                                   |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters                |    |      | 67 | 
|Item 13.                                                   |  | Certain Relationships and
    Related Transactions                                                                    |    |      | 67 | 
|Item 14.                                                   |  | Principal Accounting Fees
    and Services                                                                            |    |      | 67 | 
|                                                          
|PART IV                                                   
|Item 15.                                                   |  | Exhibits, Consolidated
    Financial Statement Schedules, and Reports on Form 8-K                                     |    |      | 69 | 
|SIGNATURES                                                 |  |                                                                                                                       | 70 |     
|EX-10.22 CHANGE IN CONTROL AGREEMENT, DATED 12/9/03       
|EX-10.25 EMPLOYMENT AGREEMENT, DATED 4/27/04              
|EX-10.26 CONSULTING AGREEMENT, DATED SEPTEMBER 1, 2004    
|EX-21.1 SUBSIDIARIES OF THE COMPANY                       
|EX-23.1 CONSENT OF PRICEWATERHOUSECOOPERS LLP.            
|EX-31.1 SECTION 302 CERTIFICATION OF THE CEO              
|EX-31.2 SECTION 302 CERTIFICATION OF THE CFO              
|EX-32.1 SECTION 906 CERTIFICATION OF THE CEO              
|EX-32.2 SECTION 906 CERTIFICATION OF THE CFO              





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##### Table of Contents






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, 2004;                                                                                                      
|
| |  | our critical accounting policies;                                                                                                                                                                                      
|
| |  | the timing of the exercisability of the Siemens
    option to purchase an additional ownership interest in CTI PET
    Systems and the effect of the Siemens option, or its exercise,
    on our business;             
|
| |  | our expectations regarding the size and growth of
    the market for our products and services and the market
    acceptance of CTIs products and services;                                                           
|
| |  | our business strategies and our ability to grow
    our business;                                                                                                                                                      
|
| |  | competition, pricing, the seasonality of capital
    equipment sales, the timing of orders from and shipments to
    distribution partners and customers, and the availability of
    financing services for customers;
|
| |  | our ability to enhance existing, or develop new,
    products and services and the impact of any such enhancements or
    developments;                                                                                
|
| |  | the development and timing of new applications
    for PET and the impact of any such new applications;                                                                                                                
|
| |  | the implementation or interpretation of current
    or future regulations and legislation;                                                                                                                             
|
| |  | the number and scope of procedures involving our
    products and services for which third-party reimbursement is
    available, and the reimbursement levels of third-party payors;                                   
|
| |  | our ability to maintain contracts and
    relationships with key suppliers, customers, distributors or
    research and development collaboration partners;                                                            
|
| |  | our ability to maintain our existing, or to
    develop additional, valuable intellectual property
    rights; and                                                                                                     
|
| |  | our future sources of and needs for liquidity and
    capital resources.                                                                                                                                               

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

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

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

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

1



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PART I

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






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

Overview

We are a leading manufacturer of positron
emission tomography imaging equipment and related molecular
imaging 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 often 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 comprehensive
product line for PET, including scanners, cyclotrons,
microPET® animal scanners, radiopharmaceuticals, detector
materials, medical image analysis applications, and support
services. Our business model emphasizes our focus on PET, our
ability to provide a total solution for our
customers, our proprietary technology rights and our proven
track record of technological innovation.

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

We believe the market for PET products and
services will continue to grow 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 resultant
    increasing number of patients with cancer, cardiac disease,
    neurological disorders and other diseases for which PET scans
    are performed;     
|
| |  | technological innovations involving PET that
    shorten scan times and improve imaging capabilities, such as the
    current generation of LSO-based scanners and the combined PET/CT
    scanner; and
|
| |  | the increasing availability of the
    radiopharmaceuticals used in PET, as well as the development of
    new radiopharmaceuticals that extend PET technology to new
    applications.                

We believe we are well positioned to benefit from
the anticipated growth in the PET market due to our 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 distribute
a broad line

2



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of sophisticated PET and PET/CT scanners through
CTI PET Systems, Inc., doing business as
CPS Innovations (CPS). We manufacture the detection
materials and sources utilized in PET scanners including our
proprietary lutetium oxyorthosilicate, or LSO, technology. We
have a nationwide network for the production and distribution of
the highly specialized radioactive pharmaceuticals used in PET
imaging, and we are a leading manufacturer of the cyclotron
equipment used to produce those radiopharmaceuticals. Through
our subsidiary, CTI Concorde Microsystems, LLC (Concorde), which
we acquired in June 2004, we manufacture and distribute
microPET® animal scanners, which are small animal PET
systems for laboratory animals used in medical research. Our
subsidiary, Mirada Solutions Limited (Mirada), develops and
licenses medical image analysis applications, which are designed
to provide our customers with innovative, unique and productive
tools for the creation, display and analysis of molecular
images. We also provide a variety of valuable services including
site planning, installation, preventive maintenance and repair,
technical support, and marketing support 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 configured to surround 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 much 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 is also used to research 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. The
radionuclides used to tag most clinically important
radiopharmaceuticals are produced using a sophisticated piece of
electronic equipment called a cyclotron, which requires
specially trained technicians and a licensed special purpose
facility. Historically, institutions performing PET scans
required an on-site cyclotron to produce radiopharmaceuticals on
demand. PET customers now have an alternative to installing and
operating cyclotrons on-site by obtaining local distribution of
radiopharmaceuticals from specialized pharmacy providers. We
expect the market for radiopharmaceuticals to grow as the
adoption and utilization of PET continues to grow and as new and
more effective radiopharmaceuticals are developed for additional
applications of PET technology.

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The most common medical imaging technologies in
the U.S. today are X-ray, CT, ultrasound and MRI. These
imaging technologies have several advantages over PET, namely
they represent the current standard of patient care, provide
clear anatomical images (in the case of CT and MRI), generally
are reimbursed, are fast (in the case of X-ray and CT) and
todays radiologists are very competent in reading these
types of images. In comparison to CT and MRI, PET has some
disadvantages including the lack of reimbursement for several
types of cancer and the steep physician learning curve
associated with PET. The poor accuracy of FDG in certain cancers
such as prostate cancer is another limitation of 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, CT,
ultrasound and MRI 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 change. 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

One of the principal reasons for growth in the
PET market is the increasing number of PET applications being
approved for reimbursement by third-party payors, such as
Medicare, national and local private insurers and HMOs.
Reimbursement is critical to increasing the adoption rate of PET
by clinicians. Through active educational efforts, industry
participants and associations, such as the Academy for Molecular
Imaging, the Society of Nuclear Medicine and the Radiological
Society of North America as well as the National Institutes of
Health, have been successful in increasing the awareness of
PETs benefits to patients, physicians and members of the
payor community and in increasing the number of PET applications
for which reimbursement is available. On July 1, 2001, the
Center 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. Effective October 1, 2003, CMS announced
expansion of Medicare coverage for PET to include thyroid cancer
and patients with potential cardiac disease. On June 5,
2004, CMS announced the expansion of Medicare coverage for PET
to include a subset of patients with Alzheimers 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 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                                   
|January 1, 1998 |  | Solitary pulmonary nodules
    (SPNs)          |  | Characterization                                  

4



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|                |  |                                                                              |  |                                                                                                                                                                                                                                                                
|--------------- |  | ---------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Effective Date  |  | Clinical Condition                                                           |  | Coverage                                                                                                                                                                                                                                                       
|                |  |                                                                              |  |                                                                                                                                                                                                                                                                
|July 1, 1999    |  | Colorectal cancer                                                            |  | Determining location of tumors if rising
    carcinoembryonic antigen (CEA) level suggests recurrence                                                                                                                                                          
|July 1, 1999    |  | Lymphoma                                                                     |  | Staging and restaging only when used as an
    alternative to gallium scan                                                                                                                                                                                     
|July 1, 1999    |  | Melanoma                                                                     |  | Evaluating recurrence prior to surgery as an
    alternative to a gallium scan                                                                                                                                                                                 
|July 1, 2001    |  | Colorectal cancer                                                            |  | Diagnosis, staging and restaging                                                                                                                                                                                                                               
|July 1, 2001    |  | Esophageal cancer                                                            |  | Diagnosis, staging and restaging                                                                                                                                                                                                                               
|July 1, 2001    |  | Head and neck cancers
    (excluding central nervous
    system and thyroid) |  | Diagnosis, staging and restaging                                                                                                                                                                                                                               
|July 1, 2001    |  | Lung cancer (non-small cell)                                                 |  | Diagnosis, staging and restaging                                                                                                                                                                                                                               
|July 1, 2001    |  | Lymphoma                                                                     |  | Diagnosis, staging and restaging                                                                                                                                                                                                                               
|July 1, 2001    |  | Melanoma                                                                     |  | Diagnosis, staging and restaging; not covered for
    evaluating regional nodes                                                                                                                                                                                
|July 1, 2001    |  | Myocardial viability                                                         |  | Covered only following inconclusive single photon
    emission computed tomography (SPECT)                                                                                                                                                                     
|July 1, 2001    |  | Refractory seizures                                                          |  | Pre-surgical evaluation                                                                                                                                                                                                                                        
|October 1, 2002 |  | Myocardial viability                                                         |  | Primary evaluation or initial study to determine
    myocardial viability prior to revascularization                                                                                                                                                           
|October 1, 2002 |  | Breast cancer                                                                |  | Staging for metastasis/restaging for regional
    and/or distant metastasis and monitoring response to therapy                                                                                                                                                 
|October 1, 2003 |  | Thyroid cancer                                                               |  | Restaging of recurrent or residual thyroid
    cancers of follicular cell origin that have been previously
    treated by thyroidectomy and radioiodine ablation and have a
    serum thyroglobulin > 10 ng/ml and negative I-131 whole
    body scan performed
|October 1, 2003 |  | Perfusion of the heart                                                       |  | Noninvasive imaging of the perfusion of the heart
    or using ammonia N-13 (non-FDG) tracer.                                                                                                                                                                  
|June 5, 2004    |  | Alzheimers Disease                                                          |  | Coverage for patients when a specific diagnosis
    remains uncertain despite a thorough clinical evaluation as well
    as for patients with early dementia or unexpected memory loss
    who are enrolled in clinical trials.                                

5



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---

Source: Section 50-36 of the CMS
Coverage Manual and CMS Decision Memoranda #CAG-00094A and #CAG
00098N. Information for 2004 and 2003 obtained from
www.ami-imaging.org.

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 aged 45-64 who will
reach 65 over the next two decades increased by 34% during the
past decade. We believe the volume of PET scans in the oncology
market will continue to grow as the aging of the population
drives a corresponding increase in the number of patients with
cancer, as future discoveries bring additional oncology
applications, and as expanding reimbursement of cancer
indications makes PET more widely available to physicians and
patients.

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

Business Strategy

Our business focuses on enabling diagnosis and
therapy management for cancer, cardiac disease and neurological
disorders using PET and 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 a leading provider of
comprehensive 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 technologies
    beyond diagnosis to a broader management of the treatment of
    disease; and                                                                  
|
| |  | developing new applications for PET technology by
    developing new radiopharmaceuticals, by supporting clinical
    trials that involve PET and by collaborating with pharmaceutical
    companies.

Continue Offering Customers a Comprehensive
Line of PET Products and Services.We
offer a broad range of products and services that complement our
sophisticated PET imaging equipment in order to:



| |   |                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | better compete with larger imaging equipment
    companies that have captive finance companies and a broader
    imaging product line but lack the full array of PET products and
    services that customers need to operate PET imaging centers;

6



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| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 a comprehensive approach of 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.                                                                              

Continue to Build Our Production and
Distribution Network for
Radiopharmaceuticals.We intend to
further expand our existing 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 radiopharmacy network and
    leverage this greater scale to achieve operating efficiencies
    and improve delivery time and quality of service.

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



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

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



| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | develop new varieties of radiopharmaceuticals to
    be used as biomarkers to characterize the varied pathways of
    disease and extend the use of PET imaging to additional
    diseases; and
|
| |  | explore new therapeutic applications for PET.                                                                                                                                                  

Facilitate Pharmaceutical Development by
Providing a Full Line of PET-Related Products and
Services.We intend to focus
increasing research and development efforts on our biomarker
development business, including efforts to:



| |   |                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | collaborate with leading pharmaceutical companies
    and academic institutions to, among other things, improve their
    process for conducting drug development and clinical trials;                                                                                      
|
| |  | obtain access to pharmaceutical compounds for use
    as molecular probes;                                                                                                                                                                                                  
|
| |  | expand research applications of PET
    technology; and                                                                                                                                                                                                                     
|
| |  | utilize the technologies of our subsidiaries
    Concorde and Mirada, acquired in 2004 and 2003, respectively, to
    better leverage opportunities for our molecular imaging products
    with leading pharmaceutical companies and academic and research
    institutions.

7



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Our Products and Services

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



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

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.



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

Our subsidiary, CPS, manages the development,
manufacturing and distribution of the ECAT® line of PET and
PET/ CT scanners. The ECAT® scanner line performs
simultaneous acquisition, image reconstruction, processing, and
data analysis, which improves patient throughput and delivers
prompt results. The scanners produced by CPS range in price from
$0.6 million to $2.3 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.



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

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

8



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##### Table of Contents



We discontinued the use of BGO in our scanner
manufacturing because of the significant advantages of LSO, as
outlined in the following table:


|                                                                                                                   |  |                                                                                                  |  |                                                 |  |                                                                                                                                                                                                                                                                              
|------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------ |  | ----------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                   |  |                                                                                                  |  |                                                 |  |                                                                                                                                                                                                                                                                              
|                                                                                                                   |  |                                                                                                  |  |                                                 |  | LSO                                                                                                                                                                                                                                                                          
|Feature                                                                                                            |  | LSO                                                                                              |  | BGO                                             |  | Advantage                                                                                                                                                                                                                                                                    
|Scan Time                                                                                                          |  |                                                                                                  |  |                                                 |  |                                                                                                                                                                                                                                                                              
|The shorter the decay constant for the detector
    material, the shorter the patient scan time                    |  | Decay constant of 40 nanoseconds, or more than
    seven times faster than BGO.                  |  | Decay constant of 300 nanoseconds.              |  | LSO-based scanners generally exhibit a shorter
    patient scan time than BGO-based scanners. This shorter scan
    time increases the number of patient scans that can be performed
    each day and reduces the likelihood of image distortion due to
    patient movement.
|Image Quality                                                                                                      |  |                                                                                                  |  |                                                 |  |                                                                                                                                                                                                                                                                              
|Detector materials that provide a higher light
    output allow for higher image resolution and higher sensitivity |  | LSO has a light output of 75 on a scale of 100,
    or five times greater light output than BGO. |  | BGO has a light output of 15 on a scale of 100. |  | The increased light output results in higher
    image resolution for LSO-based scanners and allows the detection
    of smaller lesions.                                                                                                                                    
|                                                                                                                  
|Proprietary Technology                                                                                             |  | We have an exclusive license to use LSO in the
    molecular imaging market.                     |  | BGO 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.                                                                                                              



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

Radiopharmaceuticals.We currently operate 41 radiopharmaceutical production and
distribution centers, located in major metropolitan areas across
the U.S., 1 radiopharmaceutical production and distribution
center in the United Kingdom, and 1 radiopharmaceutical
production and distribution center in South Korea. Of our 43
radiopharmacies, we operate 14 cyclotrons owned by others, or
hosts, pursuant to contracts. Our radiopharmacies principally
produce and distribute FDG, which is used in oncology,
cardiology and neurology applications. These radiopharmacies can
also manufacture and distribute research biomarkers under
license. Our 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 including reimbursement
education, radiation safety consulting, licensure assistance and
marketing assistance. We believe that the demand for
radiopharmaceuticals will follow the future growth of the PET
market. To meet this demand, we expect to continue to expand our
network of radiopharmacies.

9



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Cyclotron Systems.We manufacture cyclotrons for the production of
radiopharmaceuticals by our own radiopharmacies and for sale to
hospitals and imaging centers that choose to manufacture
radiopharmaceuticals. 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 and
automated operation. Our cyclotrons combine high beam quality
and shielding with efficiencies in space requirements, building
modifications and operating costs. Currently, we offer cyclotron
models for hospital use, research use, and high-yield commercial
use.

Mirada Medical Image Analysis
Applications.Through Mirada, we
develop and supply computer workstations and software designed
to improve the quality of care delivered by our customers to
their patients, with innovative, unique and productive tools for
the creation, display and analysis of molecular images.
Miradas products include:



| |   |                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Reveal-MVS, a high-performance computer
    workstation for review, analysis, and image fusion of PET and
    PET/ CT images, available in customized versions for clinical
    and pre-clinical markets;                             
|
| |  | Fusion7DTM, an industry-leading image
    fusion software package, available as part of the Reveal-MVS
    system or for integration in a wide range of OEM imaging systems
    and PACS platforms;                                   
|
| |  | RTistTM, an extension to the
    Reveal-MVS and Fusion7DTM products that provides
    interconnectivity and communication with radiation therapy
    systems, enabling PET imaging to play a major role in treatment
    delivery; and
|
| |  | SceniumTM, advanced quantification for
    PET neurological imaging, with particular capabilities for
    assessment of Alzheimers disease.                                                                                          

Animal Scanners.Through Concorde, we develop and manufacture microPET®
animal scanners, which are PET scanners for animals used in
laboratory research. The research includes the use of PET
imaging of laboratory animals in the drug development process.
Concordes products include:



| |   |                                                     
| | - | ----------------------------------------------------
| |  | Focus 120, small laboratory animal
    scanners; and
|
| |  | Focus 220, primate animal scanners.                 

Reveal Network
Solutions.We have introduced an
internet-hosting service called Reveal Network Solutions to
connect physicians, radiopharmacies, patients, and PET
providers. Reveal Network Solutions facilitates sharing relevant
information including scheduling imaging procedures and
researching important information about PET and related
reimbursement rates.

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:



| |   |                                            
| | - | -------------------------------------------
| |  | Preventive maintenance and repair services;
|
| |  | Site planning and installation services;   
|
| |  | Radioactive materials licensing;           
|
| |  | Technologist recruiting and training;      
|
| |  | Physician training;                        
|
| |  | Technical support; and                     
|
| |  | Calibration sources.                       

10



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##### Table of Contents



Research & Development

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

|     |  |                                                                                                                                                                                                                                                          
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date |  | Innovation                                                                                                                                                                                                                                               
|     |  |                                                                                                                                                                                                                                                          
|1985 |  | Invented the block detector which assisted in the
    commercial introduction of PET by lowering the cost and
    increasing the performance of PET equipment                                                                                            
|1990 |  | Developed the first three dimensional high
    resolution PET that images human organs in a single frame                                                                                                                                                 
|1992 |  | First to develop whole body imaging capability                                                                                                                                                                                                           
|1995 |  | Developed the first whole body three dimensional
    PET scanner for cancer                                                                                                                                                                              
|1997 |  | Commercially introduced the RDS 111 cyclotron
    which incorporated proprietary technology that lowered the cost,
    target volumes and power requirements for our cyclotrons and
    provided electronic automated preparation of radiopharmaceuticals
|1998 |  | Developed the first 2mm multi-slice brain scanner
    for research                                                                                                                                                                                       
|1998 |  | Filed patent application for the combined PET/ CT
    and demonstrated the first clinical image using a PET/ CT                                                                                                                                          
|1999 |  | Mirada obtained FDA clearance for first non-rigid
    image registration algorithms                                                                                                                                                                      
|2000 |  | Concorde Microsystems, Inc. shipped the first
    commercial microPET® animal scanner                                                                                                                                                                    
|2001 |  | Introduced LSO scanners on a commercial basis                                                                                                                                                                                                            
|2003 |  | Introduced high resolution (Hi-Rez) PET/ CT                                                                                                                                                                                                              

Our research and development team focuses on
developing the next generation of PET technologies. In addition
to our internal ideas, our research and development department
collaborates with a network of leading physicians, academic
imaging experts and, in the case of CPS, with our distributors.
We incurred $33.4 million in 2004, $31.3 million in
2003 and $21.7 million in 2002 in research and development
expenses, including clinical and regulatory expenses.

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

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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, pharmaceutical and scientific
institutions including The Cleveland Clinic, Columbia
Presbyterian, Emory University, Washington University in
St. Louis, Baylor University, UCLA, Massachusetts General
Hospital, MD Anderson Cancer Center, Hospital San Raffaele
in Milan, Italy, DKFZ German Cancer Research Center in
Heidelberg, Germany, Peking Union Medical College in Beijing,
China, Max Planck Institute in Köln, Germany, and Service
Hospitalier Frederic Joliot in Orsay, France.

Products Under Development

CPS develops dedicated PET scanners that use our
advanced LSO-based detector materials. These scanners provide
substantially higher patient throughput while providing improved
image quality and upgradeable performance. CPS also develops
PET/ CT scanners that incorporate advanced LSO-based detector
systems. Future PET/ CT scanners are expected to better
integrate PET and CT technologies to further decrease body scan
time 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,
Parkinsons disease and Alzheimers disease.

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

Our Relationship with Siemens



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

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

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

12



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##### Table of Contents



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


The exercisability of the put/call right is
contingent upon CPS selling, during the year preceding exercise,
in excess of the cumulative total number of units specified in
the Siemens minima plus 20% plan attached to the
joint venture agreement. The Siemens minima plus 20%
plan provides for annual increases in the cumulative total
number of units sold by CPS beginning on December 9, 1987.
As of September 30, 2004, the cumulative total number of
units sold by CPS was 852 and CPS would need to have sold a
cumulative total of 1,055 units to achieve the required
cumulative sales level for the put/call right to be exercisable.
The cumulative unit sales requirement increases by 74 units
each year. It is impossible to definitively state when the
put/call right will become exercisable by either party. However,
based upon our current forecasts, we do not expect this target
level to be reached before the second half of fiscal year 2006.
Siemens cannot exercise its option until the end of the fiscal
year in which this target level is reached. Assuming that sales
volumes are met in 2006 and further assuming the exercise of the
one-year deferral right, the sale of CPS is not expected to
occur before 2007.

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

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

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

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

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

13



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

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

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



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

We have also agreed that for so long as we and
Siemens each own more than 20% of the outstanding shares of CPS,
our board of directors will nominate a representative of
Siemens, chosen by Siemens, to serve as a member of our board of
directors. Currently, Dr. Wolf-Ekkehard Blanz 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 seventeen 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 in 2001 to address a contract
interpretation issue with respect to the implementation of a
multiple distributor strategy. A favorable resolution was
reached that led to the expansion of our sales and marketing
force for the distribution of products manufactured by CPS.
Additionally, this process resulted in the signing of a number
of new long-term contracts with Siemens and increased joint
projects with Siemens on several new initiatives, including the
development of more advanced PET/ CT capabilities.

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



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

Siemens served as our exclusive distributor of
ECAT® scanners from 1987 to 1997. From 1997 until 2001,
Siemens and CPS served as the only distributors of ECAT®
scanners. In 2001, CPS adopted a multiple distributor strategy
in order to expand its distribution channels. In November 2001
CPS added Hitachi Medical Systems America, Inc. as a third-party
distributor of CPS products and in October 2003 CPS added
Toshiba Medical Systems Corporation as a third-party distributor
of CPS products in Japan.

From 2001 to 2004, CTI served as a direct
distributor of CPS products, as part of CPS multiple
distributor strategy. These arrangements were amended by the
execution of a Sales Agency and Services

14



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Agreement with Siemens (the Agency Agreement),
effective May 1, 2004, between CTI, CPS and Siemens.
Pursuant to the Agency Agreement, Siemens appointed CTI as
Siemens non-exclusive sales representative to solicit
purchases of CPS-manufactured PET and PET/ CT scanners
throughout the United States, on terms and conditions and at
prices determined by Siemens and subject to acceptance by
Siemens. CPS products sold by CTI as Siemens sales
representative will be marketed and sold under the Siemens
brand. In connection with this arrangement, Siemens will
reimburse CTI for all directly related sales and marketing
expenses, up to $10 million annually. During the year ended
September 30, 2004, CTI recorded $4.0 million of
revenue for the reimbursement of sales and marketing expenses.


Service contracts entered into in connection with
scanner sales in the United States after May 1, 2004 are
divided equally between CTI and Siemens in terms of revenue.
Siemens and CTI are free to independently pursue sales of
service contracts to the installed base of CPS scanner
customers. Each CTI sales order executed but not filled prior to
May 1, 2004 will be concluded by CTI.

During the two-year term of the Agency Agreement,
CTI agreed to cease its sales and service of PET and PET/ CT
scanners in international markets, except in South Korea and
Japan. All existing scanner service contracts in international
markets other than South Korea and Japan were assigned to
Siemens. During the term of the Agency Agreement, CTI has agreed
not to enter or re-enter any international market to sell or
service PET or PET/ CT scanners, except that CTI may continue to
pursue its existing business in South Korea and may retain its
existing distribution agreement in Japan. In exchange for the
assignment of the international service contracts, the covenant
not to compete in the United States and international markets
other than South Korea and Japan, certain price reductions for
detector materials including on international scanner sales, and
as compensation for the cost of closing certain international
operations, Siemens paid CTI $2.2 million. CTI recognized
$1.1 million as revenue during the year ended
September 30, 2004, in association with the assignment of
international service contracts. The remaining amount is being
amortized over the two-year term of the agreement concurrent
with our LSO price reduction and non-compete commitments. During
the year ended September 30, 2004 $0.2 million of this
remaining amount was amortized into earnings.

Under the Agency Agreement, Siemens serves as
CTIs non-exclusive representative to offer for sale
products manufactured by CTI and its subsidiaries to
Siemens customers. Subject to the expiration or
termination of any existing agreements for the provision of
cyclotrons or radiopharmaceuticals to Siemens customers,
Siemens has agreed to offer exclusively CTIs cyclotrons,
radiopharmaceuticals and calibration sources for sale to
Siemens customers.

The parties also agreed to certain changes in
transfer prices charged to and received from CPS. Siemens and
CTI agreed to reduce the transfer prices for CT components and
LSO detector materials, respectively, sold to CPS. These price
reductions are being passed on, dollar-for-dollar, in the form
of lower transfer prices on scanners sold by CPS to Siemens. CPS
agreed to a second round of transfer price reductions on
scanners sold to Siemens, which are expected to become effective
in December 2004.

The initial term of the Agency Agreement is two
years commencing May 1, 2004, and the term will be extended
automatically for additional one-year periods unless either
party provides written notice, as required, of its election not
to renew. In the event the Agency Agreement is terminated or not
renewed by Siemens for any reason, CTI has the right to resume
distribution of PET and PET/ CT scanners in competition with
Siemens. The Agency Agreement also provides that CTI can
terminate this agreement under certain specified circumstances,
including the event that certain total unit sales thresholds for
PET and PET/ CT scanners are not met for a period of two
consecutive fiscal quarters.

Siemens also executed an agreement with Mirada,
under which Siemens pays Mirada a fee to install Miradas
image-fusion software on every workstation sold worldwide with a
Siemens branded PET or PET/ CT scanner.

Following the exercise of the put/call right, if
the Agency Agreement is terminated or not renewed by Siemens,
CTI will have the right to distribute PET products manufactured
by CPS through at least 2010

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on substantially the same terms as existed under
the distribution agreement between CTI and CPS. During the term
of our distribution agreement, we will have access to new
products developed by CPS on the same terms and conditions that
CPS grants distribution rights to Siemens.




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

Pursuant to the terms of our revolving credit
facility, CPS is allowed to borrow up to $55.0 million
under the credit facility to finance its operations. At
September 30, 2004, CPS had no outstanding balance under
the credit facility. CPS pays its pro rata portion of all fees
and commissions under this credit facility. Our subsidiaries
guarantee all obligations under the credit facility, except that
the guarantee by CPS is limited to $55.0 million and does
not include any advances under the credit facility that are
loaned (on an intercompany basis) to our PETNET subsidiary. The
credit facility and the obligations of our subsidiary guarantors
under the credit facility are secured by a lien on substantially
all of our assets (including the capital stock or other forms of
ownership interests we hold in our subsidiaries) and the assets
of our subsidiary guarantors, except that the lien securing the
guarantee of CPS is principally limited to the accounts
receivable and inventory of CPS.



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

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

Competition

The primary competitive factors in the PET
equipment market are quality, technical capability, breadth of
product line, distribution capabilities, price, the ability to
offer vendor financing, and the ability to provide quality
service and support. Our principal competition in the market for
PET scanners comes from divisions or subsidiaries of much larger
corporations such as GE Healthcare (formerly known as GE Medical
Systems) and Philips Medical Systems. GE Healthcare markets and
sells a combined PET/ CT, which is the main competitor to the
PET/ CT manufactured by CPS. We also compete with Siemens in
certain locations in connection with the sale and distribution
of the PET scanners manufactured by CPS, as well as for service
and support business. Our competitors also include academic
institutions and other public and private research organizations
that conduct research, seek patent protection and establish
arrangements for commercializing products that compete with our
products. We are not as large a company as our primary
competitors in the PET equipment market, GE Healthcare 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
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
(acquired by GE Healthcare), Tyco, Cardinal Health and Ion Beam
Applications (and its subsidiary, Eastern Isotopes). The second
group consists of independent regional radiopharmacy companies
such as 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

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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 43 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 comprehensive
product line will help us to compete in the cyclotron market.

Sales and Marketing

Our sales and marketing efforts are focused on
two primary segments of the PET market. The first segment
includes hospitals, universities and other research
institutions. The second segment includes customers such as
freestanding imaging centers and cancer treatment centers, often
owned by physicians and other entrepreneurs, who we believe are
particularly well suited to benefit from our ability to offer a
complete, integrated line of PET products and services. In order
to effectively target each of these segments, CPS has a multiple
distributor strategy for scanners. Through CPS
distribution arrangement with Siemens and our Agency Agreement
with Siemens, we are able to leverage Siemens large sales
and marketing force to sell scanners to hospitals and research
institutions.

Our marketing and sales strategy emphasizes our
comprehensive line of PET-related products and services,
including PET scanners, radiopharmaceuticals, cyclotrons,
microPET® animal scanners, medical image analysis
applications, 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 comprehensive
provider for all PET related needs. To implement this strategy,
which we call the total solutions approach, sales
personnel from each of our business segments work together with
prospective customers to develop a customized package of
products and services.

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

For fiscal years 2004, 2003 and 2002, our
revenues from U.S. sales were $302.9 million,
$278.0 million and $197.7 million, respectively. For
fiscal years 2004, 2003 and 2002, our revenues from sales
outside the U.S. were $98.9 million,
$84.3 million and $60.7 million, respectively, and
substantially all of our long-lived assets, were located in the
United States. Sales to Siemens represented approximately 49.3%
of our consolidated revenues for the fiscal year ended
September 30, 2004. We have no other single third-party
customer that accounts for more than 10% of our sales.

Customer Service and Support

Due to the anticipated continuing growth in our
business, we continue to expand our customer service and support
staff. We maintain a network of approximately 130 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.

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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. We
offer a variety of post-warranty equipment service agreements
that permit customers to contract for the level of equipment
maintenance 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, 2004, we held 34 U.S. patents and
have 41 patent applications pending, which are generally related
to our PET scanners, cyclotrons and radiopharmaceutical
production. We believe it could take up to four years, and
possibly longer, for our pending U.S. patent applications
to result in issued patents. Certain technologies already
patented in the U.S. are either patented or subject to
pending patents in Europe, Canada and Japan. We have received
trademark registrations for CTI, ECAT,
REVEAL, MetaTrace, CPS
Innovations, microPET, and our logo. As we
develop brand names in the future we will seek trademark
protection where appropriate. We rely on trade secrets and other
unpatented proprietary information, which we attempt to protect
by entering into confidentiality agreements with certain
employees, consultants, suppliers, distributors, and other
partners. We also seek to control access to and distribution of
our documentation and other proprietary information.

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

Manufacturing

CPS assembles our ECAT® scanners and a full
line of PET/ CT tomographs, and we assemble cyclotrons and
microPET® animal scanners, from components manufactured by
us and components supplied to us by suppliers to whom we have
outsourced portions of our manufacturing process. For our
ECAT® scanners and microPET® animal scanners, the most
significant internal manufacturing process involves the
production of detector materials, which includes several
proprietary processes. 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 manufacture our LSO detector
material from a single source. We now hold more inventories of
this critical raw material to enable us to continue production
in the event of a disruption in supply. Although we have taken
actions to alleviate our dependence on our single source of
supply by holding these

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inventories, we cannot provide assurance that
these inventories will be sufficient to prevent interruption in
our production in the event of an extended disruption in our
single source of supply. Delays in or loss of supply from any of
our single source suppliers could disrupt our manufacturing
process or cause significant unanticipated costs in engaging
alternate suppliers, obtaining alternative components, or
incorporating alternative components into our production process.


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

Government Regulation

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



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

We are subject to licensing and regulation under
multiple federal and state laws, including laws relating to the
use and handling of radioactive materials and laws relating to
the operation of pharmacies. We also are required to register
with the appropriate state agencies our radioactive sealed
sources and each cyclotron that we own and operate. In addition,
some states require us to obtain a reciprocity license before
delivering products or servicing machines utilizing radioactive
materials in those states. The pharmacists operating in the
radiopharmacy 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 to 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

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statutes and regulations, govern, among other
things, the pre-clinical and clinical testing, design,
manufacture, safety, efficacy, labeling, storage, record keeping
and reporting, advertising and promotion of medical devices
and/or radiopharmaceuticals.


Devices.Generally,
before we can market a new medical device, we must obtain
marketing clearance through 510(k) premarket notification. The
FDA will typically grant a 510(k) clearance if we can establish
that the device is substantially equivalent to a predicate
device. The FDAs 510(k) clearance process for our devices
usually takes 90 days from the date the application is
submitted, but may take longer. 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.

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

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

In addition to granting marketing clearances for
our products, the FDA and international regulatory authorities
periodically inspect our facilities and operations. We must
comply with the host of regulatory requirements that apply to
medical devices marketed in the U.S. and internationally. These
requirements include labeling regulations, Quality System
Regulation manufacturing requirements, medical device reporting
regulations that require a manufacturer to report to the FDA
serious 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 constitute 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 agency inspections
of our facilities and operations over the past several years.

Radiopharmaceuticals.Our PET radiopharmaceutical imaging products currently are
produced and sold through our network of radiopharmacies. In the
United States, our radiopharmacies operate under applicable
state pharmacy licenses and compound PET products in response to
the prescription order of a licensed practitioner. The Food and
Drug Administration Modernization Act of 1997 (the 1997 Act)
authorized the production of PET products that conform to the
United States Pharmacopoeia

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(USP) positron emission tomography
compounding standards and the official monographs of the USP.
Under these terms, we are manufacturing and distributing several
PET products.


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

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

The language of the 1997 Act and FDA
pronouncements within the March 10, 2000 notice strongly
suggested that any FDA regulations pertaining to marketing
approval for PET products would apply to the compounded PET
products produced in our state-licensed radiopharmacies. Within
two years after FDAs new drug approval procedures and
current good manufacturing practice requirements for PET
products published, we would be able to submit to the FDA a new
drug application or abbreviated new drug application for our PET
products which would request 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 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 (including unit dose containers, multiple
containers, and pharmacy bulk packages), and these activities
would be subject to current good manufacturing practice.

Until FDA adopts final current good manufacturing
practice requirements for PET products, it is uncertain whether
any such requirements will have a material impact on our
radiopharmaceutical business. However, we may incur significant
costs in establishing and maintaining procedures and in
improving certain facilities to comply with these requirements.
Our failure to comply with agency requirements could result in
voluntary company recalls of product or FDA enforcement actions.
These actions include, but are not limited to, product seizure,
notice of violation or warning letters, fines, injunction and
injunction consent decrees, FDA refusal to grant approval of any
required new drug applications or abbreviated new drug
applications, 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.

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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
Center,in which we were not a party, held that the
prohibition on promotion and advertising violates the free
speech guarantees of the First Amendment. The U.S. Supreme
Court was not asked to rule on the appellate court decision that
the advertising restriction invalidates the entire pharmacy
compounding section of the 1997 Act. Notwithstanding this
advertising decision of the U.S. Supreme Court, FDA has
clearly evidenced its desire to regulate the practice of
pharmacy compounding, and in June 2002 reissued a Compliance
Policy Guide that describes the FDAs short-term policy on
pharmacy compounding. FDA is currently considering the long-term
implications of the U.S. Supreme Court decision. Any other
regulatory limitations not related to advertising restrictions
could adversely impact the operations of our radiopharmacies
with respect to the compounding of PET drug products in general
or of specific PET radiopharmaceuticals.



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

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

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

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

We must also obtain European marketing approval
for our radiopharmaceuticals sold in Europe. We have obtained
approval in the United Kingdom from the Medicines and Health
Care Products Registry Agency (MHRA) to produce and
distribute FDG in England from our Mount Vernon facility under a
Specials License. In the future, we will submit a
Common Technical Document (CTD) to support full product
marketing authorization of FDG in the United Kingdom.
Subsequently, through the process of mutual recognition of the
UK Marketing Authorization, we will gain marketing authorization
of FDG in other European Union nations. Additional costs and
expenditures of time in obtaining any required European or other
international approvals could have a material adverse effect on
our business, financial condition, and results of operations.



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

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

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




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

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

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

All third-party reimbursement programs, whether
government funded or insured commercially, whether inside the
U.S. or outside, are developing increasingly sophisticated
methods of controlling health care costs through prospective
reimbursement and capitation programs, prior authorization of
procedures, group purchasing, redesign of benefits, requiring
second opinions prior to major surgery, careful review of bills,
encouragement of healthier lifestyles and exploration of more
cost-effective methods of delivering health care. In August
2000, CMS implemented the Hospital Outpatient Prospective
Payment System (HOPPS) in an effort to control costs to the
Medicare program. HOPPS 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 HOPPS, 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 HOPPS made by CMS, some of the
radiopharmaceuticals we sell currently are no longer eligible
for pass-through payments. Instead, CMS has incorporated these
products into ambulatory payment classifications. It is expected
that CMS will continue to refine HOPPS as it collects more data
on various reimbursable items and services. We cannot predict
what impact the forthcoming changes in payments under HOPPS 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.

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

On April 16, 2003, CMS announced that it
affirmed its prior non-coverage decision of the application of
PET to Alzheimers disease, saying that the clinical
benefit of PET has not yet been demonstrated. However, CMS
announced two special efforts to help determine the potential of
PET for Alzheimers disease. A demonstration will be
designed to evaluate the appropriate role of PET in patients
with suspected dementia and CMS will work with the National
Institutes of Heath to convene a multidisciplinary expert
meeting with geriatricians, neurologists, radiologists, PET
experts and patient advocates to fully explore the value of PET
for Alzheimers disease. The CMS decision was consistent
with our expectation that gaining reimbursement approval for
Alzheimers disease will take some time. On August 14,
2003, a new and more restrictive coverage request for the use of
PET in the diagnosis of mild to moderate Alzheimers
disease was filed with CMS. On October 7, 2003, CMS
formally accepted this request and on June 5, 2004
announced a national coverage decision to provide Medicare
coverage of PET scans to aid physicians in the early diagnosis
of Alzheimers and to help differentiate Alzheimers
from other neurological disorders. The coverage decision
authorized Medicare payment for PET scans when certain criteria
are met.

On November 1, 2004, CMS announced a
proposal to expand coverage for PET scans as part of a broader
initiative to improve care for cancer patients. In the draft
decision memo, the CMS proposes to expand coverage of PET scans
for cervical cancer for the detection of pre-treatment
metastases in newly diagnosed cervical cancer subsequent to
negative conventional imaging and proposes to issue a
national coverage determination (NCD) for this indication.

On November 3, 2004, CMS announced that
effective January 1, 2005 that it will lower the technical
fee for the use of a PET scanner from $1,450 to $1,150 and the
payment rate for the administration of FDG from $324 to $221.
The reimbursement rate changes only apply to hospital
based-outpatient PET procedures, and not to PET scans covered by
private insurance or by Medicare under the physician fee
schedule, which is set on a state-by-state basis by regional
Medicare intermediaries. However, over time it is anticipated
that the other payors will also lower current reimbursement
rates for PET procedures.



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

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

The Anti-Kickback Law is broad, and it prohibits
many arrangements and practices that are lawful in businesses
outside of the health care industry. Recognizing that the
Anti-Kickback Law is broad and may technically prohibit many
innocuous or beneficial arrangements within the health care
industry, the U.S. Department of Health and Human Services
(HHS) has issued a series of regulations, known as the
safe harbors. These regulations set forth certain
safe harbors which, if all applicable requirements are met, can
protect health care providers and other parties from being
prosecuted under the Anti-Kickback Law. Although full compliance
with all applicable safe harbors can provide protection against
prosecution under the Anti-Kickback Law, the failure of a
transaction or arrangement to fit within one or more safe
harbors does not necessarily mean that the transaction or
arrangement is illegal or that prosecution under

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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 federal and state laws constrain the sales,
marketing and other promotional activities of manufacturers of
medical devices, such as us, by limiting the kinds of financial
arrangements (including sales programs) we may have with
hospitals, physicians, imaging centers, and other potential
purchasers of medical devices. We have in place formal policies
related to compliant marketing practices. These laws are also
implicated by a manufacturers compensation or ownership
arrangements with customers (or physicians in a position to
recommend the purchase of a manufacturers products). We
have various types of compensation arrangements with customers
and physicians, including consulting agreements, research and
development agreements, and lease agreements. Furthermore, we
have certain joint venture arrangements with customers to
establish and operate our 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
radiopharmaceutical 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. We have not requested
advisory opinions from the OIG or any other governmental entity.

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

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



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

Congress has also passed significant prohibitions
against certain physician referrals of patients for health care
services. The Stark Law prohibits a physician from making
referrals for particular health care services (called designated
health services) to entities with which the physician, or an
immediate family

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member of the physician, has a financial
relationship. If an arrangement is covered by the Stark Law, the
requirements of a Stark Law exception must be met for the
physician to be able to make referrals to the entity for
designated health services.


The Stark Law also prohibits the entity receiving
the referral from seeking payment under the Medicare and
Medicaid programs for services rendered pursuant to a prohibited
referral.

The term financial relationship is
defined very broadly to include most types of direct or indirect
ownership or compensation relationships. We have various
compensation arrangements with physicians, including consulting
agreements, research and development agreements, and lease
agreements. Also, we have a number of joint venture arrangements
to establish and operate radiopharmacies. In connection with
these different arrangements certain physicians have financial
relationships with us under the Stark Law. Accordingly, these
physicians would not be able to refer patients to us for
designated health services unless a Stark Law exception applies.

The definition of designated health
services includes (among other things) radiology
services, including magnetic resonance imaging, computerized
axial tomography and ultrasound services. The
Stark II Phase II regulations exclude from the
definition of covered designated health services nuclear
medicine procedures. The regulations also provided a
specific list of reimbursement codes included in this DHS
category. This list currently does not include the common
reimbursement codes for nuclear medicine services. Therefore, we
believe that the exclusion for nuclear medicine
procedures currently covers the equipment and services we
provide. However, the regulatory exclusion and DHS Code List are
subject to change.

HHS issued the Stark II Phase II
interim final regulations on March 26, 2004, and made
no changes to the treatment of nuclear medicine procedures
under the DHS definitions noted above. However, the
preamble discussion accompanying the regulations notes that
several commenters had requested that nuclear medicine not be
excluded from the definition of DHS and indicates that HHS will
continue to consider the application of the Stark Law to nuclear
medicine. If the nuclear medicine exclusion were removed and
reimbursement codes associated with nuclear medicine were
included in the Code List, then our nuclear medicine services
and supplies would be included under the definition of
designated health services and would be subject to the Stark Law
unless an exception applies.

Additionally, the definition of designated
health services includes (among other things)
inpatient and outpatient hospital services which are
subject to the Stark Law. The Stark II Phase I
preamble notes that even though certain services may be excluded
from the designated health services category noted above, any
services meeting the definition of inpatient and
outpatient hospital services also may be considered a
designated health service subject to the referral prohibition
contained in the Stark Law. In connection with certain of our
joint ventures with hospitals, it is possible that those
ventures would involve inpatient or outpatient hospital
services. While we believe we have structured those
ventures appropriately so that the Stark law prohibitions would
not affect referrals by physicians to those ventures, we cannot
provide assurance that those relationships would not be
determined to be affected by the Stark Law.

If the Stark Law applies to the relationships
between referring physicians and us, there are exceptions to the
Stark Law which, if certain requirements are met, would permit
those physicians to refer patients to us for designated health
services. We believe that our compensation and joint venture
arrangements with physicians who refer to us would meet or could
be restructured to meet the requirements for an exception under
the Stark Law.

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

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repay amounts received from Medicare for those
services and could be subject to civil monetary penalties. If we
were required to repay amounts to Medicare or were subject to
fines, the Company could be harmed.


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



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

The Health Insurance Portability and
Accountability Act of 1996 (HIPAA) established several
requirements regarding the privacy, security and transmission of
health information. HHS has issued several sets of regulations
under HIPAA that apply directly to health care providers who
conduct certain health claims transactions electronically, and
to health plans, and health care clearinghouses, as well as
indirectly, in certain instances, to those who provide services
on behalf of these entities which involve the receipt or
disclosure of health information. Our employee health plan will
be subject to the HIPAA regulations.

Pursuant to HIPAA, HHS issued final privacy
regulations establishing comprehensive federal standards
relating to the use and disclosure of protected health
information. These regulations, among other things, establish
limits on the use and disclosure of protected health
information, provide for patients rights to access,
request amendments, and receive an accounting of certain
disclosures of protected health information, and require covered
health entities to implement certain safeguards to protect
identifiable health information. The federal privacy regulations
do not supersede state privacy laws that are more stringent,
requiring compliance by a covered entity with state laws in
addition to the federal regulations.

Covered entities are required to be in compliance
with the HIPAA security regulations by April 21, 2005. The
security regulations establish the 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 and security regulations are
punishable by civil and criminal penalties. State laws may
impose similar sanctions.

HHS also issued final electronic transaction
standards for the processing of health claims, which establish
uniform standards relating to data reporting, formatting, and
coding that covered entities must use in conducting certain
health care transactions electronically. 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. Violations of the electronic
transactions standards are punishable by civil penalties.

Although we may be considered a health care
provider under the HIPAA regulations, we do not conduct any of
the covered health care transactions electronically and,
therefore, we believe that we are not a covered entity under the
HIPAA regulations, outside of our health plan. However, we
provide health care devices and services to many covered
entities and in connection with some of those relationships, we
have entered into business associate agreements under which we
agree to provide certain protections for identifiable health
information that we receive from those covered entities. If we
were determined to be a covered entity under those regulations,
the HIPAA privacy, security and transaction standards
regulations could result in significant financial obligations
for us and would 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 if we were determined to be a covered entity.
However, the HIPAA regulations could have a significant impact
on us operationally and financially.

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Employees

As of September 30, 2004, we employed
directly and through our subsidiaries 963 people. Of these 963
people, 219 work in CPS, 59 work in Detector Materials, 542 work
in CTI Solutions (radiopharmaceuticals, scanner service,
cyclotrons, microPET® animal scanners, and other
businesses), and the remaining 143 work in various
administrative functions supporting all of these businesses.
None of our employees is subject to a collective bargaining
agreement. We consider our relationships with our employees to
be good.

Available Information

Our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 are available through our website (www.ctimi.com)under the Investor Relations caption free of
charge as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the Securities and
Exchange Commission (SEC). All filings are also available
electronically at www.sec.gov or by mail at SEC Headquarters,
Office of Investor Education and Assistance, 450 Fifth
Street, NW, Washington DC 20549. We are not including the
information on our website as a part of, nor incorporating it by
reference into, this Form 10-K.






|        |           
|------- | ----------
|Item 2. | Properties

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

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

We currently lease space for 33 radiopharmacies
throughout the U.S., primarily located in major metropolitan
areas. Four of these leased properties are locations for future
radiopharmacies. We operate 14 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 radiopharmacies located in the United Kingdom and South
Korea.

CTI Solutions has offices in Europe that house
sales and service personnel who provide support for cyclotrons,
microPET® animal scanners, sources, and medical image
analysis applications sold in Europe. Our CTI Solutions segment
uses these facilities.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

On January 30, 2004, the University of
Pittsburgh (Pitt) filed suit in the U.S. Western District
of Pennsylvania, Civil Action No. 04-0127, against
Dr. David Townsend, Dr. Ronald Nutt, CTI and CPS
alleging that Pitt has an ownership interest in the intellectual
property associated with the PET/ CT system manufactured and
sold by CPS. Under a variety of causes of action, the relief
sought by Pitt in the complaint is a declaration of Pitts
ownership rights, injunctive relief against disclosure and
transfer of the intellectual property, actual and punitive
damages, and attorneys fees. Based on the results of the
Companys investigation, which is continuing, the Company
intends to vigorously defend against Pitts claim of an
ownership interest in these patents or in any other intellectual
property used in the PET/ CT system manufactured and sold by
CPS, or that Pitt has any right to a share of the profits earned
from the sale of PET/ CT systems. On June 30, 2004, the
District Court for the Western District of Pennsylvania entered
an order transferring the case to the District Court for the
Eastern District of Tennessee. We deny

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liability and intend to vigorously defend this
suit; however, given the uncertainties inherent in the
litigation process, we are unable to predict the ultimate
outcome of this suit.


Crystal Photonics, Inc. (CPI) filed for
arbitration against CTI under the rules of the American
Arbitration Association, alleging wrongful termination of a
Crystal Production and Technology Transfer Agreement between CTI
and CPI and asserting unauthorized use and wrongful transfer to
third parties of CPIs technology and failure to purchase
LSO crystal materials manufactured by CPI. CTI asserted
counterclaims to recover certain overpayments under the
agreement. After an arbitration hearing was conducted, the
arbitrator issued an award on August 25, 2004 in favor of
CPI on its claims and against CTI on its counterclaims.
CTIs motion for reconsideration of this award was denied
on September 14, 2004 and CTI was required by the
arbitrator to pay an aggregate of approximately
$4.2 million to CPI for damages and purchases of LSO
products.

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, 2004.




PART II






|        |                                                                                                                      
|------- | ---------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity,
    Related Stockholder Matters, and Issuer Purchases of Equity
    Securities

Price Range of Common Stock

The Companys Common Stock has been traded
on the Nasdaq National Market (Nasdaq symbol: CTMI) since
June 21, 2002. The following table sets forth the high and
low sales prices as reported on the Nasdaq National Market for
quarter ends during our 2004 and 2003 fiscal years.

|                   |  |      |       |     |  |   |       | 
|------------------ |  | ---- | ----- | --- |  | - | ----- | 
|Quarter Ended      |  | High |       | Low
|                   |  |      |       |    
|December 31, 2002  |  | $    | 27.70 |     |  | $ | 21.30 | 
|March 31, 2003     |  | $    | 26.34 |     |  | $ | 16.22 | 
|June 30, 2003      |  | $    | 20.13 |     |  | $ | 16.26 | 
|September 30, 2003 |  | $    | 17.90 |     |  | $ | 12.80 | 
|December 31, 2003  |  | $    | 16.91 |     |  | $ | 12.88 | 
|March 31, 2004     |  | $    | 18.12 |     |  | $ | 14.49 | 
|June 30, 2004      |  | $    | 16.01 |     |  | $ | 13.38 | 
|September 30, 2004 |  | $    | 14.02 |     |  | $ | 8.02  | 

Holders

The number of record holders of the
Companys Common Stock at December 1, 2004 was 140,
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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Securities Authorized for Issuance Under
Equity Compensation Plans

The following table summarizes our equity
compensation plans as of September 30, 2004:

|                                                           |  |                      |           |                      |  |                           |       |  |  |  |           |    
|---------------------------------------------------------- |  | -------------------- | --------- | -------------------- |  | ------------------------- | ----- |  |  |  | --------- | ---
|                                                           |  |                      |           |                      |  | Number of Shares         
|                                                           |  | Number of Shares     |           |                      |  | Remaining Available for  
|                                                           |  | to be Issued         |           | Weighted-Average     |  | Future Issuance Under    
|                                                           |  | Upon Exercise of     |           | Exercise Price of    |  | Equity Compensation Plans
|                                                           |  | Outstanding Options, |           | Outstanding Options, |  | (Excluding Securities    
|                                                           |  | Warrants, and Rights |           | Warrants and Rights  |  | Reflected in Column (a)) 
|Plan Category                                              |  | (a)                  |           | (b)                  |  | (c)                      
|                                                           |  |                      |           |                      |  |                          
|Equity Compensation plans approved by stockholders         |  |                      | 3,780,256 |                      |  | $                         | 10.34 |  |  |  | 1,696,469 | (1)
|Equity Compensation plans not approved by
    stockholders |  |                      | 418,362   | (2)                  |  | $                         | 5.31  |  |  |  |          |    
|                                                           |  |                      |           |                      |  |                           |       |  |  |  |           |    
|Total                                                      |  |                      | 4,198,618 |                      |  | $                         | 9.84  |  |  |  | 1,696,469 |    
|                                                           |  |                      |           |                      |  |                           |       |  |  |  |           |    



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes up to 212,485 shares that may be
    granted as awards of restricted stock, performance shares or
    unrestricted stock under the 2002 Long-Term Incentive Plan.                                                                                                                                                                                                                                                                             
|   
|(2) | Includes warrants to acquire 76,000 shares
    issued in connection with the execution of a consulting
    agreement and 342,362 options issued outside of our 1998 Amended
    and Restated Incentive Stock Option Plan to certain non-employee
    advisors and consultants. See Stock Options, Warrants and
    Restricted Stock in note 9 of the notes to our
    consolidated financial statements appearing elsewhere in this
    annual report

Sales of Unregistered Securities

During the year ended September 30, 2004, we
did not sell any unregistered securities except, as disclosed in
our Quarterly Report on Form 10-Q for our fiscal quarter
ended June 30, 2004. We issued on June 30, 2004 an
aggregate of 1,480,465 shares of our common stock to
Concorde Microsystems, Inc., a Tennessee corporation (CMSI) as
part of the consideration for the purchase of substantially all
of the business, assets, and liabilities of CMSI. The acquired
business, assets, and liabilities were contributed to our
subsidiary Concorde, which was organized to continue the
operation of the acquired business. The shares issued to CMSI
were issued in reliance on the exemption from registration set
forth in Section 4(2) of the Securities Act of 1933, as
amended, because the issuance did not involve any public
offering.

Use of Offering Proceeds

The Registration Statement on Form S-1 (SEC
File No. 333-85714) for our initial public offering was
declared effective on June 20, 2002, and on
June  26, 2002 we closed the initial public offering
of our common stock. The net offering proceeds received by us,
after deducting underwriting discounts and commissions and
estimated offering expenses of approximately $16.0 million
was approximately $171.4 million. As of September 30,
2004, $10.2 million of the net offering proceeds had been
used to redeem all of our Series A Redeemable Preferred
Stock, including all accrued dividends, $0.3 million of the
net offering proceeds had been used to redeem
1,191,165 shares of our common stock, approximately
$62.0 million of the net offering proceeds had been used to
decrease our outstanding balance under our credit facility,
approximately $14.5 million had been used to extinguish
capital lease obligations, and $11.4 million was used to
repay our construction loan and our mortgage loan agreement. In
addition, approximately $40.1 million was used for the
acquisitions of CMSIs assets, in June 2004 and Mirada in
August 2003. The balance of the net offering proceeds have been
invested in highly liquid instruments, such as commercial paper
and U.S. government obligations, with an average maturity
of twelve months or less.

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Issuer Purchases of Equity
Securities

We made no repurchases of our equity securities
within the quarter ended September 30, 2004.






|        |                        
|------- | -----------------------
|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,                  
|                                               |                                                  |                                                   
|                                               |                                                  | 2004                                               |         | 2003       |  | 2002 |         | 2001       |  | 2000
|                                               |                                                  |                                                    |         |            |  |      |         |            |  |     
|                                               |                                                  |                                                   
|                                               |                                                  | (In thousands, except share and per share amounts)
|Consolidated Statement of Operations
    Data: |                                                  |                                                    |         |            |  |      |         |            |  |      |         |            |   |   |         |            |  |   |         |           
|Net revenue                                    |                                                  | $                                                  | 401,748 |            |  | $    | 362,289 |            |  | $    | 258,395 |            |   | $ | 188,877 |            |  | $ | 124,026 |           
|Costs and expenses                             |                                                  |                                                    |         |            |  |      |         |            |  |      |         |            |   |   |         |            |  |   |         |           
|                                               | Cost of revenues                                 |                                                    |         | 242,804    |  |      |         | 219,127    |  |      |         | 150,654    |   |   |         | 110,249    |  |   |         | 68,372     | 
|                                               | Selling, general and administrative expenses     |                                                    |         | 65,047     |  |      |         | 52,221     |  |      |         | 37,069     |   |   |         | 29,433     |  |   |         | 21,751     | 
|                                               | Research and development expenses                |                                                    |         | 33,363     |  |      |         | 29,931     |  |      |         | 21,658     |   |   |         | 18,985     |  |   |         | 14,845     | 
|                                               | Write-off of in process research and development |                                                    |         |           |  |      |         | 1,380      |  |      |         |           |   |   |         |           |  |   |         |           | 
|                                               | Stock-based compensation expenses                |                                                    |         | 2,530      |  |      |         | 1,909      |  |      |         | 12,250     |   |   |         | 538        |  |   |         | 503        | 
|Income from operations                         |                                                  |                                                    | 58,004  |            |  |      | 57,721  |            |  |      | 36,764  |            |   |   | 29,672  |            |  |   | 18,555  |           
|Warrant liability mark to market expense       |                                                  |                                                    |        |            |  |      |        |            |  |      | 8,902   |            |   |   | 3,921   |            |  |   | 3,174   |           
|Interest expense, net                          |                                                  |                                                    | 1,375   |            |  |      | 804     |            |  |      | 4,148   |            |   |   | 3,767   |            |  |   | 2,300   |           
|Provision for income taxes                     |                                                  |                                                    | 21,918  |            |  |      | 22,935  |            |  |      | 14,590  |            |   |   | 9,930   |            |  |   | 3,875   |           
|Minority interest expense                      |                                                  |                                                    | 16,676  |            |  |      | 15,387  |            |  |      | 12,969  |            |   |   | 6,366   |            |  |   | 4,453   |           
|Net income (loss)                              |                                                  |                                                    | 18,620  |            |  |      | 20,563  |            |  |      | (3,419  | )          |   |   | 6,116   |            |  |   | 4,378   |           
|Earnings (loss) per common share:              |                                                  |                                                    |         |            |  |      |         |            |  |      |         |            |   |   |         |            |  |   |         |           
|                                               | Basic                                            |                                                    | $       | 0.42       |  |      | $       | 0.47       |  |      | $       | (0.25      | ) |   | $       | 0.15       |  |   | $       | 0.10       | 
|                                               | Diluted                                          |                                                    | $       | 0.40       |  |      | $       | 0.44       |  |      | $       | (0.25      | ) |   | $       | 0.13       |  |   | $       | 0.09       | 
|Weighted average shares outstanding:           |                                                  |                                                    |         |            |  |      |         |            |  |      |         |            |   |   |         |            |  |   |         |           
|                                               | Basic                                            |                                                    |         | 44,673,893 |  |      |         | 43,351,390 |  |      |         | 32,497,070 |   |   |         | 27,860,086 |  |   |         | 25,243,051 | 
|                                               | Diluted                                          |                                                    |         | 46,774,504 |  |      |         | 46,457,355 |  |      |         | 32,497,070 |   |   |         | 31,340,041 |  |   |         | 28,440,078 | 

|                                       |  |                     |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|-------------------------------------- |  | ------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                       |  |                    
|                                       |  | As of September 30,
|                                       |  |                    
|                                       |  | 2004                |         | 2003 |  | 2002 |         | 2001 |  | 2000
|                                       |  |                     |         |      |  |      |         |      |  |     
|Balance Sheet Data:                    |  |                     |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Total assets                           |  | $                   | 465,214 |      |  | $    | 425,048 |      |  | $    | 351,709 |  |  | $ | 207,781 |  |  | $ | 143,041 | 
|Long-term debt and capital leases      |  |                     | 17,145  |      |  |      | 18,688  |      |  |      | 26,730  |  |  |   | 73,122  |  |  |   | 36,878  | 
|Redeemable preferred stock             |  |                     |        |      |  |      |        |      |  |      |        |  |  |   | 7,740   |  |  |   | 7,397   | 
|Convertible redeemable preferred stock |  |                     |        |      |  |      |        |      |  |      |        |  |  |   | 5,040   |  |  |   | 4,230   | 
|Stockholders equity                   |  | $                   | 307,052 |      |  | $    | 259,853 |      |  | $    | 219,489 |  |  | $ | 24,157  |  |  | $ | 8,110   | 

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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 Risk
Factors. See also the Cautionary Notice Regarding
Forward-Looking Statements set forth at the beginning of
this report.

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

Overview

We are a leading manufacturer of positron
emission tomography imaging equipment and related products used
in the detection and treatment of cancer, neurological disorders
and cardiac disease. 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 PET and PET/ CT
scanners, cyclotrons, microPET® animal scanners, detector
materials, radiopharmaceuticals, medical imaging analysis
applications and related support services.

Historically, the majority of our consolidated
revenues, gross margin and net income have been attributable to
CTI PET Systems, Inc., doing business as CPS Innovations (CPS).
Our strategy includes plans for growing our other segments over
time with a goal of having a significant portion of our gross
revenues and net income being derived from such other segments
by the second half of fiscal year 2006, which is when we
presently anticipate that Siemens Medical Solutions USA, Inc.
(Siemens), a wholly owned subsidiary of Siemens AG, could first
announce its intentions to exercise its option to purchase a
controlling interest in CPS. This strategy contemplates the
following initiatives: (1) expansion of our
radiopharmaceutical distribution network to meet market needs;
(2) development of new proprietary radiopharmaceuticals;
(3) acquisition of complimentary PET-related products and
services; and (4) growth of our service contract business.

Late in the third quarter of fiscal year 2004, we
observed that the rate of unit growth in the PET and PET/ CT
market had slowed considerably from historic growth rates;
however, our most recent projections for fiscal year 2005
indicate a stable domestic market and escalating growth in
international shipments.

We expect the demand for PET products and
services to grow as more indications are approved for
reimbursements. However, it is also reasonable to expect
reimbursement rates to decline over time, as PET becomes more
widely adopted, which could also affect the demand for our
products and services.

Management expects its closer collaboration with
Siemens following the execution of the Sales Agency and Services
Agreement, effective May 1, 2004, to enable the Company to
avoid the substantial costs of the direct scanner distribution
business.

Segments

Effective October 1, 2003 we operate in
three segments for financial reporting purposes: CPS; Detector
Materials, and CTI Solutions. CTI Solutions reflects the
combination of the former PETNET and CTI Services segments which
previously were reported separately. All comparative financial
information for fiscal years 2003 and 2002 have been
retroactively reclassified to reflect the new reporting
structure.

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| |    
| | ---
| | CPS

Our CPS segment includes the development,
production and sale of PET and PET/ CT scanners. We conduct this
business through our subsidiary, CPS, which was formed in 1987
as a joint venture with Siemens. We own 50.1% of CPS and Siemens
owns the remaining 49.9%.

From 1987 until April 2001, the products of CPS
were distributed exclusively by Siemens. In April 2001 we
implemented a multiple distributor strategy for CPS by pursuing
additional third-party distributor agreements. In November 2001
CPS added Hitachi Medical Systems America, Inc. as a third-party
distributor of its products, and in October 2003 we added
Toshiba Medical Systems as a third-party distributor of
CPS products in Japan. Under these agreements, CPS sets
the price to distributors who set their own prices to end
customers. CPS does not bear credit risk associated with sales
made by the distributor to end customers. Effective May 1,
2004, CTI, CPS and Siemens entered into a new Sales Agency and
Service Agreement, as discussed below.

The scanners manufactured by CPS have
historically ranged in customer price from $0.6 million to
$2.3 million and offer customers a broad range of scan
times, resolution and image quality.



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

Our Detector Materials segment includes our
business of developing, manufacturing and selling detector
materials for use in PET scanners. The Detector Materials
segment has certain exclusive rights to the development and
manufacturing of a detector material called lutetium
oxyorthosilicate, or LSO. We obtained an exclusive license from
Schlumberger Technology Corporation with respect to LSO in
February 1995. The rights terminate upon the expiration of
Schlumbergers patents for LSO, which are expected to
expire in October 2008. We have invested significant capital in
our Detector Materials segment to develop LSO in order to meet
an expected increase in demand for detector materials as the PET
market continues to grow.



| |              
| | -------------
| | CTI Solutions

Our CTI Solutions segment includes CTIs
direct distribution of PET and PET/ CT scanners manufactured by
CPS; the manufacture, sale and installation of cyclotrons,
microPET® animal scanners, medical image analysis
applications, calibration sources; and CTIs product
service division. The CTI Solutions segment also consists of our
business of developing, manufacturing and distributing
radiopharmaceuticals as well as providing certain PET-related
services such as reimbursement education, radiation safety
consulting, licensure assistance and marketing assistance.

We currently operate 41 radiopharmacies in
the U.S., 1 radiopharmacy in the United Kingdom and
1 radiopharmacy in South Korea. Fourteen 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.

Components of Revenues and Expenses



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

Our revenue is derived primarily from sales of
PET and PET/ CT products and services. Revenues for scanners,
detector materials, radiopharmaceuticals, microPET® animal
scanners, calibration sources and spare parts are recognized
when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or 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 CPS and,
therefore, is eliminated in consolidation for financial
reporting purposes. Effective July 1, 2003, in conjunction
with the implementation of Emerging Issues

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Task Force (EITF) Issue 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables(EITF 00-21), revenue for cyclotron
systems is recognized upon delivery with amounts attributable to
installation of the systems deferred until services are
performed. Revenue for service contracts is recognized ratably
over the period the service is provided.




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

Our scanners, cyclotrons, microPET® animal
scanners, detector materials, calibration sources and spare
parts are manufactured at our facilities in Knoxville and
Rockford, Tennessee. Our radiopharmaceuticals are manufactured
at 43 radiopharmacies. We employ a network of 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;
amortization of acquired technology 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, benefits 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.

New Agreement with Siemens

Effective May 1, 2004, CTI and CPS entered
into a Sales Agency and Services Agreement with Siemens (the
Agency Agreement), pursuant to which Siemens appointed CTI as
Siemens non-exclusive sales representative to solicit
purchases of CPS-manufactured PET and PET/ CT scanners
throughout the United States, on terms and conditions and at
prices determined by Siemens and subject to acceptance by
Siemens. CPS products sold by CTI as Siemens sales
representative are marketed and sold under the Siemens brand. In
connection with this arrangement, Siemens reimburses CTI for all
directly related sales and marketing expenses, up to
$10.0 million annually. During the year ended
September 30, 2004, CTI recorded $4.0 million of
revenue for the reimbursement of sales and marketing expenses.

Service contracts entered into in connection with
new or used scanner sales in the United States will be divided
equally between CTI and Siemens in terms of revenue. Siemens and
CTI remain free to independently pursue sales of service
contracts to the installed base of CPS scanner customers.

During the term of the Agency Agreement, CTI
agreed to cease its sales and service of PET and PET/ CT
scanners in international markets, except in South Korea and
Japan. All existing scanner service contracts in international
markets other than South Korea and Japan were assigned to
Siemens. During the term of the Agency Agreement, CTI has agreed
not to enter or re-enter any international market to sell or
service PET or PET/ CT scanners, except that CTI may continue to
pursue its existing business model in South Korea and may retain
its existing distribution agreement in Japan. In exchange for
the assignment of the international service contracts, the
covenant not to compete in the United States and international
markets other than South Korea and Japan, certain price
reductions for detector materials including on international
scanner sales, and as compensation for the cost of closing
certain international

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operations, Siemens paid CTI $2.2 million.
CTI recognized $1.1 million as revenue during the year
ended September 30, 2004, in association with the
assignment of international service contracts. The remaining
amount is being amortized over the two-year term of the
agreement concurrent with our LSO price reduction and
non-compete commitments. During the year ended
September 30, 2004 $0.2 million of this remaining
amount was amortized into earnings.


Under the Agency Agreement, Siemens serves as
CTIs non-exclusive representative to offer for sale
products manufactured by CTI and its subsidiaries to
Siemens customers. Subject to the expiration or
termination of any existing agreements for the provision of
cyclotrons or radiopharmaceuticals to Siemens customers,
Siemens agreed to offer exclusively CTIs cyclotrons,
radiopharmaceuticals and calibration sources for sale to
Siemens customers.

The parties also agreed to certain changes in
transfer prices charged to and received from CPS. Siemens and
CTI have reduced the transfer prices for CT components and LSO
detector materials, respectively, sold to CPS. These price
reductions are being passed on, dollar-for-dollar, in the form
of lower transfer prices on scanners sold by CPS to Siemens. CPS
agreed to a second round of transfer price reductions on
scanners sold to Siemens, which are expected to become effective
during the second quarter of fiscal year 2005.

The initial term of the Agency Agreement is two
years commencing May 1, 2004, and the term will be extended
automatically for additional one-year periods unless either
party provides written notice, as required, of its election not
to renew. In the event the Agency Agreement is terminated or not
renewed by Siemens for any reason, CTI has the right to resume
distribution of PET and PET/ CT scanners in competition with
Siemens. The Agency Agreement also provides that CTI can
terminate this agreement under certain specified circumstances,
including the event that certain total unit sales thresholds for
PET and PET/ CT scanners are not met for a period of two
consecutive fiscal quarters.

Siemens also executed an agreement with Mirada,
under which Siemens pays Mirada a fee to install Miradas
image-fusion software on every workstation sold worldwide with a
Siemens branded PET or PET/ CT scanner.

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,
|                  |                           |                         
|                  |                           | 2004                     |   | 2003   |       | 2002
|                  |                           |                          |   |        |       |     
|Revenues:         |                           |                          |   |        |       |      |   |        |       |  |   |      
|                  | CPS                       |                          | $ | 266.8  |       |      | $ | 247.7  |       |  | $ | 189.0 |      
|                  | Detector materials        |                          |   | 47.1   |       |      |   | 55.2   |       |  |   | 29.2  |      
|                  | CTI Solutions             |                          |   | 196.2  |       |      |   | 192.8  |       |  |   | 112.5 |      
|                  | Intercompany eliminations |                          |   | (108.4 | )     |      |   | (133.4 | )     |  |   | (72.3 | )    
|                  |                           |                          |   |        |       |      |   |        |       |  |   |      
|                  |                           | Total                    |   |        | 401.7 |      |   |        | 362.3 |  |   |       | 258.4 | 
|                  |                           |                          |   |        |       |      |   |        |       |  |   |      
|Cost of revenues: |                           |                          |   |        |       |      |   |        |       |  |   |      
|                  | CPS                       |                          |   | 180.9  |       |      |   | 167.9  |       |  |   | 118.8 |      
|                  | Detector materials        |                          |   | 22.9   |       |      |   | 26.1   |       |  |   | 18.4  |      
|                  | CTI Solutions             |                          |   | 148.2  |       |      |   | 155.4  |       |  |   | 81.5  |      
|                  | Intercompany eliminations |                          |   | (109.2 | )     |      |   | (130.3 | )     |  |   | (68.1 | )    
|                  |                           |                          |   |        |       |      |   |        |       |  |   |      
|                  |                           | Total                    |   |        | 242.8 |      |   |        | 219.1 |  |   |       | 150.6 | 
|                  |                           |                          |   |        |       |      |   |        |       |  |   |      

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|                                                      |                    |                          |  |       |      |      |  |      |      |  |  |      |      | 
|----------------------------------------------------- | ------------------ | ------------------------ |  | ----- | ---- | ---- |  | ---- | ---- |  |  | ---- | ---- | 
|                                                      |                    |                         
|                                                      |                    | Year Ended September 30,
|                                                      |                    |                         
|                                                      |                    | 2004                     |  | 2003  |      | 2002
|                                                      |                    |                          |  |       |      |     
|Selling, general and administrative
    expenses:     |                    |                          |  |       |      |      |  |      |      |  |  |     
|                                                      | CPS                |                          |  | 15.0  |      |      |  | 11.8 |      |  |  | 10.8 |     
|                                                      | Detector materials |                          |  | 3.6   |      |      |  | 2.3  |      |  |  | 1.2  |     
|                                                      | CTI Solutions      |                          |  | 45.2  |      |      |  | 37.0 |      |  |  | 24.0 |     
|                                                      | Corporate          |                          |  | 1.2   |      |      |  | 1.1  |      |  |  | 1.1  |     
|                                                      |                    |                          |  |       |      |      |  |      |      |  |  |     
|                                                      |                    | Total                    |  |       | 65.0 |      |  |      | 52.2 |  |  |      | 37.1 | 
|                                                      |                    |                          |  |       |      |      |  |      |      |  |  |     
|Research and development expenses:                    |                    |                          |  |       |      |      |  |      |      |  |  |     
|                                                      | CPS                |                          |  | 20.1  |      |      |  | 19.7 |      |  |  | 15.7 |     
|                                                      | Detector materials |                          |  | 0.8   |      |      |  | 0.9  |      |  |  | 1.0  |     
|                                                      | CTI Solutions      |                          |  | 12.9  |      |      |  | 9.1  |      |  |  | 5.0  |     
|                                                      | Corporate          |                          |  | (0.4  | )    |      |  | 0.2  |      |  |  |     |     
|                                                      |                    |                          |  |       |      |      |  |      |      |  |  |     
|                                                      |                    | Total                    |  |       | 33.4 |      |  |      | 29.9 |  |  |      | 21.7 | 
|                                                      |                    |                          |  |       |      |      |  |      |      |  |  |     
|Write-off of in process research and
    development: |                    |                          |  |       |      |      |  |      |      |  |  |     
|                                                      | Corporate          |                          |  |      |      |      |  | 1.4  |      |  |  |     |     
|Stock-based compensation:                             |                    |                          |  |       |      |      |  |      |      |  |  |     
|                                                      | CPS                |                          |  | 0.2   |      |      |  | 0.3  |      |  |  | 3.9  |     
|                                                      | Detector materials |                          |  |      |      |      |  |     |      |  |  | 1.6  |     
|                                                      | CTI Solutions      |                          |  | 1.3   |      |      |  | 0.9  |      |  |  | 3.7  |     
|                                                      | Corporate          |                          |  | 1.0   |      |      |  | 0.7  |      |  |  | 3.0  |     
|                                                      |                    |                          |  |       |      |      |  |      |      |  |  |     
|                                                      |                    | Total                    |  |       | 2.5  |      |  |      | 1.9  |  |  |      | 12.2 | 
|                                                      |                    |                          |  |       |      |      |  |      |      |  |  |     
|Income (loss) from operations:                        |                    |                          |  |       |      |      |  |      |      |  |  |     
|                                                      | CPS                |                          |  | 50.6  |      |      |  | 48.0 |      |  |  | 39.8 |     
|                                                      | Detector materials |                          |  | 19.8  |      |      |  | 25.9 |      |  |  | 7.0  |     
|                                                      | CTI Solutions      |                          |  | (11.4 | )    |      |  | (9.6 | )    |  |  | (1.7 | )   
|                                                      | Corporate          |                          |  | (1.0  | )    |      |  | (6.5 | )    |  |  | (8.3 | )   
|                                                      |                    |                          |  |       |      |      |  |      |      |  |  |     
|                                                      |                    | Total                    |  | $     | 58.0 |      |  | $    | 57.8 |  |  | $    | 36.8 | 
|                                                      |                    |                          |  |       |      |      |  |      |      |  |  |     

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

|                               |                           |                          |  |       |       |      |  |       |       |   |  |       |       |  
|------------------------------ | ------------------------- | ------------------------ |  | ----- | ----- | ---- |  | ----- | ----- | - |  | ----- | ----- | -
|                               |                           |                         
|                               |                           | Year Ended September 30,
|                               |                           |                         
|                               |                           | 2004                     |  | 2003  |       | 2002
|                               |                           |                          |  |       |       |     
|Revenues:                      |                           |                          |  |       |       |      |  |       |       |   |  |      
|                               | CPS                       |                          |  | 66.4  | %     |      |  | 68.4  | %     |   |  | 73.1  | %    
|                               | Detector materials        |                          |  | 11.7  |       |      |  | 15.2  |       |   |  | 11.3  |      
|                               | CTI Solutions             |                          |  | 48.8  |       |      |  | 53.2  |       |   |  | 43.5  |      
|                               | Intercompany eliminations |                          |  | (26.9 | )     |      |  | (36.8 | )     |   |  | (27.9 | )    
|                               |                           |                          |  |       |       |      |  |       |       |   |  |      
|                               |                           | Total                    |  |       | 100.0 | %    |  |       | 100.0 | % |  |       | 100.0 | %
|                               |                           |                          |  |       |       |      |  |       |       |   |  |      
|Income (loss) from operations: |                           |                          |  |       |       |      |  |       |       |   |  |      
|                               | CPS                       |                          |  | 87.2  | %     |      |  | 83.0  | %     |   |  | 108.1 | %    
|                               | Detector materials        |                          |  | 34.1  |       |      |  | 44.8  |       |   |  | 19.0  |      
|                               | CTI Solutions             |                          |  | (19.6 | )     |      |  | (16.6 | )     |   |  | (4.6  | )    
|                               | Intercompany eliminations |                          |  | (1.7  | )     |      |  | (11.2 | )     |   |  | (22.5 | )    
|                               |                           |                          |  |       |       |      |  |       |       |   |  |      
|                               |                           | Total                    |  |       | 100.0 | %    |  |       | 100.0 | % |  |       | 100.0 | %
|                               |                           |                          |  |       |       |      |  |       |       |   |  |      

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

|                    |                                     |                          |  |       |    |      |  |       |    |  |  |       |   
|------------------- | ----------------------------------- | ------------------------ |  | ----- | -- | ---- |  | ----- | -- |  |  | ----- | --
|                    |                                     |                         
|                    |                                     | Year Ended September 30,
|                    |                                     |                         
|                    |                                     | 2004                     |  | 2003  |    | 2002
|                    |                                     |                          |  |       |    |     
|CPS:                |                                     |                          |  |       |    |      |  |       |    |  |  |      
|                    | Revenues                            |                          |  | 100.0 | %  |      |  | 100.0 | %  |  |  | 100.0 | % 
|                    | Cost of revenues                    |                          |  | 67.8  |    |      |  | 67.8  |    |  |  | 62.8  |   
|                    | Selling, general and administrative |                          |  | 5.6   |    |      |  | 4.8   |    |  |  | 5.7   |   
|                    | Research and development            |                          |  | 7.5   |    |      |  | 8.0   |    |  |  | 8.3   |   
|                    | Stock-based compensation            |                          |  | 0.1   |    |      |  | 0.1   |    |  |  | 2.1   |   
|                    |                                     |                          |  |       |    |      |  |       |    |  |  |      
|                    | Income from operations              |                          |  | 19.0  | %  |      |  | 19.3  | %  |  |  | 21.1  | % 
|                    |                                     |                          |  |       |    |      |  |       |    |  |  |      
|Detector materials: |                                     |                          |  |       |    |      |  |       |    |  |  |      
|                    | Revenues                            |                          |  | 100.0 | %  |      |  | 100.0 | %  |  |  | 100.0 | % 
|                    | Cost of revenues                    |                          |  | 48.6  |    |      |  | 47.3  |    |  |  | 63.0  |   
|                    | Selling, general and administrative |                          |  | 7.7   |    |      |  | 4.2   |    |  |  | 4.1   |   
|                    | Research and development            |                          |  | 1.7   |    |      |  | 1.6   |    |  |  | 3.4   |   
|                    | Stock-based compensation            |                          |  |      |    |      |  |      |    |  |  | 5.5   |   
|                    |                                     |                          |  |       |    |      |  |       |    |  |  |      
|                    | Income from operations              |                          |  | 42.0  | %  |      |  | 46.9  | %  |  |  | 24.0  | % 
|                    |                                     |                          |  |       |    |      |  |       |    |  |  |      
|CTI Solutions:      |                                     |                          |  |       |    |      |  |       |    |  |  |      
|                    | Revenues                            |                          |  | 100.0 | %  |      |  | 100.0 | %  |  |  | 100.0 | % 
|                    | Cost of revenues                    |                          |  | 75.5  |    |      |  | 80.6  |    |  |  | 72.4  |   
|                    | Selling, general and administrative |                          |  | 23.0  |    |      |  | 19.2  |    |  |  | 21.3  |   
|                    | Research and development            |                          |  | 6.6   |    |      |  | 4.7   |    |  |  | 4.5   |   
|                    | Stock-based compensation            |                          |  | 0.7   |    |      |  | 0.5   |    |  |  | 3.3   |   
|                    |                                     |                          |  |       |    |      |  |       |    |  |  |      
|                    | Income (loss) from operations       |                          |  | (5.8  | )% |      |  | (5.0  | )% |  |  | (1.5  | )%
|                    |                                     |                          |  |       |    |      |  |       |    |  |  |      

37



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| |                                                                            
| | ---------------------------------------------------------------------------
| | Year Ended September 30, 2004 Compared
    to Year Ended September 30, 2003



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

Revenues for the year ended September 30,
2004 were $401.7 million, an increase of
$39.4 million, or 10.9%, from $362.3 million in 2003.

CPS.Revenues for
the year ended September 30, 2004 were $266.8 million,
an increase of $19.1 million, or 7.7%, from
$247.7 million in 2003. The increase in revenues was driven
primarily by a 27.5% increase in average scanner sales price due
to the continued shift in sales mix from PET to PET/ CT
scanners. During the years ended September 30, 2004 and
2003 PET/ CT scanner sales were 80.0% and 44.1%, respectively,
of total unit sales. This increase was offset by a 13.4%
decrease in units sold and a decrease in service revenues.
Intersegment revenues accounted for 21.5% and 30.6% of total CPS
revenues for the years ended September 30, 2004 and 2003,
respectively. The decrease in intersegment revenues resulted
from reduced sales to CTI Solutions after execution of the
Agency Agreement with Siemens.

Detector Materials.Revenues for the year ended September 30, 2004 were
$47.1 million, a decrease of $8.1 million, or 14.7%,
from $55.2 million in 2003. The decrease in revenues is
primarily due to reduced scanner demand and reduced transfer
pricing to CPS in accordance with the Agency Agreement.
Intersegment revenues accounted for 98.6% and 94.8% of total
detector material revenues for the years ended
September 30, 2004 and 2003, respectively. The increase in
intercompany revenues as a percent of revenues is due to the
acquisition of Concorde in June 2004; until being acquired,
Concorde was the primary third-party customer of the Detector
Materials segment.

CTI Solutions.Revenues for the year ended September 30, 2004 were
$196.2 million, an increase of $3.4 million, or 1.8%,
from $192.8 million in 2003. The increase in revenues was
due to increased FDG dose shipments, a full year of Mirada
(acquired in August 2003) revenues in 2004, sales of
microPET® animal scanners after the acquisition of Concorde
(acquired in June 2004), and the $4.0 million expense
reimbursement under the Agency Agreement. Driven by increased
PET utilization, FDG dose shipments increased by 51.8% in 2004
over 2003; this increase was partially offset by a 14.8% decline
in the average revenue per dose during the same time period. Due
to the implementation of the Agency Agreement, sales increased
$5.6 million from sales and marketing services provided to
Siemens and increased sales of image-fusion software to Siemens.
These increases were offset during 2004 by a 32-unit decline in
direct distribution sales of PET and PET/ CT scanners by CTI
Solutions. Scanner unit sales on a direct basis decreased as the
Company ceased booking new scanner orders after May 1, 2004
following the execution of the Agency Agreement. Intersegment
revenues accounted for 2.4% and 2.8% of total CTI Solutions
revenues for the years ended September 30, 2004 and 2003,
respectively.

Intercompany
Eliminations.Intercompany revenues
that were eliminated in consolidation for the year ended
September 30, 2004 were $108.4 million, a decrease of
$25.0 million, or 18.7%, from $133.4 million in 2003.
The decrease in revenue eliminations was primarily due to
decreased sales of PET and PET/ CT scanners to CTI Solutions
from CPS as well as decreased sales of detector materials to
CPS. The decreased sale of detector materials to CPS was
attributable to reduced scanner demand and lower prices on
detector materials sold to CPS after the implementation of the
Agency Agreement.



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

Cost of revenues for the year ended
September 30, 2004 was $242.8 million, an increase of
$23.7 million, or 10.8%, from $219.1 million for 2003.
Cost of revenues for the year ended September 30, 2004 was
60.4% of revenues compared to 60.5% for 2003.

CPS.Cost of
revenues for the year ended September 30, 2004 was
$180.9 million, an increase of $13.0 million, or 7.7%,
from $167.9 million for 2003. Cost of revenues for the
years ended September 30, 2004 and 2003 were 67.8% of
revenues. The increase in total cost of revenues was driven by
the shift in sales mix from PET to PET/ CT scanners. Cost of
revenues remained consistent as a percentage of revenues despite
the continuing shift in sales mix towards PET/ CT scanners,
which have historically

38



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##### Table of Contents



carried higher production costs, due to the LSO
and CT price reductions received from the Detector Materials
segment and Siemens, respectively, in conjunction with the
execution of the Agency Agreement.


Detector Materials.Cost of revenues for the year ended September 30, 2004 was
$22.9 million, a decrease of $3.2 million, or 12.3%,
from $26.1 million for 2003. The decrease in cost of
revenues was due to the corresponding decrease in sales to CPS
as scanner shipments slowed during the second half of fiscal
year 2004. This volume related decrease was offset by a
$4.2 million one-time charge for an arbitration order with
a former supplier. Cost of revenues for the year ended
September 30, 2004 increased to 48.6% of revenues compared
to 47.3% of revenues for 2003. The increase in cost of revenues
as a percentage of revenues was due to the arbitration order as
well as a reduction in transfer prices to CPS after the
execution of the Agency Agreement.

CTI Solutions.Cost
of revenues for the year ended September 30, 2004 was
$148.2 million, a decrease of $7.2 million, or 4.6%,
from $155.4 million for 2003. The decrease in cost of
revenues was due primarily to the decrease in scanners sold on a
direct basis offset by increased FDG production costs on higher
sales volume. Cost of revenues for the year ended
September 30, 2004 decreased to 75.5% of revenues compared
to 80.6% of revenues for 2003. The decrease in cost of revenues
as a percentage of revenues results from a shift in sales mix
from direct distribution of PET and PET/ CT scanners to other
products and services with higher gross margins, such as FDG
doses, medical image analysis application sales, sales and
marketing services provided to Siemens, and the sale of
microPET® animal scanners after the acquisition of Concorde.

Intercompany
Eliminations.Intercompany cost of
revenues that were eliminated in consolidation for the year
ended September 30, 2004 were $109.2 million, a
decrease of $21.1 million, or 16.2%, from
$130.3 million in 2003. Cost of revenues eliminated for the
year ended September 30, 2004 decreased to 27.2% of
revenues compared to 36.0% of revenues for 2003. The decrease in
cost of revenue eliminations was primarily due to decreased
direct sales of PET and PET/ CT scanners by CTI Solutions, which
were purchased from CPS, as well as decreased sales of detector
materials to CPS due to the decline in scanner units
manufactured and sold by CPS and reduced transfer pricing of
detector materials to CPS in accordance with the Agency
Agreement.



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

Selling, general and administrative expenses for
the year ended September 30, 2004 were $65.0 million,
an increase of $12.8 million, or 24.5%, from
$52.2 million for 2003. Selling, general and administrative
expenses for the year ended September 30, 2004 increased to
16.2% of revenues compared to 14.4% of revenues for 2003.

CPS.Selling,
general and administrative expenses for the year ended
September 30, 2004 were $15.0 million, an increase of
$3.2 million, or 27.1%, from $11.8 million in 2003.
Selling, general and administrative expenses for 2004 were 5.6%
of revenues compared to 4.8% in 2003. The increase is primarily
attributable to promotional expenses related to product
launches, and increased administrative costs from the
implementation of a new management information system.

Detector Materials.Selling, general and administrative expenses for the year ended
September 30, 2004 were $3.6 million, an increase of
$1.3 million, or 56.5%, from $2.3 million for 2003. As
a percentage of revenues, selling, general and administrative
expenses were 7.7% and 4.2% for 2004 and 2003, respectively. The
increase is primarily attributable to increased facility costs
due to expansion in the latter half of 2003, and increased
administrative costs from the implementation of a new management
information system.

CTI Solutions.Selling, general and administrative expenses were
$45.2 million for the year ended September 30, 2004,
an increase of $8.2 million, or 22.2%, from
$37.0 million for 2003. Selling, general and administrative
expenses for the year ended September 30, 2004 were 23.0%
of revenues compared to 19.2% of revenues for 2003. The increase
in amount and as a percentage of revenue is attributable to the
acquisition of Concorde (June 2004) and consolidating a full
year of these expenses after the acquisition

39



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##### Table of Contents



of Mirada (August 2003), one-time severance costs
to cease international scanner sales and service operations, and
increased information technology costs. The $4.0 million of
underlying expenses for the sales and marketing services
provided to Siemens as defined in the Agency Agreement are
included in selling, general and administrative expenses, while
the reimbursement from Siemens is reflected in revenues.


Corporate.Selling,
general and administrative expenses not allocated to a financial
reporting segment were $1.2 million for the year ended
September 30, 2004, an increase of $0.1 million, or
9.1%, from $1.1 million for the year ended
September 30, 2003.



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

Research and development expenses for the year
ended September 30, 2004 were $33.4 million, an
increase of $3.5 million, or 11.7%, from $29.9 million
for 2003. Research and development expenses for the years ended
September 30, 2004 and 2003 were 8.3% of revenues.

CPS.Research and
development expenses for the year ended September 30, 2004
were $20.1 million, an increase of $0.4 million, or
2.0%, from $19.7 million in 2003. CPS continued to invest
in new scanner technology primarily devoted to PET/ CT and LSO
scanner developments. Research and development expenses for 2004
were 7.5% of revenues compared to 8.0% in 2003. The decrease in
expenses as a percentage of revenue is attributable to sales
growth exceeding the increase in research and development
spending.

Detector Materials.Research and development expenses for the year ended
September 30, 2004 were $0.8 million, representing a
decrease of $0.1 million, or 11.1%, from $0.9 million
for 2003. As a percentage of total revenues, research and
development expenses for the year ended September 30, 2004
increased to 1.7% from 1.6% for 2003. The relative percentage
increase resulted from the decrease in revenues.

CTI Solutions.Research and development expenses for the year ended
September 30, 2004 were $12.9 million, an increase of
$3.8 million, or 41.8%, from $9.1 million for 2003.
Research and development expenses for the year ended
September 30, 2004 were 6.6% of revenues compared to 4.7%
for 2003. The increase was primarily due to a full year of
development activities at Mirada, which was acquired in August
2003, increased spending on new molecular probe technology, and
development spending for microPET® scanners following the
acquisition of Concorde on June 30, 2004.



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

In connection with the acquisition of Mirada in
August 2003 we recorded a $1.4 million one time, non-cash
write-off of in-process research and development for which the
value was determined by an independent appraisal. The
acquisition of Concorde in June 2004 did not result in any
write-off of in process research and development.



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

Stock-based compensation expense for the year
ended September 30, 2004 was $2.5 million, an increase
of $0.6 million, or 31.6%, from $1.9 million for 2003.
Stock-based compensation expense for the year ended
September 30, 2004 was 0.6% of revenues compared to 0.5% in
2003.

CPS.Stock-based
compensation expense for the year ended September 30, 2004
was $0.2 million, a decrease of $0.1 million, or
33.3%, from $0.3 million in 2003. Stock-based compensation
expense was 0.1% of revenues for the years ended
September 30, 2004 and 2003. Stock-based compensation
expense primarily included charges for the vesting of options
granted in 2002 with exercise prices below the fair market value
of our stock. No similar grants were issued in 2004 or 2003.

Detector Materials.No stock-based compensation expense was incurred for the years
ended September 30, 2004 and 2003.

40



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##### Table of Contents



CTI Solutions.Stock-based compensation expense for the year ended
September 30, 2004 was $1.3 million, an increase of
$0.4 million, or 44.4%, from $0.9 million for 2003.
Stock-based compensation expense for the year ended
September 30, 2004 was 0.7% of revenues compared to 0.5% in
2003. The increase is attributable to issuances of deferred
stock units to the members of the board of directors of a wholly
owned subsidiary, for which the related market value of the
stock units is being amortized over the vesting period.

Corporate.Stock-based compensation expense not allocated to a financial
reporting segment for the year ended September 30, 2004 was
$1.0 million, an increase of $0.3 million, or 42.9%,
from $0.7 million in 2003. The increase is attributable to
current year issuances of restricted stock shares to senior
executives and deferred stock units to members of the
Companys board of directors, for which the market values
are being amortized over the vesting periods.



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

Income from operations for the year ended
September 30, 2004 was $58.0 million, an increase of
$0.2 million, or 0.3%, from $57.8 million for 2003.
Income from operations for the year ended September 30,
2004 was 14.4% of revenues compared to 16.0% for 2003.

CPS.Income from
operations for the year ended September 30, 2004 was
$50.6 million, an increase of $2.6 million, or 5.4%,
from $48.0 million for 2003. Income from operations for the
year ended September 30, 2004 was 19.0% of revenues
compared to 19.3% for 2003. This increase in operating profits
is primarily due to increased revenues and resulting gross
profits. The decrease in operating margin resulted from higher
selling, general, and administrative expenses.

Detector Materials.Income from operations for the year ended September 30,
2004 was $19.8 million, a decrease of $6.1 million, or
23.6%, from $25.9 million for 2003. Income from operations
for the year ended September 30, 2004 was 42.0% of revenues
compared to 46.9% for 2003. The decrease resulted primarily from
the $4.2 million arbitration order with the former vendor,
reduced scanner demand, and the reduction of the LSO transfer
prices to CPS in accordance with the Agency Agreement. Due to
the execution of the Agency Agreement and the resulting LSO
price reductions to CPS, Detector Materials gross margins
and operating margins are expected to decline in 2005 by
approximately 5.0%.

CTI Solutions.Loss
from operations for the year ended September 30, 2004 was
$11.4 million, a increase of $1.8 million, or 18.8%,
from $9.6 million for 2003. The loss from operations for
the year ended September 30, 2004 was 5.8% of revenues
compared to 5.0% for 2003. The increase in the loss from
operations for the year was primarily due to increased operating
expenses. These increases were offset by the reimbursement of
expenses incurred for the sales and marketing services provided
to Siemens, and by the gain on the sale of international scanner
service contracts to Siemens after the execution of the Agency
Agreement on May 1, 2004. Following the execution of the
Agency Agreement, CTI Solutions reported operating income for
the fourth quarter of 2004, and it is expected that this trend
will continue in 2005.

Corporate.The loss
from operations for the year ended September 30, 2004 was
$1.0 million, a decrease of $5.5 million from a loss
of $6.5 million for 2003. The majority of this decrease
represents the net change in the consolidation entry to
eliminate the intercompany gross margin on detector material
inventory held by CPS and PET scanner inventory held by CTI
Solutions at each period end. As intercompany sales of detector
materials and scanners have decreased the related margin
elimination has also decreased.



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

Interest expense, net for the year ended
September 30, 2004 was $1.4 million, an increase of
$0.6 million, or 75.0%, from $0.8 million for 2003.
The increase resulted from lower interest income on a lower
average cash equivalent position, as these funds were used to
finance the Concorde acquisition and for expansion of our
radiopharmaceutical distribution network.

41



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##### Table of Contents





| |             
| | ------------
| | Other Income

Other income for the year ended
September 30, 2004, was $0.6 million, a decrease of
$1.4 million from $2.0 million for 2003. The decrease
is primarily attributable to decreased gains on foreign currency
transactions and fluctuations in income and losses from equity
investees.



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

The income tax provision for the year ended
September 30, 2004 was $21.9 million, a decrease of
$1.0 million, or 4.4%, from $22.9 million for the year
ended September 30, 2003. The effective tax rate for the
years ended September 30, 2004 and 2003 was 38.3% and
38.9%, respectively. The decrease in the effective tax rate is
attributable to lower state income taxes. The American Job
Creation Act of 2004 that was signed into law in October 2004
replaces an export incentive with a deduction from domestic
manufacturing income. As the Company is both an exporter and a
domestic manufacturer, this change is not expected to have a
material impact on the Companys income tax provision for
the forthcoming year.



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

The minority interest expense for the year ended
September 30, 2004 was $16.7 million, an increase of
$1.3 million, or 8.4%, from $15.4 million for 2003.
The increase was due to increased net income of CPS.



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



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

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

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

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

CTI Solutions.Revenues for the year ended September 30, 2003 were
$192.8 million, an increase of $80.3 million, or
71.4%, from $112.5 million in 2002. The increase in
revenues was driven by increased FDG dose shipments and
increased direct distribution sales of PET and PET/CT scanners.
CTI Solutions delivered approximately 58.4% more doses, during
the year ended September 30, 2003 compared to the year
ended September 30, 2002. Also during the year ended
September 30, 2003, direct distribution sales of PET and
PET/CT scanners by CTI Solutions, purchased from CPS, increased
by 48 units compared to the year ended September 30,
2002. These increases were offset by a 19.3% decrease in average
FDG revenue per dose. Intersegment revenues accounted for 2.8%
and 5.7% of total CTI Solutions revenues for the years ended
September 30, 2003 and 2002, respectively. Intersegment
revenues decreased as a percentage of revenues due to an
increase in third-party sales of PET and PET/CT scanners through
CTI Solutions direct distribution efforts and fewer
intersegment sales of cyclotrons to our PETNET subsidiary.

Intercompany
Eliminations.Intercompany revenues
that were eliminated in consolidation for the year ended
September 30, 2003 were $133.4 million, an increase of
$61.1 million, or 84.5%, from

42



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##### Table of Contents



$72.3 million in 2002. The increase in
revenue eliminations was primarily due to increased sales of
detector materials to CPS, as well as increased sales of PET and
PET/ CT scanners to CTI Solutions from CPS.




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

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

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

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

CTI Solutions.Cost
of revenues for the year ended September 30, 2003 was
$155.4 million, an increase of $73.9 million, or
90.7%, from $81.5 million for 2002. The increase in cost of
revenues was due primarily to an increase in scanner units and
FDG doses sold. Cost of revenues for the year ended
September 30, 2003 increased to 80.6% of revenues compared
to 72.4% of revenues for 2002. The increase in cost of revenues
as a percentage of revenues results from a shift in sales mix to
direct distribution of PET and PET/ CT scanners purchased from
CPS. The percentage of CTI Solutions sales coming from the
direct distribution of scanners purchased from CPS, which
business carries a lower gross margin than sales of FDG doses,
cyclotrons or service contracts, increased by over 280% from
2002 to 2003. In addition to the shift in sales mix to more
direct sales, competitive pricing pressure drove a decrease in
the average scanner sales price, collectively resulting in the
increased cost of revenues as a percentage of revenues.

Intercompany
Eliminations.Intercompany cost of
revenues that were eliminated in consolidation for the year
ended September 30, 2003 were $130.3 million, an
increase of $62.2 million, or 91.3%, from
$68.1 million in 2002. Cost of revenues eliminated for the
year ended September 30, 2003 increased to 36.0% of
revenues compared to 26.4% of revenues for 2002. The increase in
revenue eliminations was primarily due to increased sales of
detector materials to CPS, as well as increased sales of PET and
PET/CT scanners to CTI Solutions from CPS.



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

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

CPS.Selling,
general and administrative expenses for the year ended
September 30, 2003 were $11.8 million, an increase of
$1.0 million, or 9.3%, from $10.8 million in 2002.
Selling, general and administrative expenses for 2003 were 4.8%
of revenues compared to 5.7% in 2002. The decrease was due to
the impact of the distribution arrangements implemented in
connection with the multiple distributor

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strategy, pursuant to which all of the selling
costs and a substantial part of the marketing costs shifted from
CPS to its distributors.


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

CTI Solutions.Selling, general and administrative expenses were
$37.0 million for the year ended September 30, 2003,
an increase of $13.0 million, or 54.2%, from
$24.0 million for 2002. The increase was primarily due to
additional marketing personnel and promotional expenses to
support the direct distribution business and PET education
programs for referring physicians. Also, a portion of this
increase was due to the Company recording $0.5 million of
bad debt expense to reserve for the outstanding accounts
receivable balances for two scanner sales that were only
partially funded by the sales financing company, DVI Financial
Services, Inc., prior to its entering into bankruptcy. Selling,
general and administrative expenses for the year ended
September 30, 2003 were 19.2% of revenues compared to 21.3%
of revenues for 2002. A significant portion of this relative
percentage decrease was related to an increase in revenues from
the direct distribution of PET and PET/ CT scanners purchased
from CPS.

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



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

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

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

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

CTI Solutions.Research and development expenses for the year ended
September 30, 2003 were $9.1 million, an increase of
$4.1 million, or 82.0%, from $5.0 million for 2003.
Research and development expenses for the year ended
September 30, 2003 were 4.7% of revenues compared to 4.5%
for 2002. The increases were due to increased investment in
radiopharmaceutical research and development, which resulted in
the addition of personnel and consulting expenses. Also,
increases were due to the continued development of our Reveal
Network Solutions and Mirada medical image analysis applications.

Corporate.Research
and development expenses not allocated to a financial reporting
segment for the year ended September 30, 2003 were
$0.2 million compared to none for 2002.



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

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

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

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

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

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

CTI Solutions.Stock-based compensation expense for the year ended
September 30, 2003 was $0.9 million, a decrease of
$2.8 million, or 75.7%, from $3.7 million for 2002.
Stock-based compensation expense for the year ended
September 30, 2003 was 0.5% of revenues compared to 3.3% in
2002.

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



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

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

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

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

CTI Solutions.Loss
from operations for the year ended September 30, 2003 was
$9.6 million, a increase of $7.9 million, from
$1.7 million for 2002. Loss from operations for the year
ended September 30, 2003 was 5.0% of revenues compared to
1.5% for 2002. The increase in the loss from operations was
partially due to the costs associated with developing our
business as a direct distributor of PET and PET/ CT scanners.
Additionally, competitive pricing pressure drove a decrease in
the average scanner sales price, which resulted in lower gross
margins.

Corporate.The loss
from operations for the year ended September 30, 2003 was
$6.5 million, a decrease of $1.8 million, or 21.7%,
from $8.3 million for 2002. The majority of this decrease
represents the net change in the consolidation entry to
eliminate the intercompany gross margin on detector material
inventory held at CPS and PET scanner inventory held by CTI
Solutions at each period end. The decrease is also attributable
to the decrease in stock-based compensation during 2003. These
decreases were offset by the write-off of in process research
and development expenses due to the acquisition of Mirada in
August 2003.

45



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

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



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

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



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

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



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

The minority interest expense for the year ended
September 30, 2003 was $15.4 million, an increase of
$2.4 million, or 18.5%, from $13.0 million for 2002.
The increase was due to the increase in the net income of CPS.
Pursuant to the CPS board of directors approval to repay
CTI $3.9 million in stock-based compensation expense,
minority interest expense for the year ended September 30,
2002 was reduced by approximately $1.0 million, net of
income taxes, in the fourth quarter.

Quarterly Results of Operations

Our business is seasonal in nature. The following
table presents our operating results by quarter for each of the
last three fiscal years ended September 30, 2004. The
information for each of these quarters is unaudited and has been
prepared on the same basis as the audited consolidated financial
statements included in this annual report. In our opinion, all
adjustments (consisting of normal recurring accruals)

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


|                                                |                        |                                                               |                          |          |      |          |       |           |      |          |       |          |      |          |      |           |      |          |      |          |      |          |      |           |      |      |      |      |      |      |      |       |      |      |      |      |      |      |      |       |      |      |      |      |      |      |      |       |      |      | 
|----------------------------------------------- | ---------------------- | ------------------------------------------------------------- | ------------------------ | -------- | ---- | -------- | ----- | --------- | ---- | -------- | ----- | -------- | ---- | -------- | ---- | --------- | ---- | -------- | ---- | -------- | ---- | -------- | ---- | --------- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | ----- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | ----- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | ----- | ---- | ---- | 
|                                                |                        |                                                              
|                                                |                        | Three Months Ended                                           
|                                                |                        |                                                              
|                                                |                        | Dec. 31,                                                      |                          | Mar. 31, |      | June 30, |       | Sept. 30, |      | Dec. 31, |       | Mar. 31, |      | June 30, |      | Sept. 30, |      | Dec. 31, |      | Mar. 31, |      | June 30, |      | Sept. 30,
|                                                |                        | 2001                                                          |                          | 2002     |      | 2002     |       | 2002      |      | 2002     |       | 2003     |      | 2003     |      | 2003      |      | 2004     |      | 2004     |      | 2004     |      | 2004     
|                                                |                        |                                                               |                          |          |      |          |       |           |      |          |       |          |      |          |      |           |      |          |      |          |      |          |      |          
|                                                |                        |                                                              
|                                                |                        | (In millions, except per share data)                         
|Consolidated Statements of Operations
    Data: |                        |                                                               |                          |          |      |          |       |           |      |          |       |          |      |          |      |           |      |          |      |          |      |          |      |           |      |      |      |      |      |      |      |       |      |      |      |      |      |      |      |       |      |      |      |      |      |      |      |      
|                                                | Revenues               |                                                               | $                        | 47.6     |      |          | $     | 55.2      |      |          | $     | 69.0     |      |          | $    | 86.6      |      |          | $    | 60.6     |      |          | $    | 81.9      |      |      | $    | 99.2 |      |      | $    | 120.6 |      |      | $    | 74.1 |      |      | $    | 106.3 |      |      | $    | 91.8 |      |      | $    | 129.5 |     
|Cost of Revenues                                |                        |                                                               | 28.5                     |          |      |          | 32.5  |           |      |          | 41.1  |          |      |          | 48.6 |           |      |          | 32.7 |          |      |          | 49.3 |           |      |      | 61.2 |      |      |      | 75.9 |       |      |      | 43.7 |      |      |      | 65.1 |       |      |      | 54.6 |      |      |      | 79.4 |      
|                                                |                        |                                                               |                          |          |      |          |       |           |      |          |       |          |      |          |      |           |      |          |      |          |      |          |      |           |      |      |      |      |      |      |      |       |      |      |      |      |      |      |      |       |      |      |      |      |      |      |      |      
|                                                |                        | Gross Margin                                                  |                          |          | 19.1 |          |       |           | 22.7 |          |       |          | 27.9 |          |      |           | 38.0 |          |      |          | 27.9 |          |      |           | 32.6 |      |      |      | 38.0 |      |      |       | 44.7 |      |      |      | 30.4 |      |      |       | 41.2 |      |      |      | 37.2 |      |      |       | 50.1 |     
|Operating expenses:                             |                        |                                                               |                          |          |      |          |       |           |      |          |       |          |      |          |      |           |      |          |      |          |      |          |      |           |      |      |      |      |      |      |      |       |      |      |      |      |      |      |      |       |      |      |      |      |      |      |      |      
|                                                |                        | Selling, general and administrative expenses                  |                          |          | 7.2  |          |       |           | 8.5  |          |       |          | 8.9  |          |      |           | 11.2 |          |      |          | 12.2 |          |      |           | 12.4 |      |      |      | 11.8 |      |      |       | 15.8 |      |      |      | 15.2 |      |      |       | 16.2 |      |      |      | 17.6 |      |      |       | 16.0 |     
|                                                |                        | Research and development expenses                             |                          |          | 4.6  |          |       |           | 4.8  |          |       |          | 5.9  |          |      |           | 6.3  |          |      |          | 6.6  |          |      |           | 7.5  |      |      |      | 7.3  |      |      |       | 8.5  |      |      |      | 10.3 |      |      |       | 8.6  |      |      |      | 7.7  |      |      |       | 6.8  |     
|                                                |                        | Write-off of in-process research and development
    expenses |                          |          |     |          |       |           |     |          |       |          |     |          |      |           |     |          |      |          |     |          |      |           |     |      |      |      |     |      |      |       | 1.4  |      |      |      |     |      |      |       |     |      |      |      |     |      |      |       |     |     
|                                                |                        | Stock-based compensation expense                              |                          |          | 0.1  |          |       |           | 8.1  |          |       |          | 3.5  |          |      |           | 0.5  |          |      |          | 0.6  |          |      |           | 0.3  |      |      |      | 0.5  |      |      |       | 0.5  |      |      |      | 0.5  |      |      |       | 0.6  |      |      |      | 0.7  |      |      |       | 0.7  |     
|                                                |                        |                                                               |                          |          |      |          |       |           |      |          |       |          |      |          |      |           |      |          |      |          |      |          |      |           |      |      |      |      |      |      |      |       |      |      |      |      |      |      |      |       |      |      |      |      |      |      |      |      
|                                                |                        |                                                               | Total operating expenses |          |      | 11.9     |       |           |      | 21.4     |       |          |      | 18.3     |      |           |      | 18.0     |      |          |      | 19.4     |      |           |      | 20.2 |      |      |      | 19.6 |      |       |      | 26.2 |      |      |      | 26.0 |      |       |      | 25.4 |      |      |      | 26.0 |      |       |      | 23.5 | 
|                                                |                        |                                                               |                          |          |      |          |       |           |      |          |       |          |      |          |      |           |      |          |      |          |      |          |      |           |      |      |      |      |      |      |      |       |      |      |      |      |      |      |      |       |      |      |      |      |      |      |      |      
|                                                | Income from operations |                                                               | $                        | 7.2      |      |          | $     | 1.3       |      |          | $     | 9.6      |      |          | $    | 20.0      |      |          | $    | 8.5      |      |          | $    | 12.4      |      |      | $    | 18.4 |      |      | $    | 18.5  |      |      | $    | 4.4  |      |      | $    | 15.8  |      |      | $    | 11.2 |      |      | $    | 26.6  |     
|                                                |                        |                                                               |                          |          |      |          |       |           |      |          |       |          |      |          |      |           |      |          |      |          |      |          |      |           |      |      |      |      |      |      |      |       |      |      |      |      |      |      |      |       |      |      |      |      |      |      |      |      
|Net income (loss)                               |                        | $                                                             |                         |          |      | $        | (11.8 | )         |      | $        | 0.8   |          |      | $        | 7.6  |           |      | $        | 3.4  |          |      | $        | 4.5  |           |      | $    | 7.5  |      |      | $    | 5.2  |       |      | $    | 0.7  |      |      | $    | 5.8  |       |      | $    | 2.7  |      |      | $    | 9.4  |      
|Basic earnings per share                        |                        | $                                                             | (0.02                    | )        |      | $        | (0.46 | )         |      | $        | (0.07 | )        |      | $        | 0.16 |           |      | $        | 0.08 |          |      | $        | 0.11 |           |      | $    | 0.17 |      |      | $    | 0.12 |       |      | $    | 0.02 |      |      | $    | 0.13 |       |      | $    | 0.06 |      |      | $    | 0.21 |      
|Diluted earnings per share                      |                        | $                                                             | (0.02                    | )        |      | $        | (0.46 | )         |      | $        | (0.07 | )        |      | $        | 0.17 |           |      | $        | 0.07 |          |      | $        | 0.10 |           |      | $    | 0.16 |      |      | $    | 0.11 |       |      | $    | 0.02 |      |      | $    | 0.12 |       |      | $    | 0.06 |      |      | $    | 0.20 |      

Liquidity and Capital Resources

Our principal liquidity requirements are to meet
the working capital and capital expenditure needs of our
expanding business. These needs have increased in order to
support the growth in our business. For example, from
September 30, 2003 to September 30, 2004, our
inventories increased from $70.9 million to
$92.2 million while our total accounts receivable decreased
from $114.7 million to $100.2 million. The increase in
inventory is primarily due to lower than expected scanner sales
during the last half of 2004, and also from holding more
inventories of critical raw materials. The decrease in accounts
receivable is attributable to the decrease in direct
distribution sales of PET and PET/ CT scanners. A greater
majority of our scanners are now sold through distributors with
payment terms that are faster than the terms for our direct
distribution sales to end customers. Our property and equipment
(net) increased from $107.3 million to $133.1 million
during this same period. Property and equipment increased due to
the continued expansion of our radiopharmacy network,
establishment of our South Korean operations, and the
implementation of our new management information system. On
June 30, 2004 the Company acquired the assets of Concorde
for an aggregate purchase price of $41.9 million, including
$20.5 million of cash and shares of common stock valued at
$21.4 million. The purchase of Concorde increased
inventories, intangible assets, and goodwill by
$5.6 million, $14.8 million, and $21.6 million,
respectively.

On September 30, 2002 we entered into an
amended and restated credit agreement with a syndicate of banks
agented by SunTrust Bank. The credit agreement makes available
to us up to $125 million in revolving loans, with a
$10 million sub-limit for letters of credit. Of this total,
CPS is allowed to borrow up to $55.0 million to finance its
operations. 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).
Our subsidiaries guarantee all obligations under the credit
agreement, except that the guarantee of CPS is limited to
$55 million and does not include any advances under the
credit agreement that are loaned (on an intercompany basis) to
our PETNET subsidiary. Our obligations and the obligations of
our subsidiary guarantors under the credit agreement are secured
by a lien on substantially all of our assets (including the
capital stock or other forms of ownership interests we hold in
our subsidiaries) and the assets of our subsidiary guarantors,
except that the lien securing the guarantee obligations of CPS
is principally limited to the accounts

47



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##### Table of Contents



receivable and inventory of CPS. As of
September 30, 2004 no balance was outstanding under the
credit agreement, and after deducting $6.7 million in
outstanding letters of credit, $118.3 million was available
to the Company.


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 2.5 to 1; a
fixed charge coverage ratio no less than 3 to 1; and a minimum
tangible net worth of $195.0 million plus 50% of positive
net income accrued since the end of the preceding fiscal quarter
plus 80% of the net proceeds of any equity offering. The credit
agreement also contains customary events of default. These
include cross-defaults to other debt agreements, a change in
control involving us or any subsidiary guarantor, and the
failure to comply with certain covenants.

We anticipate that our current cash and cash
equivalents balances and our expected operating cash flow,
together with borrowings under our credit facility, will be
sufficient to meet our future operating expenses, capital
expenditures and debt service obligations through the expected
date of the CPS put/call. Our decision to exit the direct
distribution of scanners in conjunction with executing the
Agency Agreement with Siemens should also improve cash flow as
we will be able to reduce consolidated scanner inventory levels
and receivables from third party customers. We may from time to
time evaluate the benefits of raising additional debt or equity
capital.



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

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



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

The following table discloses aggregate
information about our contractual obligations and the periods in
which payments are due as of September 30, 2004:

|                             |                                    |                        |        |         |  |           |       |           |  |       |       |        |  |   |       |        |  |   |       |       | 
|---------------------------- | ---------------------------------- | ---------------------- | ------ | ------- |  | --------- | ----- | --------- |  | ----- | ----- | ------ |  | - | ----- | ------ |  | - | ----- | ----- | 
|                             |                                    |                       
|                             |                                    | Payments Due by Period
|                             |                                    |                       
|                             |                                    |                        |        | 1 Year  |  |           |       | After 5  
|Contractual Cash Obligations |                                    | Total                  |        | or Less |  | 2-3 Years |       | 4-5 Years |  | Years
|                             |                                    |                        |        |         |  |           |       |           |  |      
|                             |                                    |                       
|                             |                                    | (In thousands)        
|Long-term debt               |                                    | $                      | 6,425  |         |  | $         | 1,444 |           |  | $     | 1,496 |        |  | $ | 3,485 |        |  | $ |      |      
|Capital lease obligations    |                                    |                        | 12,774 |         |  |           | 3,716 |           |  |       | 5,890 |        |  |   | 2,729 |        |  |   | 439   |      
|Operating leases             |                                    |                        | 24,482 |         |  |           | 5,590 |           |  |       | 8,421 |        |  |   | 4,447 |        |  |   | 6,024 |      
|                             |                                    |                        |        |         |  |           |       |           |  |       |       |        |  |   |       |        |  |   |       |      
|                             | Total contractual cash obligations |                        | $      | 43,681  |  |           | $     | 10,750    |  |       | $     | 15,807 |  |   | $     | 10,661 |  |   | $     | 6,463 | 
|                             |                                    |                        |        |         |  |           |       |           |  |       |       |        |  |   |       |        |  |   |       |      

In addition to the cash obligations listed above,
we guarantee lease obligations on behalf of our unconsolidated
radiopharmacies of $0.2 million at September 30, 2004.
These lease obligations generally have a term of seven years and
commenced in 2000. In August 2003, we also guaranteed a debt
obligation related to a cyclotron and radiopharmacy project for
an international distributor in the maximum aggregate amount of
approximately $6.5 million. The debt obligation and the
guarantee expire in July 2009. In the event a claim is made
under this guarantee, we have the right to acquire the facility
and all related customer contracts and would operate the
facility as a CTI Solutions radiopharmacy. The Company has
recorded a liability of $0.3 million for this guarantee to
reflect the estimated fair value of the Companys

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obligation in accordance with FASB Interpretation
No. 45 (FIN 45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others.


In September 2003, we entered into a financing
program arrangement with DLL. The program provides flexible
lease financing to CTI Solutions customers for the full
range of PET and PET/ CT scanners and other products and
services sold by CTI. In connection with this program a credit
reserve pool was established whereby the Company provides a
guarantee to DLL for 9.9% of the principal balance of the first
$25 million in leases, and 5% thereafter, on all leases DLL
executed on behalf of CTI Solutions customers. At
September 30, 2004, the Company had recorded a reserve of
$0.3 million for this guarantee to reflect the estimated
fair value of the Companys obligation after recovery and
resale of the underlying equipment in accordance with
FIN 45.



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



| |                                                                            
| | ---------------------------------------------------------------------------
| | Year Ended September 30, 2004 Compared to
    Year Ended September 30, 2003

Net cash provided by operating activities for the
year ended September 30, 2004 was $48.5 million
compared to $16.5 million in 2003. The increase in net cash
provided by operating activities was primarily due to lower
trade receivables resulting from the reduction in direct
distribution scanner sales. The increase in cash flows from
receivables was partially offset by cash used to build inventory
in our CPS and Detector Materials segments.

Net cash used in investing activities during the
year ended September 30, 2004 was $51.2 million
compared to $54.7 million in 2003. In 2004, investing
activities consisted primarily of the acquisition of Concorde
and radiopharmacy expansion. In 2003, investing activities
consisted primarily of our acquisition of Mirada, facility
expansion, and radiopharmacy expansion.

Net cash used by financing activities during the
year ended September 30, 2004 was $10.7 million
compared to cash provided by financing activities of
$3.4 million in 2003. In 2004, the cash was used primarily
to fund the decrease in our checks in transit and scheduled
principal payments on outstanding debt, net of cash received
from the exercise of stock options and the purchase of stock
through our employee stock purchase plan.

Non-cash investing and financing activity for the
year ended September 30, 2004 consisted of the issuance of
shares of common stock for the purchase of Concorde. For the
year ended September 30, 2003, non-cash investing and
financing activities for equipment financed by capital leases
was $0.7 million.



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

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

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

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

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

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. Our financial position and results
of operations may be significantly different when reported under
different conditions or when using different assumptions in the
application of such policies. In the event estimates or
assumptions prove to be different from actual amounts,
adjustments are made in subsequent periods to reflect more
current information.

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



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

We record revenue in accordance with the guidance
of the SECs Staff Accounting Bulletin
(SAB) No. 104(SAB 104), which supersedes
SAB 101 in order to encompass EITF Issue 00-21,
Revenue Arrangements with Multiple Deliverables(EITF 00-21). Our revenue is derived from sales of
scanners, calibration sources, spare parts, detector materials,
cyclotrons, radiopharmaceuticals, medical image analysis
applications, sales and marketing services, and the provision of
services on equipment sold, including site planning and
installation, preventive maintenance and repair, training,
technical support and assistance with licensing. Revenue is
recognized when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the
contract price is fixed or determinable, and collectibility is
reasonably assured. No right of return privileges are granted to
customers after shipment. Revenues derived from the sale of
scanners, cyclotrons, calibration sources, spare parts, medical
image analysis applications and detector materials are
recognized upon either shipment or arrival at destination
depending on shipment terms. We account for sales of scanning
equipment and related installation and associated training
services as multiple-element arrangements. We recognize 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. We determine
the value of the equipment and installation and training
services based on sales of the equipment both with and without
installation and training. We also recognize as revenue
reimbursements for certain sales and marketing services as such
services are provided to Siemens and as the Company is the
primary obligor for the expenses incurred in providing these
services.

For arrangements with multiple deliverables, such
as scanner and cyclotron sales, we recognize product revenue by
allocating the revenue to each deliverable based on the fair
value of each deliverable in accordance with EITF 00-21 and
SAB 104, and recognize revenue for equipment upon delivery
and for installation and other services as performed.
EITF 00-21 was effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003.

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.

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

Revenues derived from our software license sales
are recognized in accordance with Statement of Position
(SOP) No. 97-2, Software Revenue
Recognition, and SOP 98-9, Modifications of
SOP 97-2, Software Revenue Recognition with Respect to
Certain Transactions. For software license sales for which
any services rendered are not considered essential to the
functionality of the software, we recognize revenue upon
delivery of the software, provided (1) there is evidence of
an arrangement, (2) collection of our fee is considered
probable and (3) the fee is fixed and determinable. If
professional services are considered essential to the
functionality of the software, we record revenue for the license
and professional services over the implementation period using
the percentage of completion method, measured by the percentage
of labor hours incurred to date to estimated total labor hours
for each contract.

Revenue recognition depends on the timing of
shipment and service performance and can be subject to customer
readiness and acceptance. If services and shipments are not
performed as scheduled, our reported revenues may differ
materially from expectations.



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

On October 1, 2001, we adopted Statement of
Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets(SFAS 142)
which required us to perform an initial impairment review of our
goodwill at that date and also requires us to perform impairment
reviews thereafter, at least once annually. We conduct our
impairment test at the end of each fiscal year based on
judgments regarding ongoing profitability and cash flow of the
underlying assets. Changes in strategy or market conditions
could significantly impact these judgments and require
adjustments to recorded asset balances. For example, if we had
reason to believe that our recorded goodwill had become impaired
due to decreases in the fair market value of the underlying
business, we would have to take a charge to income for that
portion of goodwill that we believe is impaired. The annual
impairment test was conducted and it did not result in any
impairment charges.



| |                         
| | ------------------------
| | 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 in
accordance with Financial Accounting Standards Board
(FASB) Interpretation No. 46(R), Consolidation of
Variable Interest Entities(FIN 46(R)),
SFAS No. 94, Consolidation of All Majority-Owned
Subsidiaries(SFAS 94),and Accounting
Principles Board (APB) Opinion No. 18, The Equity
Method of Accounting for Investments in Common Stock(APB 18) and, where appropriate, evaluate our and
the minority shareholders participating rights in
accordance with EITF Issue 96-16, Investors Accounting
for an Investee When the Investor Has a Majority of the Voting
Interest but the Minority Shareholder or Shareholders Have
Certain Approval or Veto Rights(EITF 96-16) to determine
whether consolidation or equity method accounting is appropriate
in each case.

We evaluated FIN 46(R) effects on our
investments during the second quarter of fiscal year 2004. In
conjunction with this evaluation, we identified one of our
investments as a variable interest entity as defined by
FIN 46(R). However, the evaluation of FIN 46(R) did
not have a significant impact on our consolidated financial
statements since the Company is also identified as the primary
beneficiary of the variable interest entity and therefore is not
required to make changes to the entities included in the
consolidated financial statements for this reporting period. As
required by FIN 46(R), we will continue to monitor our
investments in both consolidated and unconsolidated entities for
events that may occur which would require the Company to
reevaluate whether any of these investments qualifies as a
variable interest entity. The evaluation of FIN 46(R) did
not result in changes in the application of previously issued
generally accepted accounting principles, SFAS 94 and
APB 18, to our investments.

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

Where appropriate, we evaluate our and the
minority interest shareholders participating rights in
accordance with EITF 96-16 to determine whether consolidation or
equity method accounting is appropriate in each case. In cases
where the minority shareholder is deemed to have veto
rights or has equal representation on the board of
directors, we account for these investments using the equity
method as we do not have control over significant operating
decisions. We have invested in three radiopharmacies that are
accounted for under the equity method. For the entities not
previously included in the consolidated financial statements,
the evaluation of FIN 46(R) resulted in us continuing to
apply previously issued generally accepted accounting principles
to the respective investments and continuing to account for
these entities under the equity method.

Recent Accounting Pronouncements



| |                
| | ---------------
| | Inventory Costs

On November 24, 2004, the FASB issued
SFAS 151, Inventory Costs  an amendment
of ARB No. 43, Chapter 4.SFAS 151 amends the
guidance in Accounting Research Bulletin (ARB) No. 43,
Chapter 4, to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted
material (spoilage). SFAS 151 requires that these costs be
recognized as current period charges regardless of whether they
are abnormal. In addition, SFAS 151 requires that
allocation of fixed production overheads to the costs of
manufacturing be based on the normal capacity of the production
facilities. The Company does not expect this new standard to
have a material effect 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 Healthcare (formerly known as GE Medical Systems)
and Philips Medical Systems. We also compete with Siemens for
renewals of service contracts on the installed base of CPS
scanner customers shipped prior to the Agency Agreement. The
intense and increasing competition in the molecular imaging
equipment market has caused and may continue to cause downward
pressure on the pricing of our molecular imaging equipment
and/or service contracts. In our radiopharmaceutical business,
we compete with for-profit corporations, such as Cardinal
Health, Inc. 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;

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| |   |                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Additional lines of products and the ability to
    offer rebates, provide upgrades to previously installed machines
    or bundle products in order to offer discounts or incentives;
|
| |  | Greater ability to finance capital equipment
    sales for their customers; and                                                                                                       
|
| |  | Greater resources for product development, sales
    and marketing and patent prosecution and litigation.                                                                             

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



| |                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 in
    expected volumes 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, Hitachi Medical Systems America and Toshiba Medical
Systems Corporation. For example, for the years ended
September 30, 2004, 2003, and 2002 sales to Siemens
constituted 49.3%, 39.7% and 49.6%, respectively, of our
consolidated revenues. If we fail to sell a large volume of our
scanners through our distributors, we could experience a decline
in overall sales. None of our current scanner distributors is
obligated to continue selling, or to commit the necessary
resources to effectively market and sell, our scanner products.

Effective May 1, 2004, CTI, CPS, and Siemens
executed an agreement appointing CTI as Siemens
non-exclusive sales representative to solicit purchases of
Siemens-branded PET and PET/ CT scanners manufactured by CPS in
the United States. This agreement provides for us to cease our
direct distribution of PET and PET/ CT scanners, with the
exception of certain rights retained in South Korea and Japan.
In compliance with this agreement, we have ceased direct
distribution of CPS scanner products and terminated our
sub-distribution agreements outside of the U.S. as
required, yet retained those agreements as permitted in South
Korea and Japan. Following this change, our dependence on our
third-party distributors, especially Siemens, has increased for
sales growth and market information used to develop future
guidance.



| |                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 could become limited.

Medicare reimbursement rates are established by
the U.S. Department for Health and Human Services
Centers for Medicare and Medicaid Services (CMS), the government
agency that administers 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. Medicare reimbursement rates for PET
applications have recently declined and are subject to periodic
reevaluation by CMS which could cause further downward
adjustments in the future.

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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 it
has grown.



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

For the years ended September 30, 2004, 2003
and 2002, approximately 52.2%, 47.5% and 58.5%, respectively, of
our consolidated revenues were derived from the sale of PET
equipment manufactured by our 50.1% owned subsidiary, CPS.
Siemens owns the remaining 49.9% of CPS pursuant to a joint
venture agreement that we entered into with Siemens in 1987.
According to this joint venture agreement, Siemens has an option
to acquire from us for cash up to an 80% interest in CPS, if and
when CPS achieves specified unit sales volumes. Siemens
right to exercise this option is contingent upon CPS selling,
during the year preceding exercise, in excess of the cumulative
total number of units specified in the Siemens minima plus
20% plan attached to the joint venture agreement. The
Siemens minima plus 20% plan provides for annual
increases in the cumulative total number of units sold by CPS
beginning on December 9, 1987. As of September 30,
2004, the cumulative total number of units sold by CPS under
this agreement was 852, and at such date, CPS would need to have
sold a cumulative total of 1,055 units to achieve the
required cumulative sales level for the option to be
exercisable. After 2004, the cumulative unit sales requirement
will continue to increase by 74 units each year. 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 the second half of
fiscal year 2006. Siemens cannot exercise its option until the
end of the fiscal year in which this target level is reached.
Once these sales volumes are achieved and the call right is
exercised, we have the right to defer the exercise of the option
for one year. If Siemens exercises its option and increases its
ownership interest in CPS to 80%, Siemens could use that
controlling ownership interest to cause CPS to engage in a
transaction the effect of which would be a purchase by Siemens
of our remaining 20% ownership interest in CPS. Accordingly, the
Siemens option effectively gives Siemens the ability to acquire
100% of CPS.

Under the terms of our new Agency Agreement with
Siemens, in the event the Agency Agreement is terminated or not
renewed by Siemens for any reason, we would continue to have the
right to distribute PET and PET/ CT products manufactured by CPS
until at least 2010 on substantially the same terms as existed
under the distribution agreement between CTI and CPS. The Agency
Agreement also provides that CTI can terminate this agreement
under certain specified circumstances, including the event that
certain total unit sales thresholds for PET and PET/CT scanners
are not met for a period of two consecutive fiscal quarters. The
joint venture agreement also contains cross-covenants not to
compete, which prohibit the parties to the joint venture
agreement from participating in or owning an interest in any
business engaged in the manufacture, development, or sale of
products that compete with the products offered by CPS
currently, and for a period of three years following the closing
of the exercise of the Siemens option.

The exercise of the Siemens option would
eliminate a large portion of our revenues, operations and
assets, including some valuable employees and intellectual
property assets relating to the manufacture and development of
PET scanners. As of September 30, 2004, approximately 34.8%
of our total assets were

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




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

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

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



| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Properly identify customer needs;                                                                                                                                                                              
|
| |  | Prove feasibility of new products;                                                                                                                                                                             
|
| |  | Limit the time required from proof of feasibility
    to routine products;                                                                                                                                     
|
| |  | Limit the timing and cost of regulatory approvals;                                                                                                                                                             
|
| |  | Price our products competitively;                                                                                                                                                                              
|
| |  | Manufacture and deliver our products in
    sufficient volumes on time, and accurately predict and control
    costs associated with manufacturing, installation, warranty and
    maintenance of the products;
|
| |  | Manage customer acceptance and payment for
    products;                                                                                                                                                       
|
| |  | Limit customer demands for retrofits of both new
    and old products; and                                                                                                                                     
|
| |  | Anticipate and 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, 2004 we have 34 issued
U.S. patents and 41 patent applications pending before the
U.S. Patent and Trademark Office. We also have patents
issued and pending in Europe, Canada

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and Japan, including through our ownership of
Mirada. We have no assurance that our patent applications will
result in issued patents or that they will be issued in a form
that will be advantageous to us. We may not be able to prevent
the unauthorized disclosure or use of our technical knowledge or
other trade secrets by employees. Furthermore, the laws of
foreign countries may not protect our intellectual property
rights to the same extent as the laws of the
U.S. Litigation may be necessary to enforce our
intellectual property rights, which could result in substantial
costs to us and substantial diversion of management attention.
If our intellectual property is not adequately protected, our
competitors could use our intellectual property to enhance their
products. This could harm our competitive position, decrease our
market share or otherwise harm our business.


The prosecution and enforcement of copyrights and
patents relating to software and other technology licensed or
sold to us by third parties is not within our control, and
without this software and technology, we may be unable to
manufacture our products or maintain our technological
advantage. For example, we license Siemens
syngoTM 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. While LSO is the only lutetium based scintillator
material currently used in the PET industry, it may be possible
for others to produce a lutetium based detector that does not
contain LSO without violating the Schlumberger patent and,
therefore, our exclusive license. 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, 21 of our issued patents are held in
the name of CPS. If Siemens exercises its right to purchase a
majority interest in CPS, there is no guarantee that we will
have the right to license or otherwise use the technology
underlying these patents or other intellectual property that is
proprietary to CPS such as manufacturing know-how. Our inability
to access or use this technology could harm our business and
financial condition.



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

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

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

Our scanner products are medical devices that are
subject to extensive regulation in the U.S. and in foreign
countries where we do business. Unless an exemption applies,
each medical device that we wish to market in the U.S. must
first receive clearance from the U.S. Food and Drug
Administration, 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 90 days
from the date the application is submitted, but may take longer.
Although we have obtained 510(k) clearance for our current
products, our 510(k) clearance can be revoked if safety or
effectiveness problems develop. We expect that our scanner
products currently under development will require 510(k)
clearance. We may not be able to obtain additional clearances in
a timely fashion, or at all. Delays in obtaining clearance or
the revocation of existing clearances could adversely affect our
revenues and profitability.

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

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

The FDA and similar governmental authorities in
other countries have the authority to require the recall or
related remedies of our scanner products in the event of
material deficiencies or defects in design or manufacture. A
government-mandated or voluntary recall by us could occur as a
result of component 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 a 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) premarket clearance. The FDA requires every
manufacturer to make this determination, but 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
civil or criminal penalties.

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

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

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

Under the 1997 Act the FDA cannot require NDAs or
ANDAs for any PET products that comply with the PET compounding
standards and the official monographs of the United States
Pharmacopoeia until two years after the issuance of final
current good manufacturing practice regulations and appropriate
procedures for the approval of the specific PET drug product,
whichever occurs later. In March 2002, the FDA issued
preliminary draft proposed regulations for the current good
manufacturing practice requirements. The public comment period
for the draft regulations closed on June 5, 2002, after
which the FDA said it intends to issue a proposed rule with an
additional period for public comment before issuing the final
current good manufacturing practice regulations for PET. It is
not possible to accurately predict when the FDA will finalize
these regulations, but we have begun working toward compliance
with these proposed regulations. We currently anticipate that
the FDA authority and the proposed approval procedures and
current good manufacturing practice requirements would not take
effect until calendar year 2007 at the earliest.

Once the requirements for FDA approval take
effect, we could incur significant costs, including upgrading or
replacing certain facilities, and spend considerable time
obtaining FDA approval for existing and newly developed
radiopharmaceuticals or for new indications for existing
radiopharmaceuticals. Such additional costs and time spent to
obtain any required FDA approval could have a material adverse
effect on our business, financial condition, and results of
operations. With regard to the FDAs future issuance of
proposed current good manufacturing practice requirements for
PET drug products, we cannot predict with certainty the precise
nature of these requirements or their future effect on our
business, financial condition, and results of operations.

Our PET products are subject to other rigorous
FDA regulatory requirements, including compounding standards,
reporting of serious adverse events, labeling and promotional
requirements. Our failure to satisfy these requirements could
result in, among other things, notice of violations or warning
letters, fines, consent decrees and injunctions, civil
penalties, repairs, replacements, refunds, recalls or seizures
of products, total or partial suspension of production, import
or safety alerts, 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.

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

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



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

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



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

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



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

We anticipate that our expenses will increase in
the foreseeable future as we grow our business and:



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

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



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

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



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

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



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

Many of our customers require or desire financing
in connection with purchases of our molecular imaging equipment.
Some of our competitors have sufficient capital resources to
provide capital equipment financing directly to their customers
on attractive terms. In order to compete with these competitors,
we maintain relationships with third party financing sources who
offer financing services to our customers. Our business,
operations and financial condition could be adversely impacted
if our new financing source is unable to provide our customers
with competitive financing or experiences adverse financial
conditions that impact its ability to offer financing or fund
future sales.

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

We conduct business globally. International sales
accounted for approximately 24.6%, 23.3%, and 23.5% of sales for
the years ended September 30, 2004, 2003 and 2002,
respectively. We also acquire various raw materials and
components from international suppliers. We intend to expand our
presence in international markets, and we cannot assure you that
we will compete successfully in international markets or meet
the service and support needs of foreign customers. Our future
results could be harmed by a variety of factors relating to
international operations, including:



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



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

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



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

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

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approval. This could also create supply
disruptions that would harm our product sales and operating
results.




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

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



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

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

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

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



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

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



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

We generally warrant each of our products against
defects in materials and workmanship for a period of twelve
months from the acceptance of our product by a customer or
eighteen months from the date of shipment to a distributor.
Further, we have entered into long-term service agreements with
certain customers pursuant to 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.

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

Our executive officers, principal stockholders
and directors and entities affiliated with them beneficially
own, in the aggregate, approximately 28.1% of our common stock
as of September 30, 2004. 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 significant or 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 exert substantial influence over 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 some of our investors may
consider desirable.



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | 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 has been and may continue
    to be volatile.

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



| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | volume and timing of orders for our products;                                                                            
|
| |  | our ability to develop, obtain regulatory
    clearance for, and market, new and enhanced products on a timely
    basis;
|
| |  | the announcement of new products or product
    enhancements by us or our competitors;                                   
|
| |  | announcements of technological or medical
    innovations in the monitoring or treatment of diseases;                    
|
| |  | 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;                    

64



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






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

Interest Rate Sensitivity

Our exposure to market risk relates principally
to changes in interest rates for borrowings under our revolving
credit facility and our industrial revenue bonds. These
borrowings, which represent an aggregate principal amount of
$4.9 million at September 30, 2004, bear interest at
variable rates. Based on our borrowings during 2004, a
hypothetical increase in interest rates of 1.0% (i.e. an
additional 100 basis points) would have increased our
annual interest expense by less than $0.1 million and would
have decreased our annual cash flow from operations by less than
$0.1 million.

The Companys cash equivalents and
short-term investments are also 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, 2004, we had cash and
cash equivalents of $36.4 million. Because of the short
maturities of these instruments, a sudden change in market
interest rates would not have a material impact on the fair
value of the portfolio. We would not expect our operating
results or cash flows to be materially affected by the effect of
a sudden change in market interest rates on our portfolio.

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

|                  |                       |      |   |        |   |            |   |        |   |  |   |        |  
|----------------- | --------------------- | ---- | - | ------ | - | ---------- | - | ------ | - |  | - | ------ | -
|                  |                       |      |   |        |   | 9/30/04   
|                  |                       | 2004 |   | Total  |   | Fair Value
|                  |                       |      |   |        |   |           
|Assets:           |                       |      |   |        |   |            |   |        |   |  |   |       
|Cash equivalents: |                       |      |   |        |   |            |   |        |   |  |   |       
|                  | Fixed rate            |      | $ | 26,632 |   |            | $ | 26,632 |   |  | $ | 26,632 |  
|                  | Average interest rate |      |   | 2.23   | % |            |   | 2.23   | % |  |   | 2.23   | %
|                  | Variable rate         |      | $ | 90     |   |            | $ | 90     |   |  | $ | 90     |  
|                  | Average interest rate |      |   | 1.92   | % |            |   | 1.92   | % |  |   | 1.92   | %

Foreign Currency Risk

International revenues from the Companys
foreign direct sales and distributor sales comprised 24.6% of
total revenues for the year ended September 30, 2004.
However, because the vast majority of our international sales
are transacted in the United States dollar, our exposure to
foreign currency risk associated with these sales is immaterial.
The Company experienced approximately $0.7 million of
foreign currency transaction gains for the year ended
September 30, 2004 that resulted primarily from the
substantial collection of long-term receivables in one of our
international subsidiaries. The Company is also exposed to
foreign exchange rate fluctuations as the financial results of
its international subsidiaries are translated into
U.S. dollars in consolidation. As exchange rates vary,
these results when translated may vary from expectations and
adversely impact overall expected profitability. A 10% change in
the value of the U.S. dollar relative to other currencies
would not have a material effect on our consolidated financial
position, results of operations, or cash flow.

Equity Security Price Risk

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

65



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##### Table of Contents



Commodity Price Risk

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






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






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

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

There have been no changes in the Companys
internal control over financial reporting that occurred during
the quarter ended September 30, 2004 that have materially
affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.






|         |                  
|-------- | -----------------
|Item 9B. | Other Information

Effective as of September 1, 2004, Thomas J.
Hook a Senior Vice President of the Company and President of the
Companys wholly owned subsidiary PETNET Pharmaceuticals,
Inc., resigned employment with the Company but was retained by
the Company as a strategic consultant pursuant to a two-year
consulting agreement which also authorized Mr. Hook to
retain 64,308 restricted shares of common stock that will vest
over the term of the consulting agreement.




PART III






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

The information required by this Item 10
will be contained in the section entitled Management
of the Companys definitive proxy statement for its 2005
Annual Meeting of Stockholders to be filed with the SEC, and
such information is incorporated in this Annual Report on
Form 10-K by this reference.






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

The information required by this Item 11
will be contained in the section entitled Executive
Compensation of the Companys definitive proxy
statement for its 2005 Annual Meeting of Stockholders to be
filed with the SEC, and such information is incorporated in this
Annual Report on Form 10-K by this reference.

66



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##### Table of Contents








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

The information required by this Item 12
will be contained in the section entitled Beneficial
Security Ownership of the Companys definitive proxy
statement for its 2005 Annual Meeting of Stockholders to be
filed with the SEC, and such information is incorporated in this
Annual Report on Form 10-K by this reference.






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

The information required by this Item 13
will be contained in the section entitled Certain
Transactions of the Companys definitive proxy
statement for its 2005 Annual Meeting of Stockholders to be
filed with the SEC, and such information is incorporated in this
Annual Report on Form 10-K by this reference.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services

PricewaterhouseCoopers LLP (PwC) has audited our
financial statements for the fiscal years ended
September 30, 2004 and September 30, 2003. The SEC has
begun requiring new disclosures regarding the fees public
companies pay their independent auditors for various services.

Audit Fees

During the fiscal years ended September 30,
2004 and September 30, 2003, PwC billed us an aggregate of
$433 and $385, respectively, for professional services rendered
for:



| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | Audits of our annual financial statements
    included in our Annual Reports on Form 10-K for those two
    fiscal years; and
|
| |  | Review of our financial statements included in
    our Quarterly Reports on Form 10-Q for those two fiscal
    years.        

Audit-Related Fees

During the fiscal years ended September 30,
2004 and September 30, 2003, PwC billed us an aggregate of
$104 and $35, respectively, for assurance and related services
reasonably related to the performance of the audits and reviews
for those two fiscal years, in addition to the fees described
above under the heading Audit Fees. These services
include:



| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | Accounting consultation on potential financing
    structures;                                      
|
| |  | Sarbanes-Oxley Act compliance; and                                                                  
|
| |  | Support and review services provided in
    connection with our acquisitions of Concorde and Mirada.

Tax Fees

During the fiscal years ended September 30,
2004 and September 30, 2003, PwC billed us an aggregate of
$260 and $145, respectively, for tax compliance, tax advice, and
tax planning services. These professional services consist of
general consultation from time to time regarding compliance with
and planning for federal, state, local, and international tax
matters.

All Other Fees

During the fiscal years ended September 30,
2004 and September 30, 2003, all services rendered by PwC
were under the headings of Audit Fees,
Audit-Related Fees, and Tax Fees. No
other fees were billed to us from PwC.

67



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Pre-Approval of Services

Since May 6, 2003, all services provided to
the Company by PwC have been required by SEC rules implementing
the Sarbanes-Oxley Act of 2002 to be approved by the Audit
Committee prior to PwCs beginning to perform those
services. In preparation for these rules taking effect, the
Audit Committee established a policy setting forth procedures
for PwC, in cooperation with our management, to seek
pre-approval to provide services to the Company. These
procedures divide potential services that might be provided by
PwC into three classifications:



| |                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Services that are permitted by the Audit
    Committee, including audit and review of annual and quarterly
    financial statements and related attestations, pension and
    benefit plan audits and similar audit reports, financial and
    other due diligence on acquisitions, and federal, state, and
    non-US tax services;
|
| | 2. Services that may be permitted by the
    Audit Committee, subject to individual pre-approval, including
    compliance and internal-control reviews, indirect tax services
    such as transfer pricing and customs and duties, certain human
    resources services, and forensic auditing; and                                   
|
| | 3. Services which PwC, as the Companys
    independent auditor, may not legally provide, such as
    bookkeeping, internal audit outsourcing, and investment advising
    or investment banking.                                                                                                                                      

Many of PwCs services are pre-approved
annually. PwC and our management jointly prepare a schedule
outlining all services that PwC could provide to the Company
during the year which the Company reasonably expects to need,
and categorizing them according to the classifications described
above. Each service identified on the schedule then is reviewed
and approved or rejected by the Audit Committee at its September
meeting. The Audit Committees pre-approval of a service
identified on the schedule does not obligate the Company to use
PwC to provide the service; our management retains the
discretion to obtain those services from other providers. Our
management also retains the responsibility to negotiate with PwC
regarding the terms on which any pre-approved service will be
provided.

Other services are pre-approved on a case-by-case
basis. When the need for a service not previously pre-approved
becomes apparent, PwC and our management jointly prepare a
proposal for PwC to provide the services to the Company. The
proposal then is reviewed and approved or rejected by the Audit
Committee. The Audit Committee may designate a single member to
approve or reject these interim requests.

The Audit Committees policy strictly
prohibits PwC from performing any services in the third category
for the Company.

No services provided by PwC were approved by the
Audit Committee pursuant to paragraph (c)(7)(i)(C) of
Rule 2-01 of Regulation S-X.

68



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

(a) (1) Financial Statements:

|                                  |                                                                                                                                                                                 |      |  |            | 
|--------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | ---------- | 
|                                  |                                                                                                                                                                                 | Page
|                                  |                                                                                                                                                                                 |     
|                                  | The following consolidated financial statements
    of the Company and Report of PricewaterhouseCoopers LLP                                                                     |      |  |            | 
|                                  | Independent Registered Public Accounting Firm,
    are included in this report:                                                                                                 |      |  |            | 
|                                  | Report of Independent Registered Public
    Accounting Firm                                                                                                                     |      |  | F-1        | 
|                                  | Consolidated Balance Sheets as of
    September 30, 2004 and 2003                                                                                                               |      |  | F-2        | 
|                                  | Consolidated Statements of Operations for the
    Years Ended September 30, 2004, 2003, and 2002                                                                                |      |  | F-3        | 
|                                  | Consolidated Statements of Changes in
    Shareholders Equity for the Years Ended September 30,
    2004, 2003 and 2002                                                        |      |  | F-4        | 
|                                  | Consolidated Statements of Cash Flows for the
    Years Ended September 30, 2004, 2003 and 2002                                                                                 |      |  | F-5        | 
|                                  | Notes to Consolidated Financial Statements                                                                                                                                      |      |  | F-6  F-31 | 
|(2) Financial Statement Schedule: |                                                                                                                                                                                 |      |  |           
|                                  | Schedule II. Valuation and Qualifying
    Accounts  Years Ended September 30, 2004, 2003
    and 2002                                                                          |      |  | F-32       | 
|                                 
|(3) Exhibits:                     |                                                                                                                                                                                 |      |  |           
|                                  | The Exhibits listed in the Index of Exhibits
    appearing at pages 71-75 are included in this annual report
    and such Index of Exhibits is incorporated herein by reference |      |  |            | 

(b)     Exhibits:



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

(c)     Financial
Statement Schedules:



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

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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this Annual Report on Form  10-K to be
signed on its behalf by the undersigned, thereunto duly
authorized, on the 10th day of December, 2004.



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



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

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

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

|                                                  |  |                                                                                                    |  |                   |  | 
|------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | ----------------- |  | 
|                                                  |  |                                                                                                    |  |                  
|Signature                                         |  | Title                                                                                              |  | Date             
|                                                  |  |                                                                                                    |  |                  
|                                                 
|/s/ RONALD NUTTRonald Nutt, Ph.D.                 |  | President and Chief Executive Officer and
    Director (Principal executive officer)               |  | December 10, 2004
|                                                 
|/s/ DAVID N. GILLDavid N. Gill                    |  | Senior Vice President and Chief Financial Officer
    (Principal financial and accounting officer) |  | December 10, 2004
|                                                 
|/s/ TERRY D. DOUGLASSTerry D. Douglass, Ph.D.     |  | Chairman of the Board of Directors                                                                 |  | December 10, 2004
|                                                 
|/s/ ROY DOUMANIRoy Doumani                        |  | Director                                                                                           |  | December 10, 2004
|                                                 
|/s/ WOLF-EKKEHARD BLANZWolf-Ekkehard Blanz, Ph.D. |  | Director                                                                                           |  | December 10, 2004
|                                                 
|/s/ JAMES R. HEATHJames R. Heath, Ph.D.           |  | Director                                                                                           |  | December 10, 2004
|                                                 
|/s/ LEROY HOODLeroy Hood, M.D., Ph.D.             |  | Director                                                                                           |  | December 10, 2004
|                                                 
|/s/ HAMILTON JORDANHamilton Jordan                |  | Director                                                                                           |  | December 10, 2004
|                                                 
|/s/ WILLIAM W. MCINNESWilliam W. McInnes          |  | Director                                                                                           |  | December 10, 2004
|                                                 
|/s/ MICHAEL E. PHELPSMichael E. Phelps, Ph.D.     |  | Director                                                                                           |  | December 10, 2004

70



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EXHIBIT INDEX

|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1          |  | Certificate of Incorporation of CTI Molecular
    Imaging, Inc., filed as Exhibit 3.1to the
    Companys Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.                                                                                                                                                                                                                                                    
|        | 3  | .2          |  | Bylaws of CTI Molecular Imaging Inc., filed as
    Exhibit 3.2to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference.                                                                                                                                                                                                                                                                           
|        | 3  | .3          |  | Certificate of Retirement of Stock of CTI
    Molecular Imaging, Inc., filed as Exhibit 3.1to 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 3.2to 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 4.1to
    the Companys Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.                                                                                                                                                                                                                                          
|        | 4  | .2          |  | Reference is made to Exhibits 3.1, 3.2, 3.3
    and 3.4.                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 4  | .3          |  | Shareholder Protection Rights Agreement, filed as
    Exhibit 4.3to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference.                                                                                                                                                                                                                                                                        
|        | 10 | .1          |  | Stock Purchase, Reorganization and Joint Venture
    Agreement, dated December 9, 1987, among CTI Group, Inc.,
    CTI PET Systems, Inc., Dr. Terry D. Douglass,
    Dr. Ronald Nutt, Michael C. Crabtree, J. Kelly Milam and
    Siemens Gammasonics, Inc. (Joint Venture Agreement),
    filed as Exhibit 10.1to the Companys
    Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.                       
|        | 10 | .2          |  | Amendment to Joint Venture Agreement, dated
    March 31, 1995, filed as Exhibit 10.2to the
    Companys Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.                                                                                                                                                                                                                                                    
|        | 10 | .3          |  | Second Amendment to Joint Venture Agreement,
    dated June 30, 1997, filed as Exhibit 10.3to
    the Companys Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.                                                                                                                                                                                                                                              
|        | 10 | .4          |  | Third Amendment to Joint Venture Agreement, dated
    April 2001, filed as Exhibit 10.4to the
    Companys Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.                                                                                                                                                                                                                                                  
|        | 10 | .5          |  | Fourth Amendment to Joint Venture Agreement,
    dated March  20, 2002, filed as Exhibit 10.5to the Companys Registration Statement on
    Form S-1 (Reg. No. 333-85714), and incorporated herein
    by reference.                                                                                                                                                                                                                                            
|        | 10 | .6          |  | Distribution Agreement, dated March 1, 2002,
    between CTI PET Systems, Inc. and Siemens Medical Solutions USA,
    Inc., filed as Exhibit 10.6to the Companys
    Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference. (The
    Company has been granted confidential treatment with respect to
    certain portions of this Exhibit.)                                                                        
|        | 10 | .7          |  | Sales Agency and Service Agreement between
    Siemens Medical Solutions USA, Inc., CTI Molecular Imaging, Inc.
    and CIT PET Systems, Inc. dated May 1, 2004, filed as
    Exhibit 10.1to the Companys Quarterly Report
    on Form 10-Q for the quarter ended June 30, 2004 (File
    No. 000-49867), and incorporated herein by reference. (The
    Company has been granted confidential treatment with respect to
    certain portions of this Exhibit.)
|        | 10 | .8          |  | 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 10.10to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference. (The Company has been granted
    confidential treatment with respect to certain portions of this
    Exhibit.)                                  

71



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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .9          |  | Master Purchase Agreement, dated
    September 1, 1999, by and between CPS, Inc. and PHOTONIS,
    filed as Exhibit 10.13to the Companys
    Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference. (The
    Company has been granted confidential treatment with respect to
    certain portions of this Exhibit.)                                                           
|        | 10 | .10         |  | Master Purchase Agreement, dated
    September 1, 1999, between CPS, Inc. and Hamamatsu
    Corporation, filed as Exhibit 10.14to the
    Companys Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference. (The
    Company has been granted confidential treatment with respect to
    certain portions of this Exhibit.)                                                     
|        | 10 | .11         |  | Exclusive Patent and Technology License
    Agreement, dated February 1, 1995, between Schlumberger
    Technology Corporation and CTI, Inc., filed as
    Exhibit 10.16to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference. (The Company has been granted
    confidential treatment with respect to certain portions of this
    Exhibit.)            
|        | 10 | .12         |  | Agreement, dated January 3, 2002, between
    P.E.T.Net Pharmaceuticals, Inc. and ISOTEC, INC., filed as
    Exhibit 10.20to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference. (The Company has been granted
    confidential treatment with respect to certain portions of this
    Exhibit.)                                                          
|        | 10 | .13         |  | Agreement, dated March 9, 2000, between CTI
    Cyclotron Systems and Rotem Industries Ltd., filed as
    Exhibit 10.50to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference. (The Company has been granted
    confidential treatment with respect to certain portions of this
    Exhibit.)                                                             
|        | 10 | .14         |  | Third Modified 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,
    filed as Exhibit 10.15to the Companys Annual
    Report on Form 10-K for the fiscal year ended
    September 30, 2002 (File No. 000-49867), and
    incorporated herein by reference.
|        | 10 | .15         |  | Loan Agreement, dated August 1, 1988,
    between The Industrial Development Board of Blount County,
    Tennessee and Advanced Crystal Technology, Inc., filed as
    Exhibit 10.21to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference.                                                                                                                
|        | 10 | .16         |  | Loan Agreement, dated January 13, 2000,
    between SunTrust Bank, East Tennessee and CTI, Inc., filed as
    Exhibit 10.22to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference.                                                                                                                                                                         
|        | 10 | .17         |  | Construction Loan Agreement, dated
    August 16, 2001, between SunTrust Bank and CTI, Inc., filed
    as Exhibit 10.23to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference.                                                                                                                                                                             
|        | 10 | .18         |  | Change in Control Agreement, dated May 15,
    2002, between CTI, Inc. and Terry D. Douglass, filed as
    Exhibit 10.40to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference.                                                                                                                                                                            
|        | 10 | .19         |  | Change in Control Agreement, dated May 15,
    2002, between CTI, Inc. and Ronald Nutt, filed as
    Exhibit 10.41to the Companys Registration
    Statement on Form S-1 (File No. 333-85714), and
    incorporated herein by reference.                                                                                                                                                                                  
|        | 10 | .20         |  | Amendment dated December 9, 2003, to Change
    in Control Agreement between CTI Molecular Imaging, Inc. and
    Ronald Nutt, filed as Exhibit 10.21to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended September 30, 2003 (File No. 000-49867),
    and incorporated herein by reference.                                                                                                       
|        | 10 | .21         |  | Change in Control Agreement, dated May 15,
    2002, between CTI, Inc. and David Gill, filed as
    Exhibit 10.42to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference.                                                                                                                                                                                   
|        | 10 | .22*        |  | Change in Control Agreement dated
    December 9, 2003, between CTI Molecular Imaging, Inc. and
    Cliffreda W. Gilreath.                                                                                                                                                                                                                                                                                                 

72



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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                               
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .23         |  | Change in Control Agreement, dated
    December 17, 2002, between CTI Molecular Imaging, Inc. and
    Thomas J. Hook, filed as Exhibit 10.24to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended September 30, 2002 (File No. 000-49867),
    and incorporated herein by reference.                                                                  
|        | 10 | .24         |  | Change in Control Agreement, dated
    December 17, 2002, between CTI Molecular Imaging, Inc. and
    R. Gregory Brophy, filed as Exhibit 10.25to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended September 30, 2003 (File No. 000-49867),
    and incorporated herein by reference.                                                               
|        | 10 | .25*       |  | Employment Agreement by and between CTI Molecular
    Imaging, Inc. and Joseph Sardano dated April 27, 2004.                                                                                                                                                                                                                                                                  
|        | 10 | .26*       |  | Consulting Agreement by and between CTI Molecular
    Imaging, Inc. and Thomas J. Hook dated September 1, 2004.                                                                                                                                                                                                                                                               
|        | 10 | .27         |  | Form of Indemnity Agreement between CTI, Inc. and
    directors and certain officers, filed as Exhibit 10.46to the Companys Registration Statement on
    Form S-1 (Reg. No. 333-85714), and incorporated herein
    by reference.                                                                                                                                           
|        | 10 | .28        |  | Letter Agreement, dated January 11, 2002,
    between CTI, Inc. and David N. Gill, filed as
    Exhibit 10.18to the Companys Registration
    Statement on Form S-1 (Reg. 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, filed as
    Exhibit 10.29to the Companys Annual Report on
    Form 10-K for the fiscal year ended September 30, 2002
    (File No. 000-49867), and incorporated herein by reference.                                                                                      
|        | 10 | .30        |  | Letter Agreement, dated August 02, 2002
    between CTI Molecular Imaging, Inc. and R. Gregory Brophy, filed
    as Exhibit 10.30to the Companys Annual Report
    on Form 10-K for the fiscal year ended September 30,
    2002 (File No. 000-49867), and incorporated herein by reference.                                                                                 
|        | 10 | .31        |  | CTI, Inc. 1998 Restated Incentive Stock Option
    Plan, filed as Exhibit 10.11to the Companys
    Registration Statement on Form S-1 (Reg.
    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 10.12to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference.                                                                                                                 
|        | 10 | .33        |  | CTI Molecular Imaging, Inc. 2002 Long-Term
    Incentive Plan, filed as Exhibit 10.24to 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,
    filed as Exhibit 10.34to the Companys Annual
    Report on Form 10-K for the fiscal year ended
    September 30, 2002 (File No. 000-49867), and
    incorporated herein by reference.                                                                  
|        | 10 | .35        |  | Form of Restricted Stock Agreement under the CTI
    Molecular Imaging, Inc. 2002 Long-Term Incentive Plan, filed as
    Exhibit 10.35to the Companys Annual Report on
    Form 10-K for the fiscal year ended September 30, 2002
    (File No. 000-49867), and incorporated herein by reference.                                                                            
|        | 10 | .36        |  | CTI Molecular Imaging, Inc. 2002 Employee Stock
    Purchase Plan, filed as Exhibit 10.17to the
    Companys Registration Statement on Form S-1 (Reg.
    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 10.30to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference.

73



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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .38         |  | Stock Restriction and Non-Competition Agreement,
    dated April 9, 2001, between CTI, Inc. and Terry Douglass,
    filed as Exhibit 10.31to the Companys
    Registration Statement on Form S-1 (Reg.
    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 10.32to the Companys
    Registration Statement on Form S-1 (Reg.
    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 10.35to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference.                                                                                                           
|        | 10 | .41         |  | Shareholder Agreement, dated December 20,
    1996, between CTI, Inc. and Terry Douglass, filed as
    Exhibit 10.37to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference.                                                                                                    
|        | 10 | .42         |  | Registration Rights Agreement, dated
    September 30, 1999, between CTI, Inc. and First Union
    Capital Partners, Inc., filed as Exhibit 10.9to the
    Companys Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.                                                                        
|        | 10 | .43         |  | Warrant to Purchase 32,000 shares of
    common stock between CTI, Inc. and Jordan & Davis
    Partners, LLC, filed as Exhibit 10.47to the
    Companys Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.                                                                                    
|        | 10 | .44         |  | Warrant to Purchase 40,000 shares of
    common stock between CTI, Inc. and Jordan & Davis
    Partners, LLC, filed as Exhibit 10.48to the
    Companys Registration Statement on Form S-1 (Reg.
    No. 333-85714), and incorporated herein by reference.                                                                                    
|        | 10 | .45         |  | Warrant to Purchase 4,000 shares of
    common stock between CTI, Inc. and Gene McGrevin, filed as
    Exhibit 10.49to the Companys Registration
    Statement on Form S-1 (Reg. No. 333-85714), and
    incorporated herein by reference.                                                                                                    
|        | 10 | .46        |  | Supply Agreement, dated August 1, 2003,
    filed as Exhibit 10.47to the Companys Annual
    Report on Form 10-K for the fiscal year ended
    September 30, 2003 (File No. 000-49867), and
    incorporated herein by reference. (The Company has requested
    confidential treatment with respect to certain portions of this
    Exhibit.)
|        | 10 | .47         |  | Lease Agreement, dated as of November 1,
    2002, between CTI Molecular Imaging, Inc. and CTI PET Systems,
    Inc, filed as Exhibit 10.48to the Companys
    Annual Report on Form 10-K for the fiscal year ended
    September 30, 2003 (File No. 000-49867), and
    incorporated herein by reference.                                    
|        | 10 | .48         |  | Code of Business Conduct and Ethics of CTI
    Molecular Imaging, Inc, filed as Exhibit 10.49to
    the Companys Annual Report on Form 10-K for the
    fiscal year ended September 30, 2003 (File
    No. 000-49867), and incorporated herein by reference.                                                                                  
|        | 10 | .49         |  | Asset Purchase Agreement between CTI Molecular
    Imaging, Inc., CTI Concorde Microsystems, LLC and Concorde
    Microsystems, Inc. dated June 17, 2004, filed as
    Exhibit 10.2to the Companys Quarterly Report
    on Form 10-Q for the quarter ended June 30, 2004 (File
    No. 000-49867), and incorporated herein by reference.      
|        | 21 | .1*         |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                   
|        | 23 | .1*         |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                                                                                         
|        | 31 | .1*         |  | Certification pursuant to
    Rule 13a-14(a)/15d-14(a), as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                               
|        | 31 | .2*         |  | Certification pursuant to
    Rule 13a-14(a)/15d-14(a), as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                               

74



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|        |    |             |  |                                                                                                                         
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 32 | .1**        |  | Certification pursuant to 18 U.S.C.
    § 1350, as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002
|        | 32 | .2**        |  | Certification pursuant to 18 U.S.C.
    § 1350, as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002



---



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



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



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

75



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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

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

In our opinion, the consolidated financial
statements listed in the index appearing under
Item 15(a)(1) present fairly, in all material
respects, the financial position of CTI Molecular Imaging, Inc.
and its subsidiaries at September 30, 2004 and 2003, and
the results of their operations and their cash flows for each of
the three years in the period ended September 30, 2004 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 index appearing under
Item 15(a)(2) 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
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Atlanta, Georgia

December 10, 2004


F-1



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                   |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |         |         |         |         | 
|---------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------------------------------------ | ------------- | ------- | ------- | ------- | ------- | ------- | ------- | 
|                                                                                   |                                                                                                                                                                                                                                                 | September 30,               |                                            | September 30,
|                                                                                   |                                                                                                                                                                                                                                                 | 2004                        |                                            | 2003         
|                                                                                   |                                                                                                                                                                                                                                                 |                             |                                            |              
|                                                                                   |                                                                                                                                                                                                                                                 |                            
|                                                                                   |                                                                                                                                                                                                                                                 | (In thousands, except share
|                                                                                   |                                                                                                                                                                                                                                                 | and per share data)        
|ASSETS                                                                            
|Current assets:                                                                    |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |         |        
|                                                                                   | Cash and cash equivalents                                                                                                                                                                                                                       |                             | $                                          | 36,381        |         |         | $       | 49,978  |        
|                                                                                   | Accounts receivable  trade, less
    allowance for doubtful accounts of $4,951 at September 30,
    2004 and $3,475 at September 30, 2003                                                                                                      |                             |                                            | 65,946        |         |         |         | 72,240  |        
|                                                                                   | Accounts receivable  related party,
    less allowance for doubtful accounts of $239 at
    September 30, 2004 and $186 at September 30, 2003                                                                                                  |                             |                                            | 34,231        |         |         |         | 42,430  |        
|                                                                                   | Inventories (Note 3)                                                                                                                                                                                                                            |                             |                                            | 92,219        |         |         |         | 70,852  |        
|                                                                                   | Deferred tax asset                                                                                                                                                                                                                              |                             |                                            | 13,474        |         |         |         | 17,751  |        
|                                                                                   | Prepaid expenses and other current assets                                                                                                                                                                                                       |                             |                                            | 8,345         |         |         |         | 7,691   |        
|                                                                                   |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |         |        
|                                                                                   |                                                                                                                                                                                                                                                 |                             | Total current assets                       |               |         | 250,596 |         |         |         | 260,942 | 
|                                                                                   |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |         |        
|Property and equipment, net (Note 4)                                               |                                                                                                                                                                                                                                                 |                             | 133,074                                    |               |         |         | 107,293 |        
|Goodwill                                                                           |                                                                                                                                                                                                                                                 |                             | 46,629                                     |               |         |         | 25,040  |        
|Other assets (Note 2)                                                              |                                                                                                                                                                                                                                                 |                             | 34,915                                     |               |         |         | 31,773  |        
|                                                                                   |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |         |        
|                                                                                   |                                                                                                                                                                                                                                                 |                             | Total assets                               |               | $       | 465,214 |         |         | $       | 425,048 | 
|                                                                                   |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |         |        
|                                                                                  
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                          
|Current liabilities:                                                               |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |         |        
|                                                                                   | Cash management clearing                                                                                                                                                                                                                        |                             | $                                          | 4,945         |         |         | $       | 12,017  |        
|                                                                                   | Accounts payable                                                                                                                                                                                                                                |                             |                                            | 28,067        |         |         |         | 34,490  |        
|                                                                                   | Current maturities of long-term debt and capital
    lease obligations (Note 6)                                                                                                                                                                 |                             |                                            | 4,289         |         |         |         | 5,501   |        
|                                                                                   | Accrued payroll and benefits                                                                                                                                                                                                                    |                             |                                            | 13,095        |         |         |         | 16,708  |        
|                                                                                   | Customer advances  trade                                                                                                                                                                                                                       |                             |                                            | 8,517         |         |         |         | 6,537   |        
|                                                                                   | Customer advances  related party                                                                                                                                                                                                               |                             |                                            | 1,284         |         |         |         | 326     |        
|                                                                                   | Accrued warranty expense                                                                                                                                                                                                                        |                             |                                            | 6,148         |         |         |         | 5,262   |        
|                                                                                   | Income taxes payable                                                                                                                                                                                                                            |                             |                                            | 4,472         |         |         |         | 3,724   |        
|                                                                                   | Other accrued expenses                                                                                                                                                                                                                          |                             |                                            | 2,816         |         |         |         | 3,884   |        
|                                                                                   |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |         |        
|                                                                                   |                                                                                                                                                                                                                                                 |                             | Total current liabilities                  |               |         | 73,633  |         |         |         | 88,449  | 
|                                                                                   |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |         |        
|Deferred revenues                                                                  |                                                                                                                                                                                                                                                 |                             | 4,447                                      |               |         |         | 2,332   |        
|Deferred tax liability                                                             |                                                                                                                                                                                                                                                 |                             | 5,013                                      |               |         |         | 8,999   |        
|Long-term debt and capital lease obligations,
    less current maturities (Note 6) |                                                                                                                                                                                                                                                 |                             | 12,856                                     |               |         |         | 18,688  |        
|                                                                                   |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |         |        
|                                                                                   |                                                                                                                                                                                                                                                 |                             | Total liabilities                          |               |         | 95,949  |         |         |         | 118,468 | 
|                                                                                   |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |         |        
|Commitments and contingencies (Note 5)                                             |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |         |        
|Minority interest                                                                  |                                                                                                                                                                                                                                                 |                             | 62,213                                     |               |         |         | 46,727  |        
|Shareholders equity:                                                              |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |         |        
|                                                                                   | Preferred stock, Series C, $.01 par
    value, 50,000 shares authorized, no shares issued or
    outstanding at September 30, 2004 and September 30,
    2003 (Note 12)                                                                         |                             |                                            |              |         |         |         |        |        
|                                                                                   | Common stock, $.01 par value;
    500,000,000 shares authorized, 48,455,820 shares
    issued and 46,623,855 shares outstanding at
    September 30, 2004; 46,290,459 shares issued and
    44,458,494 shares outstanding at September 30, 2003 |                             |                                            | 484           |         |         |         | 463     |        
|                                                                                   | Additional paid-in capital                                                                                                                                                                                                                      |                             |                                            | 270,821       |         |         |         | 243,400 |        
|                                                                                   | Retained earnings                                                                                                                                                                                                                               |                             |                                            | 39,827        |         |         |         | 21,207  |        
|                                                                                   | Unearned compensation                                                                                                                                                                                                                           |                             |                                            | (3,465        | )       |         |         | (4,516  | )      
|                                                                                   | Other comprehensive income  currency
    translation adjustment                                                                                                                                                                                |                             |                                            | 348           |         |         |         | 262     |        
|                                                                                   | Treasury stock, at cost, 1,831,965 shares                                                                                                                                                                                                       |                             |                                            | (963          | )       |         |         | (963    | )      
|                                                                                   |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |         |        
|                                                                                   |                                                                                                                                                                                                                                                 | Total shareholders equity  |                                            |               | 307,052 |         |         |         | 259,853 |        
|                                                                                   |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |         |        
|                                                                                   |                                                                                                                                                                                                                                                 |                             | Total liabilities and shareholders equity |               | $       | 465,214 |         |         | $       | 425,048 | 
|                                                                                   |                                                                                                                                                                                                                                                 |                             |                                            |               |         |         |         |        

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,   
|                                                              |                                                  |                            
|                                                              |                                                  | 2004                        |         | 2003       |         | 2002
|                                                              |                                                  |                             |         |            |         |     
|                                                              |                                                  |                            
|                                                              |                                                  | (In thousands, except share
|                                                              |                                                  | and per share data)        
|Revenues(1)                                                   |                                                  | $                           | 401,748 |            |         | $    | 362,289 |            |         | $ | 258,395 |           
|Cost of revenues(2),(3)                                       |                                                  |                             | 242,804 |            |         |      | 219,127 |            |         |   | 150,654 |           
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|                                                              |                                                  | Gross margin                |         |            | 158,944 |      |         |            | 143,162 |   |         |            | 107,741 | 
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|Operating expenses:                                           |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|                                                              | Selling, general and administrative expenses(3)  |                             |         | 65,047     |         |      |         | 52,221     |         |   |         | 37,069     |        
|                                                              | Research and development expenses(3)             |                             |         | 33,363     |         |      |         | 29,931     |         |   |         | 21,658     |        
|                                                              | Write-off of in process research and development |                             |         |           |         |      |         | 1,380      |         |   |         |           |        
|                                                              | Stock-based compensation expense                 |                             |         | 2,530      |         |      |         | 1,909      |         |   |         | 12,250     |        
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|                                                              |                                                  | Total operating expenses    |         |            | 100,940 |      |         |            | 85,441  |   |         |            | 70,977  | 
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|Income from operations                                        |                                                  |                             | 58,004  |            |         |      | 57,721  |            |         |   | 36,764  |           
|Warrant liability mark to market expense                      |                                                  |                             |        |            |         |      |        |            |         |   | 8,902   |           
|Interest expense, net                                         |                                                  |                             | 1,375   |            |         |      | 804     |            |         |   | 4,148   |           
|Other income                                                  |                                                  |                             | (585    | )          |         |      | (1,968  | )          |         |   | (426    | )         
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|Income before income taxes and minority interest              |                                                  |                             | 57,214  |            |         |      | 58,885  |            |         |   | 24,140  |           
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|Provision (benefit) for income taxes:                         |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|                                                              | Current                                          |                             |         | 21,723     |         |      |         | 18,545     |         |   |         | 15,544     |        
|                                                              | Deferred                                         |                             |         | 195        |         |      |         | 4,390      |         |   |         | (954       | )      
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|                                                              |                                                  |                             | 21,918  |            |         |      | 22,935  |            |         |   | 14,590  |           
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|Income before minority interest                               |                                                  |                             | 35,296  |            |         |      | 35,950  |            |         |   | 9,550   |           
|Amount applicable to minority interest, net of
    taxes      |                                                  |                             | 16,676  |            |         |      | 15,387  |            |         |   | 12,969  |           
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|Net income (loss)                                             |                                                  |                             | 18,620  |            |         |      | 20,563  |            |         |   | (3,419  | )         
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|Accretion of preferred stocks                                 |                                                  |                             |        |            |         |      |        |            |         |   | 3,544   |           
|Dividends on preferred stocks                                 |                                                  |                             |        |            |         |      |        |            |         |   | 1,120   |           
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|Net income (loss) attributable to common
    shareholders     |                                                  | $                           | 18,620  |            |         | $    | 20,563  |            |         | $ | (8,083  | )         
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|Earnings (loss) per share (Note 2):                           |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|                                                              | Basic                                            |                             | $       | 0.42       |         |      | $       | 0.47       |         |   | $       | (0.25      | )      
|                                                              | Diluted                                          |                             | $       | 0.40       |         |      | $       | 0.44       |         |   | $       | (0.25      | )      
|Weighted average shares:                                      |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|                                                              | Basic                                            |                             |         | 44,673,893 |         |      |         | 43,351,390 |         |   |         | 32,497,070 |        
|                                                              | Diluted                                          |                             |         | 46,774,504 |         |      |         | 46,457,355 |         |   |         | 32,497,070 |        
|(1) Includes revenues from related parties                    |                                                  | $                           | 198,213 |            |         | $    | 143,856 |            |         | $ | 128,233 |           
|(2) Includes cost of revenues to related
    parties          |                                                  | $                           | 127,554 |            |         | $    | 94,490  |            |         | $ | 75,209  |           
|(3) Excludes stock-based compensation
    expense as follows: |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|                                                              | Cost of revenues                                 |                             | $       | 183        |         |      | $       | 229        |         |   | $       | 1,026      |        
|                                                              | Selling, general and administrative expenses     |                             |         | 2,086      |         |      |         | 1,288      |         |   |         | 9,578      |        
|                                                              | Research and development expenses                |                             |         | 261        |         |      |         | 392        |         |   |         | 1,646      |        
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           
|                                                              |                                                  | $                           | 2,530   |            |         | $    | 1,909   |            |         | $ | 12,250  |           
|                                                              |                                                  |                             |         |            |         |      |         |            |         |   |         |           

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

F-3



---



##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY

|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |     |     |  |   |      |      |   |   |         |         |  
|------------------------------ | --------------------------------------------------------------------------------- | ----------------------------------------------- | ---------- | ---------- | - | ------- | --- | -------- | - | ------------ | ------- | ------------- | - | -------- | ------ | ------------- | - | - | ------ | ------ | - | - | --- | --- |  | - | ---- | ---- | - | - | ------- | ------- | -
|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |         
|                               |                                                                                   | Common Stock                                    |            |            |   |         |     |          |   |              |         |               |   |         
|                               |                                                                                   |                                                 |            | Additional |   |         |     |          |   | Other        |         |               |   | Total   
|                               |                                                                                   | Number of                                       |            |            |   | Paid-In |     | Retained |   | Unearned     |         | Comprehensive |   | Treasury |        | Shareholders
|                               |                                                                                   | Shares                                          |            | Amount     |   | Capital |     | Earnings |   | Compensation |         | Income        |   | Stock    |        | Equity       
|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |              
|                               |                                                                                   |                                                
|                               |                                                                                   | (In thousands, except share and per share data)
|Balances at September 30, 2001 |                                                                                   |                                                 | 30,699,569 |            |   | $       | 307 |          |   | $            | 20,462  |               |   | $        | 4,063  |               |   | $ |       |        |   | $ | (54 | )   |  | $ | (621 | )    |   | $ | 24,157  |        
|                               | Net loss                                                                          |                                                 |            |           |   |         |     |         |   |              |         |              |   |          |        | (3,419        | ) |   |        |       |   |   |     |    |  |   |      |     |   |   |         | (3,419  | )
|                               | Translation adjustment from foreign functional
    currency to reporting currency |                                                 |            |           |   |         |     |         |   |              |         |              |   |          |        |              |   |   |        |       |   |   |     | 38  |  |   |      |     |   |   |         | 38      |  
|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |     |     |  |   |      |      |   |   |         |        
|                               | Comprehensive loss                                                                |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |     |     |  |   |      |      |   |   |         | (3,381  | )
|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |     |     |  |   |      |      |   |   |         |        
|                               | Issued common stock upon exercise of stock options                                |                                                 |            | 1,390,650  |   |         |     | 14       |   |              |         | 4,721         |   |          |        |              |   |   |        |       |   |   |     |    |  |   |      |     |   |   |         | 4,735   |  
|                               | Issued common stock upon exercise of warrant                                      |                                                 |            | 2,446,563  |   |         |     | 24       |   |              |         | 20,356        |   |          |        |              |   |   |        |       |   |   |     |    |  |   |      |     |   |   |         | 20,380  |  
|                               | Issued common stock options in lieu of
    compensation                           |                                                 |            | 21,440     |   |         |     |         |   |              |         | 367           |   |          |        |              |   |   |        | (253   | ) |   |     |    |  |   |      |     |   |   |         | 114     |  
|                               | Issued restricted common stock                                                    |                                                 |            | 216,395    |   |         |     | 2        |   |              |         | 3,731         |   |          |        |              |   |   |        | (3,724 | ) |   |     |    |  |   |      |     |   |   |         | 9       |  
|                               | Purchase and retirement of common stock                                           |                                                 |            | (3,054,500 | ) |         |     | (30      | ) |              |         | (12,219       | ) |          |        |              |   |   |        |       |   |   |     |    |  |   |      | (342 | ) |   |         | (12,591 | )
|                               | Proceeds from initial public offering                                             |                                                 |            | 11,048,000 |   |         |     | 110      |   |              |         | 171,387       |   |          |        |              |   |   |        |       |   |   |     |    |  |   |      |     |   |   |         | 171,497 |  
|                               | Conversion of preferred stock to common stock                                     |                                                 |            | 1,280,000  |   |         |     | 13       |   |              |         | 6,767         |   |          |        |              |   |   |        |       |   |   |     |    |  |   |      |     |   |   |         | 6,780   |  
|                               | Issued incentive stock options to employees                                       |                                                 |            |           |   |         |     |         |   |              |         | 15,679        |   |          |        |              |   |   |        | (4,441 | ) |   |     |    |  |   |      |     |   |   |         | 11,238  |  
|                               | Amortization of unearned compensation                                             |                                                 |            |           |   |         |     |         |   |              |         |              |   |          |        |              |   |   |        | 892    |   |   |     |    |  |   |      |     |   |   |         | 892     |  
|                               | Tax benefits realized from exercises of stock
    options                         |                                                 |            |           |   |         |     |         |   |              |         | 323           |   |          |        |              |   |   |        |       |   |   |     |    |  |   |      |     |   |   |         | 323     |  
|                               | Dividends accrued and paid on preferred stock                                     |                                                 |            |           |   |         |     |         |   |              |         | (1,120        | ) |          |        |              |   |   |        |       |   |   |     |    |  |   |      |     |   |   |         | (1,120  | )
|                               | Accretion of preferred stock                                                      |                                                 |            |           |   |         |     |         |   |              |         | (3,544        | ) |          |        |              |   |   |        |       |   |   |     |    |  |   |      |     |   |   |         | (3,544  | )
|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |     |     |  |   |      |      |   |   |         |        
|Balances at September 30, 2002 |                                                                                   |                                                 | 44,048,117 |            |   |         | 440 |          |   |              | 226,910 |               |   |          | 644    |               |   |   | (7,526 | )      |   |   | (16 | )   |  |   | (963 | )    |   |   | 219,489 |        
|                               | Net income                                                                        |                                                 |            |           |   |         |     |         |   |              |         |              |   |          |        | 20,563        |   |   |        |       |   |   |     |    |  |   |      |     |   |   |         | 20,563  |  
|                               | Translation adjustment from foreign functional
    currency to reporting currency |                                                 |            |           |   |         |     |         |   |              |         |              |   |          |        |              |   |   |        |       |   |   |     | 278 |  |   |      |     |   |   |         | 278     |  
|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |     |     |  |   |      |      |   |   |         |        
|                               | Comprehensive earnings                                                            |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |     |     |  |   |      |      |   |   |         | 20,841  |  
|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |     |     |  |   |      |      |   |   |         |        
|                               | Issued common stock upon exercise of stock options                                |                                                 |            | 2,060,413  |   |         |     | 21       |   |              |         | 5,395         |   |          |        |              |   |   |        |       |   |   |     |    |  |   |      |     |   |   |         | 5,416   |  
|                               | Proceeds from employee stock purchase plan                                        |                                                 |            | 152,474    |   |         |     | 2        |   |              |         | 2,290         |   |          |        |              |   |   |        |       |   |   |     |    |  |   |      |     |   |   |         | 2,292   |  
|                               | Issued restricted common stock                                                    |                                                 |            | 10,000     |   |         |     |         |   |              |         | 178           |   |          |        |              |   |   |        | (178   | ) |   |     |    |  |   |      |     |   |   |         |        |  
|                               | Issued unrestricted common stock                                                  |                                                 |            | 19,455     |   |         |     |         |   |              |         | 277           |   |          |        |              |   |   |        |       |   |   |     |    |  |   |      |     |   |   |         | 277     |  
|                               | Forfeitures of common stock options                                               |                                                 |            |           |   |         |     |         |   |              |         | (1,305        | ) |          |        |              |   |   |        | 1,305  |   |   |     |    |  |   |      |     |   |   |         |        |  
|                               | Amortization of unearned compensation                                             |                                                 |            |           |   |         |     |         |   |              |         |              |   |          |        |              |   |   |        | 1,883  |   |   |     |    |  |   |      |     |   |   |         | 1,883   |  
|                               | Tax benefits realized from exercises of stock
    options                         |                                                 |            |           |   |         |     |         |   |              |         | 9,655         |   |          |        |              |   |   |        |       |   |   |     |    |  |   |      |     |   |   |         | 9,655   |  
|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |     |     |  |   |      |      |   |   |         |        
|Balances at September 30, 2003 |                                                                                   |                                                 | 46,290,459 |            |   |         | 463 |          |   |              | 243,400 |               |   |          | 21,207 |               |   |   | (4,516 | )      |   |   | 262 |     |  |   | (963 | )    |   |   | 259,853 |        
|                               | Net income                                                                        |                                                 |            |           |   |         |     |         |   |              |         |              |   |          |        | 18,620        |   |   |        |       |   |   |     |    |  |   |      |     |   |   |         | 18,620  |  
|                               | Translation adjustment from foreign functional
    currency to reporting currency |                                                 |            |           |   |         |     |         |   |              |         |              |   |          |        |              |   |   |        |       |   |   |     | 86  |  |   |      |     |   |   |         | 86      |  
|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |     |     |  |   |      |      |   |   |         |        
|                               | Comprehensive earnings                                                            |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |     |     |  |   |      |      |   |   |         | 18,706  |  
|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |     |     |  |   |      |      |   |   |         |        
|                               | Issued common stock upon exercise of stock options                                |                                                 |            | 514,812    |   |         |     | 4        |   |              |         | 1,960         |   |          |        |              |   |   |        |       |   |   |     |    |  |   |      |     |   |   |         | 1,964   |  
|                               | Proceeds from employee stock purchase plan                                        |                                                 |            | 124,170    |   |         |     | 1        |   |              |         | 1,616         |   |          |        |              |   |   |        |       |   |   |     |    |  |   |      |     |   |   |         | 1,617   |  
|                               | Issued restricted common stock                                                    |                                                 |            | 55,914     |   |         |     | 1        |   |              |         | 1,471         |   |          |        |              |   |   |        | (1,472 | ) |   |     |    |  |   |      |     |   |   |         |        |  
|                               | Forfeiture of restricted shares of common stock                                   |                                                 |            | (10,000    | ) |         |     |         |   |              |         | (1,178        | ) |          |        |              |   |   |        | 1,178  |   |   |     |    |  |   |      |     |   |   |         |        |  
|                               | Issuance of stock for acquisition of Concorde
    Microsystems                    |                                                 |            | 1,480,465  |   |         |     | 15       |   |              |         | 21,384        |   |          |        |              |   |   |        |       |   |   |     |    |  |   |      |     |   |   |         | 21,399  |  
|                               | Issuance of deferred stock units                                                  |                                                 |            |           |   |         |     |         |   |              |         | 1,304         |   |          |        |              |   |   |        | (1,304 | ) |   |     |    |  |   |      |     |   |   |         |        |  
|                               | Accelerated vesting of common stock options in
    lieu of compensation           |                                                 |            |           |   |         |     |         |   |              |         | 100           |   |          |        |              |   |   |        | (100   | ) |   |     |    |  |   |      |     |   |   |         |        |  
|                               | Forfeitures of common stock options                                               |                                                 |            |           |   |         |     |         |   |              |         | (219          | ) |          |        |              |   |   |        | 219    |   |   |     |    |  |   |      |     |   |   |         |        |  
|                               | Amortization of unearned compensation                                             |                                                 |            |           |   |         |     |         |   |              |         |              |   |          |        |              |   |   |        | 2,530  |   |   |     |    |  |   |      |     |   |   |         | 2,530   |  
|                               | Tax benefits realized from exercises of stock
    options                         |                                                 |            |           |   |         |     |         |   |              |         | 983           |   |          |        |              |   |   |        |       |   |   |     |    |  |   |      |     |   |   |         | 983     |  
|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |     |     |  |   |      |      |   |   |         |        
|Balances at September 30, 2004 |                                                                                   |                                                 | 48,455,820 |            |   | $       | 484 |          |   | $            | 270,821 |               |   | $        | 39,827 |               |   | $ | (3,465 | )      |   | $ | 348 |     |  | $ | (963 | )    |   | $ | 307,052 |        
|                               |                                                                                   |                                                 |            |            |   |         |     |          |   |              |         |               |   |          |        |               |   |   |        |        |   |   |     |     |  |   |      |      |   |   |         |        

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,                                                                     
|                                                                           |                                                                                       |                                                                                              
|                                                                           |                                                                                       | 2004                                                                                          |                                           | 2003                                                    |        | 2002   
|                                                                           |                                                                                       |                                                                                               |                                           |                                                         |        |        
|                                                                           |                                                                                       |                                                                                              
|                                                                           |                                                                                       | (In thousands, except                                                                        
|                                                                           |                                                                                       | share and per share data)                                                                    
|Cash flows provided by operating activities:                               |                                                                                       |                                                                                               |                                           |                                                         |        |         |         |         |        |         |         |         
|                                                                           | Net income (loss)                                                                     |                                                                                               | $                                         | 18,620                                                  |        |         | $       | 20,563  |        |         | $       | (3,419   | )     
|                                                                           | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                                               |                                           |                                                         |        |         |         |         |        |         |         |          |       
|                                                                           |                                                                                       | Minority interest in income of subsidiaries                                                   |                                           |                                                         | 16,676 |         |         |         | 15,387 |         |         |          | 12,969 |        
|                                                                           |                                                                                       | Depreciation and amortization                                                                 |                                           |                                                         | 18,446 |         |         |         | 11,937 |         |         |          | 7,098  |        
|                                                                           |                                                                                       | Accretion of discount on marketable securities                                                |                                           |                                                         |       |         |         |         | (59    | )       |         |          |       |        
|                                                                           |                                                                                       | Deferred tax provision (benefit)                                                              |                                           |                                                         | 195    |         |         |         | 4,390  |         |         |          | (954   | )      
|                                                                           |                                                                                       | Provision for bad debts                                                                       |                                           |                                                         | 2,717  |         |         |         | 2,791  |         |         |          | 1,061  |        
|                                                                           |                                                                                       | Equity in income of equity investees                                                          |                                           |                                                         | (30    | )       |         |         | (16    | )       |         |          | (268   | )      
|                                                                           |                                                                                       | Stock-based compensation expense                                                              |                                           |                                                         | 2,530  |         |         |         | 1,909  |         |         |          | 12,250 |        
|                                                                           |                                                                                       | Write-off of in process research and development                                              |                                           |                                                         |       |         |         |         | 1,380  |         |         |          |       |        
|                                                                           |                                                                                       | Tax benefit realized from exercises of employee
    stock options                             |                                           |                                                         | 983    |         |         |         | 2,287  |         |         |          | 323    |        
|                                                                           |                                                                                       | Provision to mark to market warrant liability                                                 |                                           |                                                         |       |         |         |         |       |         |         |          | 8,901  |        
|                                                                           |                                                                                       | Loss (gain) on disposal of machinery and
    equipment                                        |                                           |                                                         | 695    |         |         |         | (8     | )       |         |          | 252    |        
|                                                                           |                                                                                       | Changes in operating assets and liabilities, net
    of effects of acquisition of businesses: |                                           |                                                         |        |         |         |         |        |         |         |          |        |        
|                                                                           |                                                                                       |                                                                                               | Accounts receivable                       |                                                         |        | 11,765  |         |         |        | (41,518 | )       |          |        | 2,171   |        
|                                                                           |                                                                                       |                                                                                               | Inventories                               |                                                         |        | (16,899 | )       |         |        | (631    | )       |          |        | (26,350 | )      
|                                                                           |                                                                                       |                                                                                               | Prepaid expenses and other current assets |                                                         |        | (1,729  | )       |         |        | 1,128   |         |          |        | 767     |        
|                                                                           |                                                                                       |                                                                                               | Accounts payable                          |                                                         |        | (7,264  | )       |         |        | 6,126   |         |          |        | 15,343  |        
|                                                                           |                                                                                       |                                                                                               | Accrued payroll and benefits              |                                                         |        | (3,646  | )       |         |        | 3,745   |         |          |        | 4,117   |        
|                                                                           |                                                                                       |                                                                                               | Customer advances                         |                                                         |        | 1,686   |         |         |        | (10,838 | )       |          |        | (4,407  | )      
|                                                                           |                                                                                       |                                                                                               | Accrued warranty expense                  |                                                         |        | 829     |         |         |        | 1,522   |         |          |        | 307     |        
|                                                                           |                                                                                       |                                                                                               | Income taxes payable                      |                                                         |        | 4,135   |         |         |        | (3,594  | )       |          |        | 1,835   |        
|                                                                           |                                                                                       |                                                                                               | Other accrued expenses                    |                                                         |        | (1,188  | )       |         |        | 4       |         |          |        | (949    | )      
|                                                                           |                                                                                       |                                                                                               |                                           |                                                         |        |         |         |         |        |         |         |         
|                                                                           |                                                                                       |                                                                                               |                                           | Net cash provided by operating activities               |        |         | 48,521  |         |        |         | 16,505  |          |        |         | 31,047  |  
|                                                                           |                                                                                       |                                                                                               |                                           |                                                         |        |         |         |         |        |         |         |         
|Cash flows used in investing activities:                                   |                                                                                       |                                                                                               |                                           |                                                         |        |         |         |         |        |         |         |         
|                                                                           | Additions to property and equipment                                                   |                                                                                               |                                           | (41,394                                                 | )      |         |         | (36,866 | )      |         |         | (29,433  | )     
|                                                                           | Purchases of marketable securities                                                    |                                                                                               |                                           |                                                        |        |         |         | (7,897  | )      |         |         | (6,704   | )     
|                                                                           | Proceeds from sales of marketable securities                                          |                                                                                               |                                           |                                                        |        |         |         | 14,660  |        |         |         |         |       
|                                                                           | Proceeds from the sale of machinery and equipment                                     |                                                                                               |                                           | 3                                                       |        |         |         | 564     |        |         |         |         |       
|                                                                           | Acquisitions of businesses, net of cash acquired                                      |                                                                                               |                                           | (19,921                                                 | )      |         |         | (19,588 | )      |         |         |         |       
|                                                                           | Proceeds from sale of lease receivables                                               |                                                                                               |                                           | 8,997                                                   |        |         |         |        |        |         |         |         |       
|                                                                           | Proceeds from execution of Sales Agency and
    Services Agreement                    |                                                                                               |                                           | 2,200                                                   |        |         |         |        |        |         |         |         |       
|                                                                           | Additions to other assets                                                             |                                                                                               |                                           | (1,057                                                  | )      |         |         | (5,605  | )      |         |         | (4,209   | )     
|                                                                           |                                                                                       |                                                                                               |                                           |                                                         |        |         |         |         |        |         |         |         
|                                                                           |                                                                                       |                                                                                               |                                           | Net cash used in investing activities                   |        |         | (51,172 | )       |        |         | (54,732 | )        |        |         | (40,346 | )
|                                                                           |                                                                                       |                                                                                               |                                           |                                                         |        |         |         |         |        |         |         |         
|Cash flows (used in) provided by financing
    activities:                 |                                                                                       |                                                                                               |                                           |                                                         |        |         |         |         |        |         |         |         
|                                                                           | (Decrease) increase in cash management clearing                                       |                                                                                               |                                           | (7,234                                                  | )      |         |         | 9,887   |        |         |         | (1,772   | )     
|                                                                           | Proceeds from exercise of stock options                                               |                                                                                               |                                           | 1,964                                                   |        |         |         | 5,416   |        |         |         | 4,735    |       
|                                                                           | Proceeds from employee stock purchase plan                                            |                                                                                               |                                           | 1,618                                                   |        |         |         | 2,292   |        |         |         |         |       
|                                                                           | Repurchase common stock                                                               |                                                                                               |                                           |                                                        |        |         |         |        |        |         |         | (12,249  | )     
|                                                                           | Proceeds from initial public offering (net of
    costs)                              |                                                                                               |                                           |                                                        |        |         |         |        |        |         |         | 171,497  |       
|                                                                           | Purchase of treasury stock                                                            |                                                                                               |                                           |                                                        |        |         |         |        |        |         |         | (342     | )     
|                                                                           | Redemption of preferred stock                                                         |                                                                                               |                                           |                                                        |        |         |         |        |        |         |         | (10,000  | )     
|                                                                           | Issuance of long-term debt                                                            |                                                                                               |                                           |                                                        |        |         |         | 1,698   |        |         |         | 5,364    |       
|                                                                           | Payment of dividends on preferred stock                                               |                                                                                               |                                           |                                                        |        |         |         |        |        |         |         | (663     | )     
|                                                                           | Principal payments of long-term debt and capital
    lease obligations                |                                                                                               |                                           | (7,044                                                  | )      |         |         | (15,919 | )      |         |         | (20,795  | )     
|                                                                           | Draws on line of credit                                                               |                                                                                               |                                           | 23,153                                                  |        |         |         | 60,840  |        |         |         | 148,367  |       
|                                                                           | Payments under line of credit                                                         |                                                                                               |                                           | (23,153                                                 | )      |         |         | (60,840 | )      |         |         | (192,155 | )     
|                                                                           |                                                                                       |                                                                                               |                                           |                                                         |        |         |         |         |        |         |         |         
|                                                                           |                                                                                       |                                                                                               |                                           | Net cash (used in) provided by financing
    activities |        |         | (10,696 | )       |        |         | 3,374   |          |        |         | 91,987  |  
|                                                                           |                                                                                       |                                                                                               |                                           |                                                         |        |         |         |         |        |         |         |         
|Effect of foreign currency exchange rates on cash
    and cash equivalents |                                                                                       |                                                                                               | (250                                      | )                                                       |        |         | 278     |         |        |         | 38      |         
|                                                                           |                                                                                       |                                                                                               |                                           |                                                         |        |         |         |         |        |         |         |         
|Net (decrease) increase in cash and cash
    equivalents                   |                                                                                       |                                                                                               | (13,597                                   | )                                                       |        |         | (34,575 | )       |        |         | 82,726  |         
|Cash and cash equivalents, beginning of year                               |                                                                                       |                                                                                               | 49,978                                    |                                                         |        |         | 84,553  |         |        |         | 1,827   |         
|                                                                           |                                                                                       |                                                                                               |                                           |                                                         |        |         |         |         |        |         |         |         
|Cash and cash equivalents, end of year                                     |                                                                                       | $                                                                                             | 36,381                                    |                                                         |        | $       | 49,978  |         |        |         | 84,553  |         
|                                                                           |                                                                                       |                                                                                               |                                           |                                                         |        |         |         |         |        |         |         |         
|Interest paid (net of $0, $319 and $170
    capitalized)                   |                                                                                       | $                                                                                             | 1,876                                     |                                                         |        | $       | 2,506   |         |        | $       | 5,394   |         
|Income taxes paid                                                          |                                                                                       |                                                                                               | 16,994                                    |                                                         |        |         | 18,075  |         |        |         | 14,047  |         
|Non cash investing and financing activities:                               |                                                                                       |                                                                                               |                                           |                                                         |        |         |         |         |        |         |         |         
|                                                                           | Issuance of common stock shares for acquisition
    of business                       |                                                                                               |                                           | 21,399                                                  |        |         |         | 251     |        |         |         |         |       
|                                                                           | Equipment purchased with capital lease obligations                                    |                                                                                               |                                           |                                                        |        |         |         | 676     |        |         |         | 8,453    |       
|                                                                           | Issuance of notes for acquisition of business                                         |                                                                                               |                                           |                                                        |        |         |         | 3,188   |        |         |         |         |       
|                                                                           | Debt and capital leases assumed through
    acquisition of business                   |                                                                                               |                                           |                                                        |        |         |         | 3,806   |        |         |         |         |       

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

F-5



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(In thousands, except share and per share
data)




|   |                              
|-- | -----------------------------
|1. | Organization and Presentation

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

The Companys products and services can be
broadly classified into three principal categories: Positron
Emission Tomography (PET) scanners, detector materials, and
other PET products and services. CPS manages the development,
production and distribution of the ECAT® line of PET and
PET/ CT scanners. Detector Materials develops and manufactures
detector materials used in PET scanners manufactured by CPS. CTI
Solutions includes the production and distribution of
radiopharmaceuticals and the sale and service by CTI of PET and
PET/ CT scanners, cyclotron systems, microPET® animal
scanners, medical image analysis applications, and other PET
related products. The CTI Solutions segment was formed effective
October 1, 2003 and reflects the combination of the former
CTI Services and PETNET segments, which previously were
separately reported. Effective June 30, 2004 the
Companys newly formed subsidiary, CTI Concorde
Microsystems, LLC (Concorde) acquired the assets of Concorde
Microsystems, Inc. (CMSI), the manufacturer of microPET®
animal scanners. See Note 11 for further discussion of the
acquisition of CMSIs assets.



|   |                                               
|-- | ----------------------------------------------
|2. | Summary of Significant Accounting
    Policies

Principles of
Consolidation All
significant intercompany balances and transactions have been
eliminated. 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 in accordance with Financial
Accounting Standards Board (FASB) Interpretation
No. 46(R), Consolidation of Variable Interest Entities(FIN 46(R)), Statement of Financial Accounting Standard
(SFAS) No. 94, Consolidation of All Majority-Owned
Subsidiaries(SFAS 94),and Accounting
Principles Board (APB) Opinion No. 18, The Equity
Method of Accounting for Investments in Common Stock(APB 18) and, where appropriate, evaluates its and
the minority shareholders participating rights in
accordance with Emerging Issues Task Force (EITF)
Issue 96-16, Investors Accounting for an Investee
When the Investor Has a Majority of the Voting Interest but the
Minority Shareholder or Shareholders Have Certain Approval or
Veto Rights(EITF 96-16) to determine whether consolidation
or equity method accounting is appropriate in each case.

The Company evaluated FIN 46(R) effects on
its investments during the second quarter of fiscal year 2004.
In conjunction with this evaluation, the Company identified one
of its consolidated investments as a variable interest entity as
defined by FIN 46(R). However, the evaluation of
FIN 46(R) did not have a significant impact on the
Companys consolidated financial statements since the
Company has the majority voting interest and is also identified
as the primary beneficiary of the variable interest entity and
therefore is not required to make changes to the entities
included in the consolidated financial statements for this
reporting period. As required by FIN 46(R), the Company
will continue to monitor its investments in both consolidated
and unconsolidated entities for events that may occur which
would require the Company to reevaluate whether any of these
investments qualifies as a variable interest entity. The
evaluation of FIN 46(R) did not result in changes in the
application of previously issued generally accepted accounting
principles, SFAS 94 and APB 18, to the Companys
investments.

CTI owns a majority interest in CPS. Under the
terms of the CPS operating agreement, CTI has influence over a
majority of the board of directors. Decisions deemed
participating rights, including approval of operating budgets
and management compensation, are determined by a majority vote
of the board of directors. The board of directors of CPS
consists of two directors selected by CTI, two directors

F-6



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

selected by Siemens, and a fifth director
selected by Siemens from a list of persons selected by CTI.
Neither Siemens nor any member of the board of directors of CPS
who was selected or nominated by Siemens has any substantive
participating or veto rights with regard to significant
operating, budget, capital and other decisions. CPS is
consolidated in the Companys financial statements.

CTI Solutions through our subsidiary, PETNET
Pharmaceuticals, Inc. (PETNET), owns 90.0% and 51.0% interests
in radiopharmacies in Denver and Houston, respectively. Under
the terms of the Denver and Houston radiopharmacy operating
agreements, CTI Solutions has control over all significant
operating decisions and these radiopharmacies are consolidated
in our financial statements.

Where appropriate, the Company evaluates its and
the minority interest shareholders participating rights in
accordance with EITF 96-16 to determine whether consolidation or
equity method accounting is appropriate in each case. 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
three radiopharmacies that are accounted for under the equity
method. For the entities not previously included in the
consolidated financial statements, the evaluation of
FIN 46(R) resulted in the Company continuing to apply
previously issued generally accepted accounting principles to
the respective investments and continuing to account for these
entities under the equity method.

Revenue
Recognition The Company
records revenues in accordance with the guidance of the
SECs Staff Accounting Bulletin No. 104(SAB 104), which supersedes SAB 101 in order to
encompass EITF Issue 00-21, Revenue Arrangements with
Multiple Deliverables(EITF 00-21). The Company derives
its revenues from sales of scanners, calibration sources, spare
parts, detector materials, cyclotrons, radiopharmaceuticals,
medical image analysis applications, sales and marketing
services, and the provision of services on equipment sold,
including site planning and installation, preventive maintenance
and repair, training, technical support and assistance with
licensing. Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been
rendered, the contract price is fixed or determinable, and
collectibility is reasonably assured. No right of return
privileges are granted to customers after shipment. Revenues
derived from the sale of scanners, cyclotrons, calibration
sources, spare parts, medical image analysis applications and
detector materials are recognized upon either shipment or
arrival at destination depending on shipment terms. 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. 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 also recognizes
as revenue reimbursements for certain sales and marketing
services as such services are provided to Siemens and as the
Company is the primary obligor for the expenses incurred in
providing these services.

For arrangements with multiple deliverables, such
as scanner and cyclotron sales, we recognize product revenue by
allocating the revenue to each deliverable based on the fair
value of each deliverable in accordance with EITF 00-21 and
SAB 104, and recognize revenue for equipment upon delivery
and for installation and other services as performed.
EITF 00-21 was effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003.

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.

F-7



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

Revenues derived from software license sales are
recognized in accordance with Statement of Position
(SOP) No. 97-2, Software Revenue
Recognition, and SOP 98-9, Modifications of
SOP 97-2, Software Revenue Recognition with Respect to
Certain Transactions. For software license sales for which
any services rendered are not considered essential to the
functionality of the software, revenue is recognized upon
delivery of the software, provided (1) there is evidence of
an arrangement, (2) collection of our fee is considered
probable and (3) the fee is fixed and determinable. If
professional services are considered essential to the
functionality of the software, we record revenue for the license
and professional services over the implementation period using
the percentage of completion method, measured by the percentage
of labor hours incurred to date to estimated total labor hours
for each contract.

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.

Concentrations of
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. Accounts receivable
are carried at the amount estimated to be collectible, and no
interest is accrued on trade receivables. The Company maintains
an allowance for doubtful accounts based upon routine
assessments of customer financial strength, current economic
trends, managements analysis of historic write-offs, and
any other known factors impacting collectibility. Receivables
for which the Company determines collectibility to be doubtful
are reserved for in the allowance through a charge to selling,
general and administrative expenses. The amount of accounts
receivable that in fact become uncollectible may differ from
management estimates; however, the eventual amounts of actual
uncollectible accounts receivable have generally been within
managements expectations. As noted above, CPS sales
of scanners are made through distribution agreements primarily
with Siemens, but also with CTI and other entities. The
Companys sales to Siemens represented 49.3%, 39.7% and
49.6% of consolidated sales for 2004, 2003 and 2002,
respectively.

During the fiscal years presented, the Company
acquired its entire LSO component inventory from a single
supplier.

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

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

Goodwill
Goodwill is presented at cost, net of accumulated amortization.
Effective September 30, 2001, the Company replaced ratable
amortization of goodwill with annual testing of impairment in

F-8



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

accordance with the provisions of SFAS
No. 142, Goodwill and Intangible Assets,
(SFAS 142). The Company completed the required annual
impairment test and determined that there is no impairment of
its goodwill under SFAS 142 for all fiscal years presented.

Other Assets Other assets include purchased
technology and trademarks arising from the Mirada Solutions
Limited (Mirada) and CMSI acquisitions, long-term lease
receivables, precious metals utilized in the production of
detector materials, other long-term receivables and investments
accounted for under the equity method. Purchased technology,
patents, trademarks are presented at cost, net of accumulated
amortization. Intangible assets with finite lives are amortized
over their estimated useful lives of 5 to 11 years using
the straight-line method. Amortization of other assets during
the years ended September 30, 2004, 2003, and 2002 was
$2,063, $418, and $138 respectively. Other assets consist of the
following:

|                                              |  |               |        |      |  |   |        |  
|--------------------------------------------- |  | ------------- | ------ | ---- |  | - | ------ | -
|                                              |  |              
|                                              |  | September 30,
|                                              |  |              
|                                              |  | 2004          |        | 2003
|                                              |  |               |        |     
|Purchased technology                          |  | $             | 24,446 |      |  | $ | 14,385 |  
|Trademarks                                    |  |               | 3,202  |      |  |   |       |  
|Lease receivables                             |  |               |       |      |  |   | 8,123  |  
|Other                                         |  |               | 10,095 |      |  |   | 10,030 |  
|Accumulated amortization on intangible assets |  |               | (2,828 | )    |  |   | (765   | )
|                                              |  |               |        |      |  |   |        |  
|                                              |  | $             | 34,915 |      |  | $ | 31,773 |  
|                                              |  |               |        |      |  |   |        |  

The estimated future amortization expense related
to intangible assets as of September 30, 2004, is as
follows:

|     |  |        |       | 
|---- |  | ------ | ----- | 
|     |  | Amount
|     |  |       
|2005 |  | $      | 3,016 | 
|2006 |  |        | 3,016 | 
|2007 |  |        | 2,956 | 
|2008 |  |        | 2,894 | 
|2009 |  |        | 2,655 | 

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. No impairment losses were recognized
during the fiscal years presented.

Cash Management
Clearing Outstanding
checks of $4,945 and $12,017 at September 30, 2004 and
2003, 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 as the related revenues are recognized over the
warranty period.

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.

F-9



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

Research and
Development Research and
development expenses include payroll, employee benefits,
corporate allocations, and other personnel-related costs
associated with product development. Research and development
costs are expensed as incurred.

Software
Development The Company
has determined that technological feasibility for software
products is reached shortly before the products are released to
manufacturing. Costs incurred after technological feasibility is
established are not material, and accordingly, the Company
expenses all development costs when incurred.

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

The Company applies APB Opinion No. 25,
Accounting for Stock Issued to Employees(APB 25) and
related interpretations in accounting for its stock option
plans. Under APB 25, compensation expense is based on the
difference, if any, on the date of grant, between the fair value
of the Companys stock and the exercise price. Had
compensation expense related to the Companys outstanding
options been determined based on the fair value at the grant
dates consistent with SFAS 123, net income and earnings per
share would be as reflected below:

|                                                                                                                                                  |                       |                          |        |      |  |      |        |      |  |   |         |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ------------------------ | ------ | ---- |  | ---- | ------ | ---- |  | - | ------- | ----- | -
|                                                                                                                                                  |                       |                         
|                                                                                                                                                  |                       | Year Ended September 30,
|                                                                                                                                                  |                       |                         
|                                                                                                                                                  |                       | 2004                     |        | 2003 |  | 2002
|                                                                                                                                                  |                       |                          |        |      |  |     
|Net income (loss), as reported                                                                                                                    |                       | $                        | 18,620 |      |  | $    | 20,563 |      |  | $ | (3,419  | )    
|Add: Stock-based employee compensation expense
    included in reported net income, net of related tax effects                                    |                       |                          | 2,020  |      |  |      | 1,490  |      |  |   | 11,911  |      
|Less: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                       |                          | (5,387 | )    |  |      | (4,603 | )    |  |   | (14,764 | )    
|                                                                                                                                                  |                       |                          |        |      |  |      |        |      |  |   |         |      
|Pro forma net income (loss)                                                                                                                       |                       |                          | 15,253 |      |  | $    | 17,450 |      |  | $ | (6,272  | )    
|                                                                                                                                                  |                       |                          |        |      |  |      |        |      |  |   |         |      
|Earnings (loss) per share:                                                                                                                        |                       |                          |        |      |  |      |        |      |  |   |         |      
|                                                                                                                                                  | Basic  as reported   |                          | $      | 0.42 |  |      | $      | 0.47 |  |   | $       | (0.25 | )
|                                                                                                                                                  | Basic  pro forma     |                          | $      | 0.34 |  |      | $      | 0.40 |  |   | $       | (0.34 | )
|                                                                                                                                                  | Diluted  as reported |                          | $      | 0.40 |  |      | $      | 0.44 |  |   | $       | (0.25 | )
|                                                                                                                                                  | Diluted  pro forma   |                          | $      | 0.33 |  |      | $      | 0.38 |  |   | $       | (0.34 | )

The fair value of each option is estimated using
the Black-Scholes option-pricing model using a risk-free
interest rate ranging from 2.79% to 3.93% in 2004, 2.27% to
3.37% in 2003, and 2.94% to 4.74% in 2002, an expected option
life of five years to ten years, volatility of 49% in 2004, 52%
in 2003, and 35% in 2002 and expected dividend yield of 0.0%.
For 2002, volatility is calculated using activity from the date
of the Companys initial public offering in June 2002
through September 30, 2002.

Warrants
In 1999 CTI recorded a liability upon issuing redeemable
preferred stock and convertible redeemable preferred stock based
on the relative fair value of the warrants issued in the
transaction. These warrants were subsequently exercised in 2002
(Note 12). While these warrants were outstanding CTI made
periodic mark to market adjustments, which are reflected in the
accompanying consolidated

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, accrued
liabilities, deferred revenues, and warrants.

Reclassifications
Certain amounts in the comparative 2003 and 2002 financial
statements have been reclassified to conform to the 2004
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, deferred stock units,
warrants, 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,                 
|             |                                                                                            |                                          
|             |                                                                                            | 2004                                      |           | 2003       |           | 2002
|             |                                                                                            |                                           |           |            |           |     
|Numerator:   |                                                                                            |                                           |           |            |           |      |           |            |           |  |   |           
|             | Net income (loss) available to common
    shareholders  basic and diluted                 |                                           | $         | 18,620     |           |      | $         | 20,563     |           |  | $ | (8,083     | )
|             |                                                                                            |                                           |           |            |           |      |           |            |           |  |   |           
|Denominator: |                                                                                            |                                           |           |            |           |      |           |            |           |  |   |           
|             | Weighted-average number of common shares
    outstanding                                   |                                           |           | 44,673,893 |           |      |           | 43,351,390 |           |  |   | 32,497,070 |  
|             |                                                                                            |                                           |           |            |           |      |           |            |           |  |   |           
|             | Dilutive potential common shares relating to:                                              |                                           |           |            |           |      |           |            |           |  |   |            |  
|             |                                                                                            | Restricted stock and deferred stock units |           |            | 556,306   |      |           |            | 164,595   |  |   |            |  | 
|             |                                                                                            | Options and warrants                      |           |            | 1,544,305 |      |           |            | 2,941,370 |  |   |            |  | 
|             |                                                                                            |                                           |           |            |           |      |           |            |           |  |   |           
|             |                                                                                            |                                           | 2,100,611 |            |           |      | 3,105,965 |            |           |  |  |           
|             |                                                                                            |                                           |           |            |           |      |           |            |           |  |   |           
|             | Total weighted average number of shares used in
    computing diluted net income per share |                                           |           | 46,774,504 |           |      |           | 46,457,355 |           |  |   | 32,497,070 |  
|             |                                                                                            |                                           |           |            |           |      |           |            |           |  |   |           

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, 2004, 2003, and
2002 because including them would have had an antidilutive
effect:

|                                       |  |                          |           |      |  |      |           |  |  |  |           | 
|-------------------------------------- |  | ------------------------ | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                                       |  |                         
|                                       |  | Year Ended September 30,
|                                       |  |                         
|                                       |  | 2004                     |           | 2003 |  | 2002
|                                       |  |                          |           |      |  |     
|Warrants                               |  |                          | 35,422    |      |  |      | 25,215    |  |  |  | 1,220,238 | 
|Convertible redeemable preferred stock |  |                          |          |      |  |      |          |  |  |  | 918,795   | 
|Restricted stock                       |  |                          |          |      |  |      |          |  |  |  | 1,245,850 | 
|Options                                |  |                          | 2,670,613 |      |  |      | 1,757,189 |  |  |  | 5,398,737 | 
|                                       |  |                          |           |      |  |      |           |  |  |  |           | 
|                                       |  |                          | 2,706,035 |      |  |      | 1,782,404 |  |  |  | 8,783,620 | 
|                                       |  |                          |           |      |  |      |           |  |  |  |           | 

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 each year in the three
years ended September 30, 2004, the Company recorded a
foreign currency translation adjustment to recognize the changes
in stockholders equity arising from converting the
accounts of our international subsidiaries from their foreign
functional currency to the Companys United States dollar
reporting currency.



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

Inventory
Costs On November 24,
2004, the FASB issued SFAS 151, Inventory
Costs  an amendment of ARB No. 43,
Chapter 4. SFAS 151 amends the guidance in
Accounting Research Bulletin (ARB) No. 43,
Chapter 4, to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted
material (spoilage). SFAS 151 requires that these costs be
recognized as current period charges regardless of whether they
are abnormal. In addition, SFAS 151 requires that
allocation of fixed production overheads to the costs of
manufacturing be based on the normal capacity of the production
facilities. The Company does not expect this new standard to
have a material effect on its financial statements.



|   |            
|-- | -----------
|3. | Inventories

Inventories consist of the following:

|                |  |               |        |      |  |   |        | 
|--------------- |  | ------------- | ------ | ---- |  | - | ------ | 
|                |  |              
|                |  | September 30,
|                |  |              
|                |  | 2004          |        | 2003
|                |  |               |        |     
|Component parts |  | $             | 30,885 |      |  | $ | 25,581 | 
|Work in process |  |               | 17,900 |      |  |   | 27,122 | 
|Finished goods  |  |               | 43,434 |      |  |   | 18,149 | 
|                |  |               |        |      |  |   |        | 
|                |  | $             | 92,219 |      |  | $ | 70,852 | 
|                |  |               |        |      |  |   |        | 

Cyclotrons, which were delivered prior to
July 1, 2003, but not yet accepted by the customers, are
included in inventories as finished goods in the consolidated
balance sheet at September 30, 2003 in the amount of $1,346.

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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,
|                                    |  |              
|                                    |  | 2004          |         | 2003
|                                    |  |               |         |     
|Land                                |  | $             | 2,044   |      |  | $ | 2,044   |  
|Buildings                           |  |               | 20,956  |      |  |   | 21,179  |  
|Building and leasehold improvements |  |               | 27,048  |      |  |   | 22,025  |  
|Machinery and equipment             |  |               | 96,097  |      |  |   | 78,958  |  
|Software and computer equipment     |  |               | 19,653  |      |  |   | 4,123   |  
|Less accumulated depreciation       |  |               | (49,242 | )    |  |   | (33,062 | )
|Assets under construction           |  |               | 16,518  |      |  |   | 12,026  |  
|                                    |  |               |         |      |  |   |         |  
|Property and equipment, net         |  | $             | 133,074 |      |  | $ | 107,293 |  
|                                    |  |               |         |      |  |   |         |  

Depreciation expense for the years ended
September 30, 2004, 2003 and 2002 was $16,383, $11,519 and
$6,960, respectively.

During 2004, property and equipment included the
following assets that are leased to others on a pay per
procedure basis:

|                         |  |      |       |  
|------------------------ |  | ---- | ----- | -
|                         |  | 2004
|                         |  |     
|Machinery and equipment  |  | $    | 6,151 |  
|Accumulated amortization |  |      | (172  | )
|                         |  |      |       |  
|                         |  | $    | 5,979 |  
|                         |  |      |       |  



|   |                              
|-- | -----------------------------
|5. | Commitments and Contingencies

Operating
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, 2004:

|                             |  |           |        | 
|---------------------------- |  | --------- | ------ | 
|                             |  | Operating
|                             |  | Leases   
|                             |  |          
|2005                         |  | $         | 5,590  | 
|2006                         |  |           | 5,333  | 
|2007                         |  |           | 3,088  | 
|2008                         |  |           | 2,436  | 
|2009                         |  |           | 2,011  | 
|Thereafter                   |  |           | 6,024  | 
|                             |  |           |        | 
|Total minimum lease payments |  | $         | 24,482 | 
|                             |  |           |        | 

Rental expense for the years ended
September 30, 2004, 2003, and 2002 was $4,653, $3,289 and
$2,676, respectively.

Guarantees
The Company guarantees lease obligations for radiopharmacy
facilities and equipment on behalf of unconsolidated investees
in the maximum aggregate amount of $225 at September 30,
2004.

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

No liability has been recorded for these lease
obligations which expire through 2009. The guarantees are not
collateralized by any assets, and are without recourse.

In August 2003, the Company also guaranteed a
debt obligation related to a cyclotron and radiopharmacy project
for an international distributor in the maximum aggregate amount
of 5,256 Euros (or approximately $6,537). The debt obligation
and the guarantee expire in July 2009. In the event a claim is
made under this guarantee, the Company has the right to acquire
the facility and all related customer contracts and would
operate the facility as a PETNET radiopharmacy. At
September 30, 2004 and 2003, the Company had recorded a
liability of $300 and $150, respectively, for this guarantee to
reflect the estimated fair value of the Companys
obligation in accordance with FASB Interpretation No. 45
(FIN 45), Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others.

The Company has a financing program arrangement
with De Lage Landen Financial Services, Inc. (DLL). The new
program provides flexible lease financing to CTI Solutions
customers for the full range of PET and PET/CT scanners and
other products and services sold by CTI. In connection with this
program a credit reserve pool was established whereby the
Company provided a guarantee to DLL for 9.9% on the first
$25 million of transactions and 5.0% thereafter, of the
principal balance of all leases DLL executes on behalf of CTI
Solutions customers. At September 30, 2004 and 2003,
the Company had recorded a reserve of $279 and $136,
respectively, to reflect the estimated fair value of the
Companys obligation for this guarantee after recovery and
resale of the underlying equipment in accordance with
FIN 45.

Warranties
The Company provides a parts and labor warranty on products it
manufactures, typically for a period of twelve months after
installation. Estimated costs of this warranty obligation are
charged to cost of revenues over the periods that revenues are
recognized. A summary of the activity in our warranty reserve is
as follows:

|                                                 |  |                          |        |      |  |      |        |   |  |   |        |  
|------------------------------------------------ |  | ------------------------ | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                 |  |                         
|                                                 |  | Year Ended September 30,
|                                                 |  |                         
|                                                 |  | 2004                     |        | 2003 |  | 2002
|                                                 |  |                          |        |      |  |     
|Balance at the beginning of the period           |  | $                        | 5,262  |      |  | $    | 3,740  |   |  | $ | 3,433  |  
|Accruals for warranties issued during the period |  |                          | 5,016  |      |  |      | 6,185  |   |  |   | 6,800  |  
|Settlements made (in cash or in kind)            |  |                          | (4,130 | )    |  |      | (4,663 | ) |  |   | (6,493 | )
|                                                 |  |                          |        |      |  |      |        |   |  |   |        |  
|Balance at the end of the period                 |  | $                        | 6,148  |      |  | $    | 5,262  |   |  | $ | 3,740  |  
|                                                 |  |                          |        |      |  |      |        |   |  |   |        |  

Other
Arrangements The Company
has an exclusive patent and technology license to manufacture
and use materials and products containing lutetium
oxyorthosilicate (LSO). The Company pays an annual royalty based
on a percentage of the manufacturing cost of materials sold. The
royalty amounts paid were $751, $835, and $429, for the years
ending September 30, 2004, 2003, and 2002, respectively.
The agreement is in effect until October 27, 2008 when the
patent is due to expire.

During fiscal year 2001 CTI Solutions entered
into a collaboration agreement with UCLA. In consideration for
the research services provided by UCLA, CTI Solutions 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 CTI
Solutions from the sale of products produced at the LA Tech
Center. Research fees were $355, $387 and $507 for the years
ended September 30, 2004, 2003 and 2002, respectively.

Litigation
On January 30, 2004, the University of Pittsburgh (Pitt)
filed suit in the U.S. Western District of Pennsylvania,
Civil Action No. 04-0127, against Dr. David Townsend,
Dr. Ronald Nutt, CTI and CPS alleging that Pitt has an
ownership interest in the intellectual property associated with
the PET/CT system manufactured and sold by CPS. Under a variety
of causes of action, the relief sought by

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Pitt in the complaint is a declaration of
Pitts ownership rights, injunctive relief against
disclosure and transfer of the intellectual property, actual and
punitive damages, and attorneys fees. Based on the results
of the Companys investigation, which is continuing, the
Company intends to vigorously defend against Pitts claim
of an ownership interest in these patents or in any other
intellectual property used in the PET/CT system manufactured and
sold by CPS, or that Pitt has any right to a share of the
profits earned from the sale of PET/CT systems. On June 30,
2004, the District Court for the Western District of
Pennsylvania entered an order transferring the case to the
District Court for the Eastern District of Tennessee. We deny
liability and intend to vigorously defend this suit; however,
given the uncertainties inherent in the litigation process, we
are unable to predict the ultimate outcome of this suit.

Crystal Photonics, Inc. (CPI) filed for
arbitration against CTI under the rules of the American
Arbitration Association, alleging wrongful termination of a
Crystal Production and Technology Transfer Agreement between CTI
and CPI and asserting unauthorized use and wrongful transfer to
third parties of CPIs technology and failure to purchase
LSO crystal materials manufactured by CPI. CTI asserted
counterclaims to recover certain overpayments under the
agreement. After an arbitration hearing was conducted, the
arbitrator issued an award on August 25, 2004 in favor of
CPI on its claims and against CTI on its counterclaims.
CTIs motion for reconsideration of this award was denied
on September 14, 2004 and CTI was required by the
arbitrator to pay an aggregate of approximately
$4.2 million to CPI for damages and purchases of LSO
products.

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. See Note 14 for additional discussion.



|   |               
|-- | --------------
|6. | Long-Term Debt

The Company has a $125,000 syndicated revolving
credit facility (the Syndicated Facility) with a group of banks.
Borrowing under the Syndicated Facility is collateralized by all
property, and interests in property; provided, however, that all
real property of CTI as of March 14, 2002, is excluded; and
provided further that the property and interests of CPS are
limited to the inventory and accounts receivable and all
proceeds therefrom of CPS. Interest is at LIBOR plus 0.75% to
1.75% or, at our option, the lenders base rate plus 0.00%
to 0.75%, payable monthly (2.92% at September 30, 2004).
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. As of September 30, 2004 no balance was
outstanding under the credit agreement, and after deducting
$6,690 in outstanding letters of credit, $118,310 was available
to the Company.

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

On August 1, 2000 the Company entered into
an agreement with the Board relating to the issue of Industrial
Development Revenue Bonds (the Series 2000 Bonds) by the
Board in the aggregate principal amount of $3,000 for the
purpose of lending proceeds from the Series 2000 Bonds to
the Company. Such proceeds are restricted to use in the
acquisition, construction, improvement and equipping of the
Companys manufacturing plant in Blount County, Tennessee.
At September 30, 2004 and 2003, the

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

remaining balances were $900 and $1,600,
respectively. The remaining $900 balance of the Series 2000
Bonds is supported by an irrevocable letter of credit agreement
that expires October 15, 2005. The Series 2000 Bonds
are due in August 2010. In May 2002, the Company redeemed all
outstanding tax-exempt bonds and reissued taxable bonds for the
purpose of terminating federal government limitations on
aggregate capital expenditures.

CTI is required to repay 10.0% of the outstanding
debt annually, for both series. Both bond series bear interest
at variable rates, which change from time to time as set by the
remarketing agents for the bonds, in order to remarket both bond
series in a secondary market (interest rates were 1.85% at
September 30, 2004 and 1.20% to 1.30% at September 30,
2003, respectively).

In August 2003 in conjunction with the
acquisition of Mirada, we assumed a $365 bank note and issued
$3,188 of unsecured loan notes. The bank note was repaid in
March 2004. For the unsecured loan notes issued during the
acquisition, the remaining balance of $692 and any outstanding
interest is due on April 30, 2005. Interest on the
unsecured loan notes is fixed at 1.50%.

In 2003, CTI, through its subsidiary CPS, entered
into a mortgage loan to purchase additional manufacturing space,
which had previously been leased. The Company is required to
make principal and interest payments totaling $78 per year
through 2008, with a balloon payment upon maturity. The debt
bears interest at a fixed rate of 4%. The outstanding balance on
this mortgage loan was $833.

Annual maturities of long-term debt at
September 30, 2004, are as follows:

|      |  |   |       | 
|----- |  | - | ----- | 
|2005  |  | $ | 1,444 | 
|2006  |  |   | 747   | 
|2007  |  |   | 749   | 
|2008  |  |   | 3,485 | 
|      |  |   |       | 
|Total |  | $ | 6,425 | 
|      |  |   |       | 

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

|                         |  |      |        |      |  |   |        |  
|------------------------ |  | ---- | ------ | ---- |  | - | ------ | -
|                         |  | 2004 |        | 2003
|                         |  |      |        |     
|Machinery and equipment  |  | $    | 20,602 |      |  | $ | 21,641 |  
|Accumulated amortization |  |      | (7,446 | )    |  |   | (5,942 | )
|                         |  |      |        |      |  |   |        |  
|                         |  | $    | 13,156 |      |  | $ | 15,699 |  
|                         |  |      |        |      |  |   |        |  

F-16



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2004:

|                                             |  |   |        |  
|-------------------------------------------- |  | - | ------ | -
|2005                                         |  | $ | 3,716  |  
|2006                                         |  |   | 2,947  |  
|2007                                         |  |   | 2,943  |  
|2008                                         |  |   | 1,883  |  
|2009                                         |  |   | 846    |  
|Thereafter                                   |  |   | 439    |  
|                                             |  |   |        |  
|Total minimum lease payments                 |  |   | 12,774 |  
|Amounts representing interest                |  |   | (2,054 | )
|                                             |  |   |        |  
|Present value of net minimum payments        |  |   | 10,720 |  
|Current portion of capital lease obligations |  |   | (2,845 | )
|                                             |  |   |        |  
|Capital lease obligations, long-term         |  | $ | 7,875  |  
|                                             |  |   |        |  

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



|   |             
|-- | ------------
|7. | Income Taxes

The Company files a consolidated
U.S. federal income tax return that includes CTI and its
wholly owned domestic subsidiaries. CPS files a separate
U.S. federal income tax return and all foreign subsidiaries
file returns in their country of incorporation. At
September 30, 2004, the Company had state and foreign net
operating loss carryforwards of $23,416 and $7,427,
respectively. These net operating loss carryforwards expire in
the years ending September 30, 2010 to 2019 and are
available to reduce future income taxes. At September 30,
2004, the Company had tax credit carryforwards of $828 that are
available to reduce future federal income taxes.

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

|                             |                                             |      |   |       |   |  |   |       | 
|---------------------------- | ------------------------------------------- | ---- | - | ----- | - |  | - | ----- | 
|                             |                                             | 2004 |   | 2003 
|                             |                                             |      |   |      
|Current deferred tax assets: |                                             |      |   |       |   |  |   |      
|                             | Allowance for doubtful accounts             |      | $ | 1,767 |   |  | $ | 1,268 | 
|                             | Inventory capitalization                    |      |   | 793   |   |  |   | 762   | 
|                             | Inventory obsolescence reserves             |      |   | 1,982 |   |  |   | 1,212 | 
|                             | Accrued incentive compensation              |      |   | 170   |   |  |   | 309   | 
|                             | Accrued vacation                            |      |   | 1,019 |   |  |   | 921   | 
|                             | Accrued warranty reserves                   |      |   | 1,632 |   |  |   | 1,736 | 
|                             | Installation reserve                        |      |   | 195   |   |  |   | 127   | 
|                             | Other accrued expenses                      |      |   | (324  | ) |  |   | 357   | 
|                             | Deferred revenues                           |      |   | 3,732 |   |  |   | 3,953 | 
|                             | Alternative minimum tax credit carryforward |      |   |      |   |  |   | 11    | 
|                             | Net operating loss carryforwards            |      |   | 1,440 |   |  |   | 6,012 | 

F-17



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                      |                                              |      |        |        |   |   |        |        |  
|------------------------------------- | -------------------------------------------- | ---- | ------ | ------ | - | - | ------ | ------ | -
|                                      |                                              | 2004 |        | 2003  
|                                      |                                              |      |        |       
|                                      | Stock-based compensation                     |      |        | 1,662  |   |   |        | 604    |  
|                                      | Insurance reserve                            |      |        | (594   | ) |   |        | 479    |  
|                                      |                                              |      |        |        |   |   |        |       
|Net current deferred tax assets       |                                              | $    | 13,474 |        |   | $ | 17,751 |       
|                                      |                                              |      |        |        |   |   |        |       
|Noncurrent deferred tax assets:       |                                              |      |        |        |   |   |        |       
|                                      | Net operating loss carryforwards             |      | $      | 2,230  |   |   | $      | 2,106  |  
|                                      | Deferred revenue                             |      |        |       |   |   |        | 1,661  |  
|                                      | Amortization                                 |      |        | 1,093  |   |   |        | 159    |  
|                                      | Research and development credit carryforward |      |        | 795    |   |   |        | 817    |  
|                                      | Alternative minimum tax credit carryforward  |      |        | 33     |   |   |        |       |  
|                                      | Fixed asset disposition                      |      |        | 90     |   |   |        |       |  
|                                      | Valuation allowance                          |      |        | (464   | ) |   |        |       |  
|Noncurrent deferred tax liabilities:  |                                              |      |        |        |   |   |        |       
|                                      | Other noncurrent                             |      |        | (258   | ) |   |        |       |  
|                                      | Acquired intangibles                         |      |        | (3,383 | ) |   |        | (3,933 | )
|                                      | Depreciation                                 |      |        | (5,149 | ) |   |        | (9,809 | )
|                                      |                                              |      |        |        |   |   |        |       
|Net noncurrent deferred tax liability |                                              | $    | (5,013 | )      |   | $ | (8,999 | )     
|                                      |                                              |      |        |        |   |   |        |       

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.

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

|                                                          |  |      |        |      |  |      |        |   |  |   |        |  
|--------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                          |  | 2004 |        | 2003 |  | 2002
|                                                          |  |      |        |      |  |     
|Federal tax at U.S. statutory rate                        |  | $    | 20,025 |      |  | $    | 20,610 |   |  | $ | 8,445  |  
|State tax, net of U.S. tax benefit                        |  |      | 1,384  |      |  |      | 1,766  |   |  |   | 401    |  
|Change in valuation allowance                             |  |      | 464    |      |  |      |       |   |  |   |       |  
|Foreign tax effects                                       |  |      | 376    |      |  |      |       |   |  |   |       |  
|Warrant liability mark to market permanent
    difference |  |      |       |      |  |      |       |   |  |   | 3,405  |  
|Stock based compensation                                  |  |      | 167    |      |  |      | 245    |   |  |   | 3,364  |  
|Extraterritorial income benefit                           |  |      | (659   | )    |  |      | (677   | ) |  |   | (522   | )
|In process research and development                       |  |      |       |      |  |      | 416    |   |  |   |       |  
|Other permanent differences                               |  |      | 161    |      |  |      | 575    |   |  |   | (503   | )
|                                                          |  |      |        |      |  |      |        |   |  |   |        |  
|Provision for income taxes                                |  | $    | 21,918 |      |  | $    | 22,935 |   |  | $ | 14,590 |  
|                                                          |  |      |        |      |  |      |        |   |  |   |        |  

The Company has undistributed earnings from
foreign subsidiaries in the amount of approximately $300. Those
earnings are considered to be indefinitely reinvested, and,
accordingly no federal or state deferred taxes have been
provided thereon.



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

F-18



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

to contribute to the plan and the Company will
match 50% of employee contributions up to 6% of their eligible
compensation. The total Company expense was approximately
$1,453, $1,982 and $1,886 for the years ended September 30,
2004, 2003 and 2002, 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
generally vest 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 seven years. Twelve million eight hundred
thousand shares had been authorized under this plan; however,
after the adoption of the 2002 Long-Term Incentive Plan in May
2002, no further awards have been or will be granted under this
plan. On May 23, 2002, the Companys shareholders
approved the 2002 Long-Term Incentive Plan (the Plan) which
authorized three million shares. On March 2, 2004 the
Companys shareholders approved certain amendments to the
Plan increasing the number of shares available for issuance
under the Plan from 3,000,000 to 5,000,000 shares. At
September 30, 2004, options for 1,696,469 shares of
the Companys stock are available for granting.

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, 2001            |  |             | 2,743,759  |          |  | $          | 3.45  |             |  |          |      |  |  |  | 1,904,464 |  |  | $ | 3.25 | 
|Options granted in 2002 at fair value    |  |             | 147,433    |          |  |            | 11.06 |             |  | $        | 4.49 |  |  |  |           |  |  |   |      | 
|Options granted in 2002 below fair value |  |             | 776,265    |          |  |            | 5.49  |             |  |          | 9.59 |  |  |  |           |  |  |   |      | 
|Options exercised in 2002                |  |             | (306,168   | )        |  |            | 3.16  |             |  |          |      |  |  |  |           |  |  |   |      | 
|Options expired in 2002                  |  |             | (64,211    | )        |  |            | 3.60  |             |  |          |      |  |  |  |           |  |  |   |      | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |      | 
|Balance at September 30, 2002            |  |             | 3,297,078  |          |  |            | 4.30  |             |  |          |      |  |  |  | 2,572,544 |  |  |   | 3.78 | 
|Options granted in 2003 at fair value    |  |             | 160,292    |          |  |            | 21.73 |             |  |          | 9.42 |  |  |  |           |  |  |   |      | 
|Options exercised in 2003                |  |             | (1,247,913 | )        |  |            | 3.49  |             |  |          |      |  |  |  |           |  |  |   |      | 
|Options expired in 2003                  |  |             | (122,946   | )        |  |            | 5.54  |             |  |          |      |  |  |  |           |  |  |   |      | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |      | 
|Balance at September 30, 2003            |  |             | 2,086,511  |          |  |            | 6.03  |             |  |          |      |  |  |  | 1,619,823 |  |  |   | 4.70 | 
|Options granted in 2004 at fair value    |  |             | 401,463    |          |  |            | 13.17 |             |  |          | 6.03 |  |  |  |           |  |  |   |      | 
|Options exercised in 2004                |  |             | (477,110   | )        |  |            | 4.03  |             |  |          |      |  |  |  |           |  |  |   |      | 
|Options expired in 2004                  |  |             | (156,285   | )        |  |            | 14.21 |             |  |          |      |  |  |  |           |  |  |   |      | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |      | 
|Balance at September 30, 2004            |  |             | 1,854,579  |          |  | $          | 7.39  |             |  |          |      |  |  |  | 1,332,919 |  |  |   | 5.24 | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |      | 

F-19



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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
incentive stock options at September 30, 2004:

|                         |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | -------- | ---- | --------- |  | -------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |           |                    
|                         |  | Options Outstanding |           | Options Exercisable
|                         |  |                     |           |                    
|                         |  | Number of           |           | Average             |  | Average  |      | Number of |  | Average 
|Range of Exercise Prices |  | Shares              |           | Life(1)             |  | Price(2) |      | Shares    |  | Price(2)
|                         |  |                     |           |                     |  |          |      |           |  |         
|$2.81 to $3.87           |  |                     | 533,392   |                     |  |          | 1.57 |           |  | $        | 3.10  |  |  |  | 533,392   |  |  | $ | 3.10  | 
|$4.69 to $6.12           |  |                     | 800,166   |                     |  |          | 5.14 |           |  |          | 5.14  |  |  |  | 721,774   |  |  |   | 5.12  | 
|$8.02 to $12.01          |  |                     | 163,729   |                     |  |          | 9.19 |           |  |          | 9.19  |  |  |  |          |  |  |   |      | 
|$13.87 to $19.76         |  |                     | 254,962   |                     |  |          | 9.05 |           |  |          | 16.02 |  |  |  | 28,677    |  |  |   | 18.01 | 
|$21.97 to $25.00         |  |                     | 102,330   |                     |  |          | 8.15 |           |  |          | 22.90 |  |  |  | 49,076    |  |  |   | 22.82 | 
|                         |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |           |  |  |   |       | 
|                         |  |                     | 1,854,579 |                     |  |          |      |           |  |          |       |  |  |  | 1,332,919 |  |  |   |       | 
|                         |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |           |  |  |   |       | 



---



|    |                                                          
|--- | ---------------------------------------------------------
|(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.

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

|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |       | 
|---------------------------------------- |  | ----------- | ---------- | -------- |  | ---------- | ----- | ----------- |  | -------- | ---- |  |  |  | --------- |  |  | - | ----- | 
|                                         |  |             |            | Weighted |  | Weighted   |       |             |  | Weighted
|                                         |  |             |            | Average  |  | Average    |       |             |  | Average 
|                                         |  | Options     |            | Exercise |  | Grant Date |       | Options     |  | Exercise
|                                         |  | Outstanding |            | Price    |  | Fair Value |       | Exercisable |  | Price   
|                                         |  |             |            |          |  |            |       |             |  |         
|Balance at September 30, 2001            |  |             | 1,410,607  |          |  | $          | 1.39  |             |  |          |      |  |  |  | 1,356,432 |  |  | $ | 1.31  | 
|Options granted in 2002 at fair value    |  |             | 1,043,517  |          |  |            | 17.04 |             |  | $        | 6.34 |  |  |  |           |  |  |   |       | 
|Options granted in 2002 below fair value |  |             | 1,218,645  |          |  |            | 5.39  |             |  |          | 8.85 |  |  |  |           |  |  |   |       | 
|Options exercised in 2002                |  |             | (1,084,532 | )        |  |            | 3.46  |             |  |          |      |  |  |  |           |  |  |   |       | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |       | 
|Balance at September 30, 2002            |  |             | 2,588,237  |          |  |            | 8.72  |             |  |          |      |  |  |  | 1,409,761 |  |  |   | 4.72  | 
|Options granted in 2003 at fair value    |  |             | 134,553    |          |  |            | 18.39 |             |  |          | 9.22 |  |  |  |           |  |  |   |       | 
|Options exercised in 2003                |  |             | (820,462   | )        |  |            | 1.49  |             |  |          |      |  |  |  |           |  |  |   |       | 
|Options expired in 2003                  |  |             | (112,552   | )        |  |            | 5.27  |             |  |          |      |  |  |  |           |  |  |   |       | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |       | 
|Balance at September 30, 2003            |  |             | 1,789,776  |          |  |            | 12.98 |             |  |          |      |  |  |  | 998,465   |  |  |   | 11.72 | 
|Options granted in 2004 at fair value    |  |             | 1,139,713  |          |  |            | 12.03 |             |  |          | 5.63 |  |  |  |           |  |  |   |       | 
|Options exercised in 2004                |  |             | (42,974    | )        |  |            | 2.95  |             |  |          |      |  |  |  |           |  |  |   |       | 
|Options expired in 2004                  |  |             | (618,476   | )        |  |            | 15.72 |             |  |          |      |  |  |  |           |  |  |   |       | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |       | 
|Balance at September 30, 2004            |  |             | 2,268,039  |          |  | $          | 11.96 |             |  |          |      |  |  |  | 881,009   |  |  |   | 11.33 | 
|                                         |  |             |            |          |  |            |       |             |  |          |      |  |  |  |           |  |  |   |       | 

F-20



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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
non-qualified stock options at September 30, 2004:

|                         |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |         |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | -------- | ---- | --------- |  | -------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                         |  |                     |           |                    
|                         |  | Options Outstanding |           | Options Exercisable
|                         |  |                     |           |                    
|                         |  | Number of           |           | Average             |  | Average  |      | Number    |  | Average 
|Range of Exercise Prices |  | Shares              |           | Life(1)             |  | Price(2) |      | of Shares |  | Price(2)
|                         |  |                     |           |                     |  |          |      |           |  |         
|$2.81 to $3.52           |  |                     | 72,696    |                     |  |          | 1.24 |           |  | $        | 3.09  |  |  |  | 72,696  |  |  | $ | 3.09  | 
|$4.69 to $5.56           |  |                     | 537,935   |                     |  |          | 4.36 |           |  |          | 5.21  |  |  |  | 418,468 |  |  |   | 5.30  | 
|$8.02                    |  |                     | 437,146   |                     |  |          | 9.98 |           |  |          | 8.02  |  |  |  |        |  |  |   |      | 
|$12.89                   |  |                     | 114,400   |                     |  |          | 9.01 |           |  |          | 12.89 |  |  |  | 10,000  |  |  |   | 12.89 | 
|$14.00 to $19.76         |  |                     | 1,019,254 |                     |  |          | 8.72 |           |  |          | 16.84 |  |  |  | 293,237 |  |  |   | 18.64 | 
|$22.40                   |  |                     | 86,608    |                     |  |          | 7.93 |           |  |          | 22.40 |  |  |  | 86,608  |  |  |   | 22.40 | 
|                         |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |         |  |  |   |       | 
|                         |  |                     | 2,268,039 |                     |  |          |      |           |  |          |       |  |  |  | 881,009 |  |  |   |       | 
|                         |  |                     |           |                     |  |          |      |           |  |          |       |  |  |  |         |  |  |   |       | 



---



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



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

During the year ended September 30, 2004,
the Company issued 97,529 deferred stock units to certain
members of the Companys board of directors and to the
members of the board of directors of a wholly owned subsidiary,
allowing the grantees the right to acquire common stock with
prices ranging from $10.76 to $14.70. The Company recorded
unearned compensation for the fair value of these deferred stock
units totaling $1,304. The Company is amortizing the balance of
unearned compensation over the vesting period of one year. For
the year ended September 30, 2004, the Company amortized
$469 to stock-based compensation expense.

From 2002 to 2004, the Company issued 282,309
restricted shares of common stock at prices ranging from $15.55
to $22.40 in connection with hiring and promoting executives. In
connection with these restricted common shares, the Company
recorded unearned compensation of $5,374. The Company is
amortizing the unearned compensation balance to stock-based
compensation expense over the three to four year vesting periods
during which the restrictions expire. The Company amortized
$1,121, $947 and $144 to stock-based compensation expense for
the years ended September 30, 2004, 2003 and 2002,
respectively.

In September 2004, a senior executive resigned
employment but was retained by the Company as a consultant. The
consulting agreement has a term of two years and the Company
allowed the senior executive to retain 64,308 restricted shares
of common stock that will vest over the term of the consulting
agreement. Due to the shift in status from an employee to a
consultant, EITF 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services, the Company
is required to mark these shares to market and prospectively
adjust the amortization of the stock-based compensation for
changes in the market value of the Companys stock. At
September 30, 2004, these shares were valued using the
closing price on September 30, 2004 of $8.07 and based on
this price the Company amortized $22 into stock-based
compensation expense for the year ended September 30, 2004.

During 2004, the Company issued options to a
senior executive with an exercise price of $15.05, and then
later in the year accelerated the vesting schedule. The Company
recorded unearned compensation for the excess of estimated fair
value over the exercise price of these options on the
remeasurement date, totaling $100 and is amortizing the balance
over the three-year vesting period. For the year ended
September 30, 2004, the company amortized $33 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 options to employees to purchase common stock
with exercise prices ranging from $4.69 to $22.40. The Company
recorded non-cash compensation charges to earnings for any
excess of estimated fair value over the exercise price of these
options totaling $11,265 and also recorded unearned compensation
of $4,441. The Company is amortizing the balance of unearned
compensation over the respective vesting periods ranging from
three to four years. For the years ended September 30,
2004, 2003 and 2002, the Company amortized $834, $885 and $723,
respectively, to stock-based compensation expense.

During the year ended September 30, 2002,
the Company issued warrants and options to purchase common stock
to non-employee consultants in exchange for receiving consulting
services. The fair value of the warrants and options was
estimated using the Black-Scholes option-pricing model. In
connection with the issuance of these warrants to purchase
common stock, the Company recorded $93 to stock-based
compensation and $253 to unearned compensation. The Company is
amortizing the balance of unearned compensation to stock-based
compensation expense over the term of the consulting contract.
For the years ended September 30, 2004, 2003 and 2002, the
Company amortized $51, $51 and $25, respectively, to stock-based
compensation expense.

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

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



|    |                           
|--- | --------------------------
|10. | Related Party Transactions

From 1987 through April 2001, Siemens was the
exclusive distributor of scanners manufactured by CPS. In April
2001, CPS implemented a multiple distributor strategy. The
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,
recorded as a reduction of sales price, 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
2004, 2003 and 2002, between the Company and Siemens, a CTI
shareholder, or its affiliates:



| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | The Companys sales to Siemens were
    $198,213, $143,856 and $128,233 in 2004, 2003 and 2002,
    respectively.                       
|
| |  | Accounts receivable and customer advances
    received from Siemens totaled $34,231 and $1,284, respectively,
    at September 30, 2004.
|
| |  | Accounts receivable and customer advances
    received from Siemens totaled $42,430 and $326, respectively, at
    September 30, 2003.  

Effective May 1, 2004, CTI and CPS entered
into a Sales Agency and Services Agreement with Siemens (the
Agency Agreement), pursuant to which Siemens appointed CTI as
Siemens non-exclusive

F-22



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

sales representative to solicit purchases of
CPS-manufactured PET and PET/CT scanners throughout the United
States, on terms and conditions and at prices determined by
Siemens and subject to acceptance by Siemens. CPS products sold
by CTI as Siemens sales representative are marketed and
sold under the Siemens brand. In connection with this
arrangement, Siemens will reimburse CTI for all directly related
sales and marketing expenses, up to $10.0 million annually.
During the year ended September 30, 2004, CTI recorded
$4.0 million of revenue related to the reimbursement of
sales and marketing expenses.

Service contracts entered into in connection with
scanner sales in the United States after May 1, 2004 will
be divided equally between CTI and Siemens in terms of revenue.
Siemens and CTI remain free to independently pursue sales of
service contracts to the installed base of CPS scanner customers.

During the two-year term of the Agency Agreement,
CTI agreed to cease its sales and service of PET and PET/CT
scanners in international markets, except in South Korea and
Japan. All existing scanner service contracts in international
markets other than South Korea and Japan were assigned to
Siemens. During the term of the Agency Agreement, CTI has agreed
not to enter or re-enter any international market to sell or
service PET or PET/CT scanners, except that CTI may continue to
pursue its existing business in South Korea and may retain its
existing distribution agreement in Japan. In exchange for the
assignment of the international service contracts, covenants not
to compete in the United States and international markets other
than South Korea and Japan, certain price reductions for
detector materials including on international scanner sales, and
as compensation for the cost of closing certain international
operations, Siemens paid CTI $2.2 million. CTI recognized
$1.1 million as revenue during the year ended
September 30, 2004, in association with the assignment of
international service contracts. The remaining amount is being
amortized over the two-year term of the agreement concurrent
with our LSO price reduction and non-compete commitments. During
the year ended September 30, 2004 $0.2 million of this
remaining amount was amortized into earnings.

Under the Agency Agreement, Siemens serves as
CTIs non-exclusive representative to offer for sale other
products manufactured by CTI to Siemens customers. Subject
to the expiration or termination of any existing agreements
Siemens agreed to offer exclusively CTIs cyclotrons,
radiopharmaceuticals and calibration sources for sale to
Siemens customers.

The parties also agreed to certain changes in
transfer prices charged to and received from CPS. Siemens and
CTI have reduced the transfer prices for CT components and LSO
detector materials, respectively, sold to CPS. These price
reductions are being passed on, dollar-for-dollar, in the form
of lower transfer prices on scanners sold by CPS to Siemens. CPS
agreed to a second round of transfer price reductions on
scanners sold to Siemens, which are expected to become effective
during the second quarter of fiscal year 2005.

The initial term of the Agency Agreement is two
years commencing May 1, 2004, and the term will be extended
automatically for additional one-year periods unless either
party provides written notice, as required, of its election not
to renew. In the event the Agency Agreement is terminated or not
renewed by Siemens for any reason, CTI has the right to resume
distribution of PET and PET/CT scanners in competition with
Siemens. The Agency Agreement also provides that CTI can
terminate this agreement under certain specified circumstances,
including the event that certain total unit sales thresholds for
PET and PET/CT scanners are not met for a period of two
consecutive fiscal quarters.

Siemens also executed an agreement with Mirada,
under which Siemens pays Mirada a fee to install Miradas
image-fusion software on every workstation sold worldwide with a
Siemens-branded PET or PET/CT scanner.

Under the terms of an agreement with Siemens (the
Siemens Agreement), Siemens shall have the right to purchase, or
CTI shall have the right to require Siemens to purchase, an
additional 30.1% of CPS. The exercise of this put/call is
contingent upon cumulative unit sales of ECAT® scanners
reaching a

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

defined target level. At September 30, 2004
the cumulative total number of units sold by CPS was 852. By the
end of 2004, CPS would need to have sold a cumulative total of
1,055 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
second half of fiscal year 2006. Siemens cannot exercise its
option until the end of the fiscal year in which this target
level is reached.

Prior to the Companys acquisition of CMSI
in June 2004 (see Note 11), the Company had four agreements
with CMSI, a company partially owned and operated by two
children of CTIs President and Chief Executive Officer,
who is also a director and major shareholder of CTI.

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

As part of the transactions contemplated by the
MicroPET Agreement, CPS entered into a Patent and Technology
Sublicense Agreement. Pursuant to this Sublicense, CPS granted
CMSI 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 was terminated in connection with the acquisition.

Effective October 1, 1999, CPS and CMSI
entered into a Development and Exclusive Supply Agreement (the
ASIC Agreement) pursuant to which CPS engaged CMSI to develop,
manufacture and supply application specific integrated circuits
(commonly referred to as ASICs) used in the PET scanners
manufactured by CPS. CPS agreed to pay CMSI for its development
costs, production set-up costs and design maintenance procedures
incurred in connection with the development and production of
the microchips or ASICs. CPS agreed that upon the successful
development of the ASICs, CMSI would be the exclusive supplier
of the ASICs. CPS also agreed to acquire at least $50,000 worth
of ASICs from CMSI during the term of the agreement. All
technology developed by CMSI in the performance of the agreement
belongs to CPS. CMSI agreed for a period of five years after the
new ASICs are developed not to engage in or own an interest in a
business competitive with CPS or to design ASICs for any
competitor of CPS. The agreement had a five-year term. In
connection with the ASIC Agreement and prior to the
Companys acquisition of CMSI, CPS paid CMSI $269, $601 and
$459 for the years ended September 30, 2004, 2003, and
2002, respectively. Following the Companys acquisition of
Concorde, CMSI retained all of its rights and obligations under
the ASIC Agreement.

In September 2002, CTI Solutions entered into an
agreement to distribute CMSI products throughout the continental
United States and Canada. CMSI retained the rights to, and sold
products directly to all international markets other than
Canada. During the year ended September 30, 2004, prior to
the acquisition discussed in Note 11, total CTI Solutions
sales and cost of sales of products purchased from CMSI and
resold under this distribution agreement were $4,398 and $4,021,
respectively. During the year

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

ended September 30, 2003, total CTI
Solutions sales and cost of sales of products purchased from
CMSI and resold under this distribution agreement were $5,436
and $5,061, respectively. At September 30, 2003 accounts
payable included $3,206 in trade payables to CMSI. There were no
transactions under the agreement for the year-ended
September 30, 2002. In connection with the acquisition of
Concorde, this distribution agreement was terminated.

On September 5, 2002 CTI entered into an LSO
Supply Agreement with CMSI pursuant to which CTI agreed to
provide CMSI with LSO. In this agreement, CTI agreed not to sell
LSO to another third party engaged in the development or
manufacture of PET scanners for use in animal applications.
During the year ended September 30, 2004 and prior to the
acquisition of CMSI, LSO sales to CMSI were $441. During the
year ended September 30, 2003, LSO sales to CMSI were
$1,371. There were no sales under this agreement in fiscal year
2002. In connection with the acquisition of Concorde, this LSO
Supply Agreement was terminated.

Since September 2000, the Company has entered
into a series of lease agreements with Corridor Park Limited
Partnership II for office space located at
830 Corridor Park Boulevard in Knoxville, Tennessee.
Certain of the Companys officers, directors and principal
stockholders, including Dr. Terry D. Douglass and
Dr. Ronald Nutt, are partners of Corridor Park Limited
Partnership II. The Company is a party to two leases with
Corridor Park Limited Partnership II under which it leases
approximately 25,300 square feet of office space. One of
these leases, covering approximately 21,700 square feet of
office space, has a three-year term ending July 15, 2006;
the Company holds an option to renew this lease for an
additional three-year term. The second of these leases, covering
approximately 3,600 square feet of office space, has a
one-year term ending October 15, 2004; the Company holds an
option to renew this lease for an additional three-year term.
The lease was renewed subsequent to year-end. Rent under both
leases is $9.00 per square foot, plus a pro rata share of
maintenance, taxes, insurance and other expenses. The Company
pays as additional rent the unamortized cost of certain
build-out construction that was completed at the Companys
request. The Company uses this property for administrative
offices. Rent paid on these leases during the years ended
September 30, 2004, 2003 and 2002 was $280, $202, and $171,
respectively.



|    |                      
|--- | ---------------------
|11. | Business Acquisitions

On June 30, 2004, the Company acquired the
assets of CMSI, a related party as described in Note 10,
and included them in the consolidated balance sheet as of that
date. The results of Concordes operations have been
included in our consolidated financial statements as part of the
CTI Solutions reporting segment effective July 1, 2004.
Concorde is the leading provider of microPET® animal
scanners for use in medical research. The acquisition will
increase the capabilities of the Company to broadly serve the
research and pharmaceutical markets. In combination with the
Companys domestic network of radiopharmacies, the Company
intends to leverage the acquisition of Concorde to accelerate
the discovery of new molecular probes for the clinical market.

The aggregate purchase price was $41,899,
including $20,500 of cash and 1,480,465 shares of common
stock valued at $21,399 based on the average closing price two
days before and two days after the announcement of the
acquisition. Under the purchase agreement, the Company may be
required to make additional payments if Concordes gross
margin exceeds defined goals for 2005 and 2006. If additional
payments are required the Company will adjust goodwill at that
time. The acquisition was reviewed by the Audit Committee of the
Companys Board of Directors and was considered and
approved only by independent board members. An investment bank
provided a fairness opinion to the independent members

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of the Board of Directors. The following table
summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition as determined by
independent appraisal.

|                          |  |          |        | 
|------------------------- |  | -------- | ------ | 
|                          |  | At      
|                          |  | June 30,
|                          |  | 2004    
|                          |  |         
|Current assets            |  | $        | 7,538  | 
|Property and equipment    |  |          | 678    | 
|Intangible assets         |  |          | 14,819 | 
|Goodwill                  |  |          | 21,568 | 
|                          |  |          |        | 
|Total assets acquired     |  |          | 44,603 | 
|                          |  |          |        | 
|Current liabilities       |  |          | 2,704  | 
|                          |  |          |        | 
|Total liabilities assumed |  |          | 2,704  | 
|                          |  |          |        | 
|Net assets acquired       |  | $        | 41,899 | 
|                          |  |          |        | 

Of the $14,819 in acquired intangible assets,
$11,415 and $202 were assigned to existing product technology
and services contracts, respectively. The services contracts and
existing technology are being amortized on a straight-line basis
over weighted average lives of approximately 7 and 9 years,
respectively. The remaining $3,202 was assigned to trade names
and trademarks. During the year ended September 30, 2004,
$363 of amortization expense was recorded on the service
contracts and existing technology, post acquisition. The
goodwill is expected to be deductible for tax purposes. No pro
forma disclosures have been included in these financial
statements as Concorde was not significant to the consolidated
financial statements taken as a whole.

On August 15, 2003, the Company acquired
100% of the capital stock of Mirada. The results of
Miradas operations have been included in the consolidated
financial statements since that date. Miradas products aid
better detection, diagnosis and management of disease through
the application of image analysis tools to medical images.

The aggregate purchase price was $23,091,
including $19,652 of cash, common stock of $251, and the balance
of $3,188 in notes payable. Under the purchase agreement, the
Company may be required to make additional payments to the
former shareholders if Mirada net income exceeds defined goals
for 2004 and 2005. No such payment is required for 2004. If an
additional payment is required for 2005 the Company

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

will adjust goodwill at that time. The following
table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition as
determined by independent appraisal.

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

Of the $14,209 in acquired intangible assets,
$12,829 was assigned to existing product technology and is being
amortized on a straight-line basis over a weighted average life
of approximately 10 years. During the years ended
September 30, 2004 and 2003 amortization expense recorded
on these assets was $1,376 and $176, respectively. The remaining
intangible assets of $1,380 were assigned to research and
development assets that were written off at the date of
acquisition in accordance with FASB Interpretation No. 4,
Applicability of FASB No. 2 to Business Combinations
Accounted for by the Purchase Method. None of the goodwill
is expected to be deductible for tax purposes. No pro forma
disclosures have been included in these financial statements as
Mirada was not significant to the consolidated financial
statements taken as a whole.

The changes in the carrying value of goodwill for
the year ended September 30, 2004 are as follows:

|                            |  |           |     |           |  |              |        |              |  |   |        |  |  |   |        | 
|--------------------------- |  | --------- | --- | --------- |  | ------------ | ------ | ------------ |  | - | ------ |  |  | - | ------ | 
|                            |  | Detector  |     | CTI       |  | Corporate &  |        | Consolidated
|                            |  | Materials |     | Solutions |  | Eliminations |        | Total       
|                            |  |           |     |           |  |              |        |             
|Balance, September 30, 2003 |  | $         | 711 |           |  | $            | (1,159 | )            |  | $ | 25,488 |  |  | $ | 25,040 | 
|Goodwill acquired           |  |           |    |           |  |              | 21,568 |              |  |   | 21     |  |  |   | 21,589 | 
|                            |  |           |     |           |  |              |        |              |  |   |        |  |  |   |        | 
|Balance, September 30, 2004 |  | $         | 711 |           |  | $            | 20,409 |              |  | $ | 25,509 |  |  | $ | 46,629 | 
|                            |  |           |     |           |  |              |        |              |  |   |        |  |  |   |        | 

The Corporate and Eliminations column
reflects the goodwill arising from the acquisitions of PETNET
and Mirada that was not pushed down to the subsidiaries for
segment reporting. Of the $45,918 total in CTI Solutions
and Corporate and Eliminations, $11,272 relates to PETNET,
$12,485 relates to Mirada, $21,568 relates to Concorde, and $593
relates to Detector Materials.



|    |                             
|--- | ----------------------------
|12. | Preferred Stock and Warrants

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

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The aggregate accretion on both issues of
redeemable preferred stock in the year ended September 30,
2002 was $3,544.

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

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

On June 26, 2002, CTI exercised a repurchase
option in connection with its initial public offering which
qualified as a Liquidity Event (as defined in the warrant
agreement). The option called for a $1,000 payment in exchange
for a portion of the warrant covering from 188,189 to
1,191,165 shares, based on the internal rate of return to
the purchaser of the preferred stock. Pursuant to the warrant
agreement, the Company received a credit against the $1,000
payment in an amount equal to fifty percent of any underwriting
fees paid by the Company to an affiliate of the holder of the
warrant in connection with a public offering of the
Companys common stock. The Company received a credit in
the amount of $658 in connection with its initial public
offering and therefore paid $342 to
repurchase 1,191,165 shares upon the closing of the
offering. The cost of the common shares acquired is reflected as
treasury stock in the accompanying consolidated financial
statements.

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

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

On May 21, 2002, the Companys Board of
Directors adopted a stockholder protection rights agreement and
declared a dividend of one Right for each share of Common Stock
held of record as of the close of business on the closing date
of the initial public offering of Common Stock of the Company
pursuant to an effective registration statement filed by the
Company with the Securities and Exchange

F-28



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 per share. The Rights may be
terminated without payment by the Company at any time prior to
the date that is ten business days after the acquisition of 15%
or more of the Companys Common Stock by a person or group.

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



|    |         
|--- | --------
|13. | Segments

The Company operates in three reportable business
segments based on differences in products and services: CPS,
Detector Materials, and CTI Solutions. CPS designs, manufactures
and markets medical research and scanning equipment. Detector
Materials manufactures a scintillation component sold primarily
to CPS. CTI Solutions includes the production and distribution
of radiopharmaceuticals, and the sale and service by CTI of PET
scanners, microPET® animal scanners, cyclotron systems and
other PET related products. CTI Solutions reflects the
combination of the former PETNET and CTI Services segments which
previously were reported separately. Corporate reflects
administrative activities not included in the three reportable
segments. All comparative financial information for fiscal years
2003 and 2002 has been retroactively reclassified to reflect the
new reporting structure.

The accounting policies of the segments are the
same as those described in the Summary of Significant
Accounting Policies. 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. 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.

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, 2004, 2003, and 2002:

|                              |  |     |         |           |  |           |        |           |  |             |         |              |  |   |       |  |  |   |          |   |  |   |         | 
|----------------------------- |  | --- | ------- | --------- |  | --------- | ------ | --------- |  | ----------- | ------- | ------------ |  | - | ----- |  |  | - | -------- | - |  | - | ------- | 
|                              |  |     |         | Detector  |  | CTI       |        |           |  | Eliminating |         | Consolidated
|                              |  | CPS |         | Materials |  | Solutions |        | Corporate |  | Entries     |         | Total       
|                              |  |     |         |           |  |           |        |           |  |             |         |             
|Year Ended September 30, 2004 |  |     |         |           |  |           |        |           |  |             |         |              |  |   |       |  |  |   |          |   |  |   |         | 
|External revenues             |  | $   | 209,606 |           |  | $         | 659    |           |  | $           | 191,483 |              |  | $ |      |  |  | $ |         |   |  | $ | 401,748 | 
|Intersegment revenues         |  |     | 57,258  |           |  |           | 46,436 |           |  |             | 4,751   |              |  |   |      |  |  |   | (108,445 | ) |  |   |        | 
|Depreciation and amortization |  |     | 2,370   |           |  |           | 1,868  |           |  |             | 9,747   |              |  |   | 3,143 |  |  |   | 1,318    |   |  |   | 18,446  | 
|Stock-based compensation      |  |     | 245     |           |  |           | 15     |           |  |             | 1,250   |              |  |   | 1,020 |  |  |   |         |   |  |   | 2,530   | 
|Interest expense              |  |     | 109     |           |  |           | 746    |           |  |             | 3,756   |              |  |   | 1,709 |  |  |   | (4,485   | ) |  |   | 1,835   | 
|Interest income               |  |     | 778     |           |  |           | 311    |           |  |             | 231     |              |  |   | 3,625 |  |  |   | (4,485   | ) |  |   | 460     | 

F-29



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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                       |  |     |         |           |  |           |        |           |  |             |         |              |  |   |         |   |  |   |          |   |  |   |         |  
|-------------------------------------- |  | --- | ------- | --------- |  | --------- | ------ | --------- |  | ----------- | ------- | ------------ |  | - | ------- | - |  | - | -------- | - |  | - | ------- | -
|                                       |  |     |         | Detector  |  | CTI       |        |           |  | Eliminating |         | Consolidated
|                                       |  | CPS |         | Materials |  | Solutions |        | Corporate |  | Entries     |         | Total       
|                                       |  |     |         |           |  |           |        |           |  |             |         |             
|Equity in (income) losses of investees |  |     |        |           |  |           | 10     |           |  |             | (40     | )            |  |   |        |   |  |   |         |   |  |   | (30     | )
|Income tax expense                     |  |     | 18,632  |           |  |           | 7,238  |           |  |             | (5,178  | )            |  |   | 89      |   |  |   | 1,137    |   |  |   | 21,918  |  
|Minority interest expense              |  |     |        |           |  |           |       |           |  |             | 571     |              |  |   |        |   |  |   | 16,105   |   |  |   | 16,676  |  
|Net income (loss)                      |  |     | 32,276  |           |  |           | 12,246 |           |  |             | (9,582  | )            |  |   | 241     |   |  |   | (16,561  | ) |  |   | 18,620  |  
|Total assets                           |  |     | 161,792 |           |  |           | 76,915 |           |  |             | 332,448 |              |  |   | 81,572  |   |  |   | (187,513 | ) |  |   | 465,214 |  
|Investment in equity method investees  |  |     |        |           |  |           | 67     |           |  |             | 1,142   |              |  |   |        |   |  |   |         |   |  |   | 1,209   |  
|Capital expenditures                   |  |     | 2,231   |           |  |           | 2,185  |           |  |             | 32,968  |              |  |   | 6,342   |   |  |   | (2,332   | ) |  |   | 41,394  |  
|Year Ended September 30, 2003          |  |     |         |           |  |           |        |           |  |             |         |              |  |   |         |   |  |   |          |   |  |   |         |  
|External revenues                      |  | $   | 172,013 |           |  | $         | 2,852  |           |  | $           | 187,424 |              |  | $ |        |   |  | $ |         |   |  | $ | 362,289 |  
|Intersegment revenues                  |  |     | 75,726  |           |  |           | 52,312 |           |  |             | 5,395   |              |  |   |        |   |  |   | (133,433 | ) |  |   |        |  
|Depreciation and amortization          |  |     | 1,539   |           |  |           | 1,800  |           |  |             | 6,431   |              |  |   | 1,994   |   |  |   | 173      |   |  |   | 11,937  |  
|Stock-based compensation               |  |     | 326     |           |  |           | 21     |           |  |             | 920     |              |  |   | 642     |   |  |   |         |   |  |   | 1,909   |  
|Interest expense                       |  |     | 14      |           |  |           | 860    |           |  |             | 3,152   |              |  |   | 1,327   |   |  |   | (3,427   | ) |  |   | 1,926   |  
|Interest income                        |  |     | 411     |           |  |           | 116    |           |  |             | 306     |              |  |   | 3,716   |   |  |   | (3,427   | ) |  |   | 1,122   |  
|Equity in (income) losses of investees |  |     |        |           |  |           |       |           |  |             | (16     | )            |  |   |        |   |  |   |         |   |  |   | (16     | )
|Income tax expense                     |  |     | 17,704  |           |  |           | 9,850  |           |  |             | (3,783  | )            |  |   | 976     |   |  |   | (1,812   | ) |  |   | 22,935  |  
|Minority interest expense              |  |     |        |           |  |           |       |           |  |             | 345     |              |  |   |        |   |  |   | 15,042   |   |  |   | 15,387  |  
|Net income (loss)                      |  |     | 30,144  |           |  |           | 15,445 |           |  |             | (8,339  | )            |  |   | 1,203   |   |  |   | (17,890  | ) |  |   | 20,563  |  
|Total assets                           |  |     | 143,397 |           |  |           | 45,510 |           |  |             | 181,723 |              |  |   | 128,921 |   |  |   | (74,503  | ) |  |   | 425,048 |  
|Investment in equity method investees  |  |     |        |           |  |           |       |           |  |             | 1,921   |              |  |   |        |   |  |   |         |   |  |   | 1,921   |  
|Capital expenditures                   |  |     | 10,199  |           |  |           | 2,411  |           |  |             | 21,427  |              |  |   | 11,461  |   |  |   | (692     | ) |  |   | 44,806  |  
|Year Ended September 30, 2002          |  |     |         |           |  |           |        |           |  |             |         |              |  |   |         |   |  |   |          |   |  |   |         |  
|External revenues                      |  | $   | 151,264 |           |  | $         | 1,047  |           |  | $           | 106,084 |              |  | $ |        |   |  | $ |         |   |  | $ | 258,395 |  
|Intersegment revenues                  |  |     | 37,774  |           |  |           | 28,155 |           |  |             | 6,416   |              |  |   |        |   |  |   | (72,345  | ) |  |   |        |  
|Depreciation and amortization          |  |     | 839     |           |  |           | 884    |           |  |             | 4,028   |              |  |   | 1,347   |   |  |   |         |   |  |   | 7,098   |  
|Stock-based compensation               |  |     | 3,926   |           |  |           | 1,671  |           |  |             | 3,678   |              |  |   | 2,975   |   |  |   |         |   |  |   | 12,250  |  
|Interest expense                       |  |     | 464     |           |  |           | 1,046  |           |  |             | 3,545   |              |  |   | 159     |   |  |   |         |   |  |   | 5,214   |  
|Interest income                        |  |     | 20      |           |  |           | 192    |           |  |             | 464     |              |  |   | 390     |   |  |   |         |   |  |   | 1,066   |  
|Equity in (income) losses of investees |  |     |        |           |  |           |       |           |  |             | 33      |              |  |   |        |   |  |   |         |   |  |   | 33      |  
|Income tax expense                     |  |     | 13,599  |           |  |           | 2,327  |           |  |             | (1,189  | )            |  |   | 2,120   |   |  |   | (2,267   | ) |  |   | 14,590  |  
|Minority interest expense              |  |     |        |           |  |           |       |           |  |             | 125     |              |  |   |        |   |  |   | 12,844   |   |  |   | 12,969  |  
|Net income (loss)                      |  |     | 25,740  |           |  |           | 3,659  |           |  |             | (3,957  | )            |  |   | (14,029 | ) |  |   | (14,832  | ) |  |   | (3,419  | )
|Total assets                           |  |     | 102,386 |           |  |           | 39,473 |           |  |             | 127,709 |              |  |   | 115,781 |   |  |   | (33,640  | ) |  |   | 351,709 |  
|Investment in equity method investees  |  |     |        |           |  |           |       |           |  |             | 1,278   |              |  |   |        |   |  |   |         |   |  |   | 1,278   |  
|Capital expenditures                   |  |     | 2,907   |           |  |           | 3,911  |           |  |             | 16,964  |              |  |   | 12,292  |   |  |   |         |   |  |   | 36,074  |  

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Sales were distributed to the following locations:

|              |  |                          |       |      |  |      |       |   |  |  |       |  
|------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|              |  |                         
|              |  | Year Ended September 30,
|              |  |                         
|              |  | 2004                     |       | 2003 |  | 2002
|              |  |                          |       |      |  |     
|United States |  |                          | 75.4  | %    |  |      | 76.7  | % |  |  | 76.5  | %
|Foreign       |  |                          | 24.6  |      |  |      | 23.3  |   |  |  | 23.5  |  
|              |  |                          |       |      |  |      |       |   |  |  |       |  
|              |  |                          | 100.0 | %    |  |      | 100.0 | % |  |  | 100.0 | %
|              |  |                          |       |      |  |      |       |   |  |  |       |  

No individual foreign country represents 10% or
more of the Companys total sales since 2002. Sales are
based on final destination of products sold.



|    |                  
|--- | -----------------
|14. | Subsequent Events

On October 8, 2004, the Company received a
letter from the U.S. Environmental Protection Agency
(EPA) requesting information on a Superfund site operated
by a former supplier. Based on the Companys investigation,
it appears that the sole nature of the Companys dealing
with the supplier was strictly for the acquisition of supplies
and not the provision of waste products or by-products by or on
behalf of the Company. No legal action has been initiated or
threatened by the EPA against the Company at present. However,
there can be no assurance that a formal legal claim may not be
brought by the EPA.

On November 2, 2004, the Company acquired
100% of the capital stock of ImTek, Inc. (ImTek). ImTek designs
and manufactures the microCAT® brand of micro-CT scanners,
which are used in preclinical applications of small animal
imaging. The acquisition augments the Companys expanding
capabilities to serve the pharmaceutical research market. The
aggregate purchase price was $3,750 in cash. Under the purchase
agreement, the Company may be required to make additional
payments if ImTeks gross margin exceeds defined goals for
2005 and 2006. If additional payments are required the Company
will adjust goodwill at that time.

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##### Table of Contents



CTI MOLECULAR IMAGING, INC. AND
SUBSIDIARIES

SCHEDULE II.     FINANCIAL
STATEMENT SCHEDULES

Valuation and Qualifying Accounts and
Reserves


|                                                        |  |  |      |            |  |            |       |            |  |            |       |       |  |  |      |        |   |  |       |       | 
|------------------------------------------------------- |  |  | ---- | ---------- |  | ---------- | ----- | ---------- |  | ---------- | ----- | ----- |  |  | ---- | ------ | - |  | ----- | ----- | 
|                                                        |  |  |      | Balance at |  | Charges to |       |            |  | Balance at
|                                                        |  |  |      | Beginning  |  | Costs and  |       | Write-offs |  | End of    
|                                                        |  |  |      | of Period  |  | Expenses   |       | and Other  |  | Period    
|                                                        |  |  |      |            |  |            |       |            |  |           
|Description                                             |  |  |      |            |  |            |       |            |  |            |       |       |  |  |      |        |   |  |       |      
|                                                        |  |  |      |            |  |            |       |            |  |            |       |       |  |  |      |        |   |  |       |      
|Accounts receivable allowance for doubtful
    accounts |  |  | 2002 |            |  |            | 757   |            |  |            | 1,466 |       |  |  | (405 | )      |   |  | 1,818 |      
|                                                        |  |  |      | 2003       |  |            |       | 1,818      |  |            |       | 2,791 |  |  |      | (948   | ) |  |       | 3,661 | 
|                                                        |  |  |      | 2004       |  |            |       | 3,661      |  |            |       | 2,717 |  |  |      | (1,188 | ) |  |       | 5,190 | 
|Inventory reserve for obsolescence                      |  |  | 2002 |            |  |            | 1,738 |            |  |            | 1,002 |       |  |  | (889 | )      |   |  | 1,851 |      
|                                                        |  |  |      | 2003       |  |            |       | 1,851      |  |            |       | 1,471 |  |  |      | (476   | ) |  |       | 2,846 | 
|                                                        |  |  |      | 2004       |  |            |       | 2,846      |  |            |       | 4,247 |  |  |      | (1,053 | ) |  |       | 6,040 | 
|Deferred tax valuation allowance                        |  |  | 2002 |            |  |            |      |            |  |            |      |       |  |  |     |        |   |  |      |      
|                                                        |  |  |      | 2003       |  |            |       |           |  |            |       |      |  |  |      |       |   |  |       |      | 
|                                                        |  |  |      | 2004       |  |            |       |           |  |            |       | 464   |  |  |      |       |   |  |       | 464   | 

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-32