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EXPLANATORY NOTE

This 10-KSB/A should have been filed instead of the 10-KSB/A that was filedearlier in the day on October 29, 2001. The 10-KSB/A that was filed earlier inthe day on October 29, 2001 was only a draft and was filed by the financialprinter due to inadvertent financial printer error.

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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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Form 10-KSB/A





(Mark One)


x

ANNUALREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the fiscal year ended June 30, 2001 ̈

TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition period from              to





Commission file number 000-27915





MOBILE PET SYSTEMS, INC.


A Delaware Corporation


(Name of small business issuer in its charter)





Delaware

11-2787966(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)2150 West Washington St., Suite 110

92110San Diego, CA 92110

(Zip Code)(Address of principal executive offices)





Issuers telephone number:    (619) 226-6738





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





Title of each class

Name of each exchange on which registeredNone

None





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





COMMON STOCK, PAR VALUE $0.0001


(Title
of class)





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





Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB or any amendment
to this Form 10-KSB.  ̈





Issuers revenues for fiscal year 2001 were $7,163,311.





The aggregate market value of voting common equity held by non-affiliates of the registrant was $12,354,013 as of October 1, 2001 (computed by reference to
the average bid and ask prices of the issuers Common Stock on that date as reported by the OTC Bulletin Board).





There were 35,224,338 shares outstanding of the registrants Common Stock as of October 11, 2001.





Transitional small business disclosures format (check one):  Yes  ̈ No  x





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TABLE OF CONTENTS





PART I

2ITEM 1

BUSINESS

2ITEM 2

PROPERTIES

11ITEM 3

LEGAL PROCEEDINGS

11ITEM 4

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

11PART II

12ITEM 5

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

12ITEM 6

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

14ITEM 7

FINANCIAL STATEMENTS

24ITEM 8

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

40PART III

41ITEM 9

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

41ITEM 10

EXECUTIVE COMPENSATION

42ITEM 11

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

47ITEM 12

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

48ITEM 13

EXHIBITS AND REPORTS ON FORM 8-K

51




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PART I





ITEM 1.    
BUSINESS





Business Development





Mobile PET Systems, Inc. was incorporated in the State of Nevada on December 1, 1998. The
Company subsequently was involved in a reverse merger with Colony International Incorporated. Colony International Incorporated (formerly American Coin and Stamp, Inc.) was incorporated in the State of Delaware on August 21, 1985 and its wholly
owned subsidiary, Colony International Incorporated, was incorporated in the State of Nevada on April 25, 1995. On December 22, 1998, Mobile PET Systems, Inc.s shareholders exchanged all of their 7,000,000 shares of outstanding common stock
for 7,000,000 shares of common stock in Colony International Incorporated. This exchange of shares was accounted for as a reverse merger, under the purchase method of accounting. Accordingly, the combination of the Mobile PET Systems, Inc. and
Colony International Incorporated and subsidiary was recorded as a recapitalization of the shareholders equity. Colony International Incorporated subsequently changed its name to Mobile PET Systems, Inc.





General Business





Mobile PET Systems, Inc. is a leading national provider of Positron Emission Tomography (PET) services. We provide our services to hospitals and
other healthcare providers in selected marketplaces in the United States and England. PET imaging systems produce diagnostic images of the body that represent the metabolic characteristics of disease rather than anatomical images generated by
conventional x-ray, Computerized Axial Tomography (CT), diagnostic ultrasound or Magnetic Resonance Imaging (MRI) imaging systems. PET effectively detects and stages many cancers, cardiac and neurological disorders at their
earliest stages, which influences treatment options and can eliminate redundant testing, hospitalization or non-beneficial therapies.





We provide use of our PET imaging systems integrated into mobile coaches or into fixed facilities. We provide the technical personnel who operate
the equipment and implement the PET procedure under the direction of hospital physicians. Our contracted services provide hospitals and other healthcare providers access to this advanced diagnostic imaging technology and related patient benefits.





We are subject to the informational requirements of
the Securities Exchange Act of 1934 (the Exchange Act) which requires us to file reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information may be
inspected at public reference facilities of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549; Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 5670 Wilshire Boulevard, Los Angeles,
California 90036. Copies of such material can be obtained from the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at prescribed rates. Because we file documents electronically with the SEC, you
may also obtain this information by visiting the SECs Internet web site at http://www.sec.gov.





About
Our Industry





The diagnostic imaging industry
generates annual revenues in excess of $50 billion in the United States, or approximately 5% to 6% of total health care spending. It is estimated that there will be a total of approximately 583 PET systems installed in the United States in 2001. In
2000, there were a total of approximately 348 PET systems installed in the United States. An analysis of approximately 67% of these systems indicated that approximately 50% were installed in hospital facilities, 36 percent were installed in
independent fixed sites, and 14% were installed in other facilities consisting of mobile PET providers, government non-hospital institutions, specialty care centers and non-classifiable institutions. By comparison, in 1998 there were
approximately 4,000 MRI systems in the United States consisting of approximately 60% hospital owned systems, 25% independent fixed site systems and 15% mobile systems.




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Studies by the Institute for Clinical PET (ICP) (now a component of the
Academy of Molecular Imaging) previously concluded that PET is a cost-effective diagnostic imaging procedure for a number of indications. (Positron Emission Tomography, Biological Imaging for Medicine, A Proven Answer to Improve Healthcare Quality
and Lower Cost, May 1995, by Terry D. Douglass, PhD.) In cost-effectiveness studies conducted by the ICP, the use of PET in four indications for the United States Medicare and non-Medicare populations demonstrated significant cost savings. The four
retrospective studies focused on lung cancer, breast cancer, colorectal cancer recurrence, and myocardial viability. In the studies of these four indications in the Medicare population, ICP estimated the total Medicare savings from the use of PET
diagnostic imaging procedures would approximate $1.6 billion per year. In addition, ICP estimated the number of invasive and other diagnostic procedures would be reduced by 189,162 procedures. Finally, ICP estimated the number of annual PET studies
required for the four indications in the Medicare population would be 388,951. ICPs cost effectiveness studies for the non-Medicare population concluded the total cost savings from the use of PET diagnostic imaging would approximate $4.1
billion annually. In this population, ICP estimates the number of invasive and other diagnostic procedures would be reduced by 182,520 procedures annually. In addition, ICP indicated that the number of annual PET studies required in this population
would approximate 401,616 tests. It should be noted that ICPs calculations examined only the savings related to the cost of the procedures avoided, and did not include additional savings realized by avoiding the complications of procedures
rendered unnecessary by knowledge of PET results.





The PET Technology and Procedure





Diagnostic PET imaging systems are comprised of high speed computers
and a table that slides into a large imaging detector gantry, which acquires and produces detailed images of the human bodys metabolic functions. Performing an actual PET procedure involves first introducing a radiotracer into the
patients blood stream. A radiotracer is a substance which when absorbed into a patients system allows the PET scanner to acquire an image of the bodys metabolic functions. On a PET scan the areas of abnormal metabolic
function will show the location and extent of the disease. After the radiotracer is absorbed by the patients body (which takes approximately 45 minutes), the patient is placed on the table which is moved into the center of the PET imaging
system, which is cylindrical and has an opening (or gantry) with a diameter of approximately 60 centimeters. The wide gantry and relatively short length of the imaging mechanism help minimize patient discomfort. The scanning process
takes approximately 30 minutes to one hour to complete, depending on the specific imaging procedure requested.





The PET imaging system detects signals emitted by the radiotracer. The radiotracer is attracted to any metabolic activity. As an example, cancer cells (which are highly metabolic)
are easily detected by the PET imaging system. A high-speed computer reconstructs the information into three dimensional images that display normal or abnormal metabolic function. The most commonly used radiotracer, fluorodeoxy glucose (FDG)
dissipates within twenty-four hours and the patient may go home the same day.





The Advantages of PET





PET offers significant advantages over other
diagnostic imaging techniques as it provides a direct measure of biochemistry and functional/metabolic activity. In most cases, the precursors to all disease are biochemical in nature and initially affect function, as opposed to structure. PET,
which has the ability to create a diagnostic image of early metabolic changes, can significantly reduce the time to diagnosis, reduce costs and improve patient outcomes for numerous indications for oncology, cardiology and neurology.





PET offers the following substantial advantages
over current diagnostic imaging procedures:





| |  |  | replaces the need for multiple, costly medical testing with a single imaging procedure;
| | - |  | ---------------------------------------------------------------------------------------




| |  |  | displays a 3D image of all of the organ systems of the body with one examination;
| | - |  | ---------------------------------------------------------------------------------




| |  |  | diagnoses and detects diseases, in most instances, before detection by other tests;
| | - |  | -----------------------------------------------------------------------------------



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| |  |  | monitors the path and progress of disease as well as how the body responds to treatment;
| | - |  | ----------------------------------------------------------------------------------------




| |  |  | reduces or eliminates ineffective or unnecessary surgical/medical treatments and hospitalization; and
| | - |  | -----------------------------------------------------------------------------------------------------




| |  |  | reduces redundant medical costs and reduces discomfort to the patient.
| | - |  | ----------------------------------------------------------------------




As a result of the cost efficiency and clinical effectiveness of PET, the Company believes that hospitals and other health care
providers are experiencing increased demand from their patients to provide PET technology and related services. Increasingly, such health care providers are utilizing third parties, like our company, to provide technology-driven patient services.





The American Cancer Society estimates that
approximately 8.9 million Americans have a history of cancer and in 2001 nearly 1.3 million new cancer cases will be diagnosed. (Cancer Facts & Figures 2001, American Cancer Society, Inc., page 4, available at www.cancer.org.) PET is currently
recognized as one of the only metabolic medical tools powerful enough to accurately image and measure with a single pass the metabolic function of cancer. It can also provide information to determine whether a primary cancer has metastasized to
other parts of the body. PET has demonstrated its usefulness in cost-effective, whole-body metastatic surveys; avoiding biopsies for low-grade tumors; non-invasive differentiation of tumors from radiation necrosis; early change in course of
ineffective chemotherapy; and avoiding unnecessary diagnostic and therapeutic surgeries.





In cardiology, a PET scan is one of the most accurate diagnostic tests to detect coronary artery disease. The PET images can display inadequate blood flow to the heart during
stress that is undetected by other non-invasive cardiac tests. PET enables physicians to screen for coronary artery disease, to assess flow rates and flow reserve, and to distinguish viable from nonviable myocardium for bypass and transplant
candidates. It is also fast becoming an important tool for cardiologists attempting to achieve reversal of coronary artery disease through aggressive risk factor modification such as the Ornish diet program, enabling both doctor and patient to
directly and non-invasively measure the progress of improvement in coronary blood flow.





In neurology, PET can assist in the early detection and diagnosis of such brain disorders as Alzheimers and Parkinsons diseases. PET scans can detect a consistent
diagnostic pattern for Alzheimers disease where certain regions of the brain may show decreased metabolism early in the disease. This pattern often can be recognized several years before a physician is able to make the diagnosis clinically. In
addition, PET scans can differentiate Alzheimers from other confounding types of dementia or depression. In a similar fashion, PET scans can detect Parkinsons disease. A labeled acid is used with PET to determine if the brain is
deficient in dopamine synthesis. If it is determined there is no deficiency and the patient is not suffering from Parkinsons disease, then the course of tremor evaluation and treatment will be different.





According to the ICP and the UCLA School of Medicine, PET diagnostic imaging
offers medical specialists a metabolic and clinical process to pinpoint soft-tissue disorders. MRIs provide anatomical images of the body that are not as effective as PETs history of early diagnosis of a growing number of cancers, heart and
brain disorders.





According to two studies,
Contribution of PET in the Diagnosis of Recurrent Colorectal Cancer Comparison with Conventional Imaging, EUROPEAN JOURNAL OF SURGICAL ONCOLOGY 1995, 21: 517-522; and Diagnostic Value of Positron Emission Tomography for Detecting Breast Cancer,
WORLD JOURNAL OF SURGERY 1998, 22: 223-228; CT scanning is also less effective than PET Scans as a tool for early detection and diagnosis.





These studies indicate that PET imaging has displayed the following detection rates compared to CT scanning and mammography:





| |  |  | an 81% detection rate for lung cancer, compared to a 52% detection rate with CT;
| | - |  | --------------------------------------------------------------------------------




| |  |  | a 95% detection rate for colon cancer, compared to a 68% detection rate with CT; and
| | - |  | ------------------------------------------------------------------------------------




| |  |  | an 85% detection rate for breast cancer, compared to a 67% detection rate for mammography.
| | - |  | ------------------------------------------------------------------------------------------



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Our Services





We provide efficient, cost effective access to this technology for hospitals, medical centers and other health care providers that are unable or
unwilling to financially justify or secure the acquisition of a dedicated PET facility.





The PET imaging system provides 2D and 3D volume measurements of metabolic and physiologic processes. The system consists of the PET imaging system, integrated workstations, 3D
Advanced Computational Image Acquisition and Display System, and patient couch, all integrated into a mobile trailer or stationary facility.





All of our mobile PET imaging systems are housed in mobile coaches designed for convenience, patient comfort and safety, and include a powered
patient lift, stairway, stabilizing system for leveling, and transportation alarm to warn of equipment not properly stowed for transport. The interior space of the coach is divided into three sections: a patient staging room, a technology control
room, and the PET imaging room.





With certain
hospitals or medical groups, we develop and operate stationary PET facilities. This provides hospitals with full time PET imaging services to easily accommodate their patients on a daily basis.





We offer a comprehensive Total Solutions approach for our clients which also
includes:





| |  |  | Medical Advisory Board to present PET seminars that educate physicians on the benefits of PET.
| | - |  | ----------------------------------------------------------------------------------------------




| |  |  | Physician training programs and expert over-read services that assist the hospitals staff physicians to become qualified PET exam interpreters.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Electronic data transmission and archiving of all PET exams by use of our Internet site and software package.
| | - |  | -------------------------------------------------------------------------------------------------------------




| |  |  | Licensure assistance by our physicists.
| | - |  | ---------------------------------------




| |  |  | PET Site Planning Guide and support to accommodate mobile PET trailers to each of our clients locations.
| | - |  | ---------------------------------------------------------------------------------------------------------




| |  |  | PET Strategic Marketing Plan complete with regional specialists to evaluate and educate referring physicians.
| | - |  | -------------------------------------------------------------------------------------------------------------




| |  |  | Convenient access to radiotracers at negotiated discount rates.
| | - |  | ---------------------------------------------------------------




As of June 30, 2001, we have nine (9) mobile CTI/Siemens Medical Systems ECAT -Registered Trademark- EXACT -TM- PET systems, five
(5) General Electric Medical Systems -Registered Trademark- ADVANCE -TM- PET Imaging Systems, and one dedicated Non/Mobile GE PET system in operation. One additional CTI/Siemens PET system was received and placed in operation after June 30, 2001.
Three (3) of the systems are under capital leases with Finova Capital Corporation, three (3) of the systems are under capital leases with Siemens Medical Systems, Inc., six (6) of the systems are under capital leases with General Electric, and three
(3) of the systems are rented from Siemens Medical Systems, Inc. The cost for a fully commissioned PET imaging system can range from $1.6 to $1.875 million inclusive of mobile coach or lease hold improvements.





Our Operations





CUSTOMER BASE. We believe that many hospitals and other health care providers will seek access to PET imaging services to remain competitive in the
health care marketplace.





Regulatory and licensing
requirements in many states may also limit general access to PET imaging services. In addition, many health care providers lack sufficient patient volumes or financial resources to justify the purchase of a dedicated in-house PET system. As a
result, providers will consider contracting for mobile services to gain access to PET technology, build patient flows and provide comprehensive PET services to their communities.




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Many health care providers, regardless of whether their patient flows or
financial resources justify the purchase of a PET system, may prefer to contract with us to (i) obtain the use of a PET system without significant capital investment or financial risk; (ii) retain the ability to switch system types and avoid
technological risk; (iii) eliminate the need to recruit, train and manage qualified technologists; (iv) provide expanded imaging services when patient demand exceeds their in-house capability; or (v) benefit from our experience in operating this
service.





Mobile Services
Agreements.    We provide our services to hospitals and health care providers under a Positron Emission Tomography Mobile Services Agreement that we enter into with these entities. These agreements have standardized
provisions which are subject to minor modifications based on the needs of a particular customer (typically billing, training and marketing modifications). Under these agreements, we provide use of our mobile PET system, along with a minimum of one
trained technical operator, for a specified number of days per week. Fees are based on a per-patient basis. A minimum number of PET exams per day is required. In some cases, we allow our customers to pay us a flat fee per day for our services. We
require our customers to pay us for our services within thirty days after we bill them. The agreements require our customers to perform various functions and supply various items, such as space, power, medical supplies, physicians and patient
support services. The agreements generally have a five year term, which is subject to automatic renewal for another five year term. The agreements may be terminated for certain causes described in the agreements, including a customers lack of
economic justification for our services, or a customers transition to a stationary site (however, in certain agreements we have a right of first refusal to participate in any joint venture created to install such a stationary system). The
agreements also require that all PET services on our customers sites be performed exclusively by us. As of June 30, 2001, we had agreements with 72 hospitals and health care providers.





Stationary Facilities.    We develop stationary PET facilities with
hospitals or medical groups who have sufficient patient volumes to support a full time service. These projects are structured as either wholly owned or joint ventures with a healthcare institution. We can start services using one of our mobile units
during the development stage of a stationary site. This approach builds awareness, patient values and a referral physician base.





Reimbursement.    Mobile imaging service providers are generally not reimbursed directly by health care payors such as
Medicare, Medicaid, private insurance companies or managed care companies. Instead, mobile imaging service companies contract directly with and are paid by the hospital, which then bills the health care payors. All of our revenues will be paid
directly by the hospital. As a result, we should realize a higher level of accounts receivable turnover and a lower allowance for uncollected debt. To date, the vast majority of our customers have paid us on time. However, there can be no assurance
that we will always be paid in a timely manner.





Billing and reimbursement for diagnostic imaging services is divided into a technical component and a professional component. Our business revenue is based on providing part of the
technical component, which includes the cost of the equipment, labor and materials needed to perform the imaging procedure by our technologists and the hospital. The professional component is the cost of interpreting the diagnostic image by the
physician.





We contract with a hospital to receive a
negotiated rate for the technical component we provide of the imaging procedure. This pays us for providing part of the technical component of the service and provides the hospital payment for the services they provide to the healthcare payor to the
extent permissible under state or federal law. This reimburses the hospital for its services rendered to the patient and the associated physician costs. At the current time, the average insurance reimbursement to a hospital for a particular PET
procedure is $1,900 to $3,100. As of June 30, 2001, insurance companies reimburse approximately 70% of PET procedures.





In January 1998, the Health Care Financing Administration (HCFA) (today known as the Centers for Medicare and Medicaid Services, or CMS) approved Medicare reimbursement
for the diagnostic evaluation of solitary pulmonary nodules and for staging non-small cell lung cancer. In March 1999, the HCFA announced approval to reimburse PET scans in the diagnosis and management of certain cancers in Medicare beneficiaries.




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The March 1999 announcement approves the reimbursement for the detection and localization of recurrent colorectal cancer with rising carcinoembryonic antigen known as CEA; staging and
characterization of both Hodgkins and non-Hodgkins lymphoma in place of a gallium scan or lymphangiogram; and identification of metastases in melanoma recurrence in place of gallium studies.





CMS has developed the hospital outpatient prospective payment system (HOPPS) for Medicare
hospital outpatients, called ambulatory pricing categories, or APCs. This new system affects the payments for outpatient procedures performed in hospitals or hospital owned imaging centers. A variety of nuclear medicine and PET
procedures have been categorized into nine groupings, one of which is allocated to PET scanning. Effective August 1, 2000, reimbursement for APC 981 for FDG-PET oncology studies is set at $2,249.50, and includes payment for the radiopharmaceutical
or radiotracer. Reimbursement for APC 285 will be used to pay for Rb-82 cardiac perfusion imaging studies and has been given a national rate of $730.22 plus the radiopharmaceutical costs.





Medicare outpatient procedures at Freestanding Imaging Centers are billed and reimbursed by PET
G-Codes on a monthly basis. The payment levels for these G-Codes vary around the country by Medicare region. Estimates on the average reimbursement for G-Codes G0030G0047 range from $1,600$2,000 for a combined cardiac rest/stress study
inclusive of isotope. For G-Codes G0125G0126 and G0163G0165 for FDG-PET oncology studies reimbursement averages $1,980 for the technical component, including the radioisotope, fluorodeoxy glucose (FDG).





On July 1, 2001, CMS approved broad coverage reimbursement for PET for the
clinical indications outlined below.





Clinical IndicationsSingle Pulmonary Nodule (SPN)

CharacterizationLung Cancer (Non small cell)

Diagnosis, Staging and
RestagingColorectal Cancer

Diagnosis, Staging and RestagingLymphoma

Diagnosis, Staging and RestagingMelanoma

Diagnosis, Staging and RestagingEsophageal

Diagnosis, Staging and RestagingHead and Neck Cancer

Diagnosis, Staging and RestagingFDG Cardiac  Myocardial Viability

Following inconclusive SPECTEpilepsy (Refractory seizures)

Pre-surgical evaluation





CMS
approval for breast cancer and Alzheimers disease utilizing PET is currently under consideration. The Medicare Coverage Advisory Committee (MCAC) has recommended approval for breast imaging.





The implication of the foregoing HCFA/CMS approvals is that a promising
technology has at last become commercially feasible. For nearly 20 years PET imaging has shown tremendous promise in the investigation of pharmacologic agents and the management of cancer patients, cardiac patients and certain neurologic
indications, but has not been reimbursable. This prevented growth of this technology to community hospitals and restricted its use to major medical centers. It appears that hospitals can now avail themselves of a cutting edge technology which may
become a standard of health care.




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Private insurance carriers are unaffected by the new Medicare coding and
reimbursement system, and continue to reimburse according to their internal policies. A majority of private insurers and HMOs currently reimburse for PET and many industry observers believe with expanded reimbursement by CMS a significant
growth in clinical utilization of PET will be realized over the next several years.





Government Regulation





We are required to adhere to a wide variety of
other regulations governing the operation of our business. For example, federal regulations commonly known as the Stark Laws impose civil penalties and exclusion from participation in the Medicare program of reimbursement for referrals
by physicians for designated health services to certain entities with which the referring physician has a financial relationship if those referrals do not fall within an exception created by law or regulation. Designated health
services include PET services. Implementing regulations have been issued regarding referrals for clinical laboratory services, but no final implementing regulations have been issued regarding PET services. It is likely these proposed rules
will be found to apply to mobile PET scanners, thereby restricting physician referrals for PET services by an investor-physician or a physician who has a compensation arrangement with us.





In addition, several states (including the State of California) in which we operate or plan to
operate have enacted or are considering legislation that restricts physician referral arrangements in a manner similar to the Stark Laws and requires physicians to disclose any financial interest they may have with a health care provider to their
patients to whom they recommend that provider. Possible sanctions for violating these provisions include loss of medical licensure and civil and criminal sanctions. Such state laws vary from state to state and seldom have been interpreted by the
courts or regulatory agencies. Nonetheless, strict enforcement of these requirements is likely.





Additional state and federal laws prohibit the payment or receipt of bribes, kickbacks, rebates and any other direct or indirect remuneration in return for or to induce the
referral of an individual to a person for the furnishing, directing or arranging of services, items or equipment, commonly referred to as anti-kickback laws. Violation of the anti-kickback laws may also result in civil and criminal penalties, loss
of medical licensure and exclusion from the Medicare and other federal health care programs, to the extent such federal reimbursement program beneficiaries are involved.





Competition





We believe that the key competitive factors affecting our business include providing quality patient care, reliable service; attracting and retaining quality technicians; price;
and availability. At the present time, we believe that there is one other national company providing mobile PET services (Alliance Imaging, Inc.) as well as several regional competitors. We believe that we currently have the largest fleet of
operating mobile PET systems operating in the U.S.





We are, and will continue to be, subject to intense competition in our targeted markets, principally from businesses providing other traditional diagnostic imaging techniques,
including existing and developing technologies, and competitive products. Significant competitive factors which will affect future sales in the marketplace include regulatory approvals, performance, pricing and general market acceptance.





The diagnostic imaging market is also highly
competitive. There are many companies engaged in this market, some with significantly greater resources than ours.





In addition to direct competition from other providers of mobile PET services, we compete with free-standing CT, MRI and PET imaging centers, health care providers that have their
own diagnostic imaging systems, and equipment manufacturers that sell or lease imaging systems to health care providers for mobile or full-time use. The risks that may occur if we fail to compete successfully are discussed in the Risks Related
To Our Business section of this Form 10-KSB.




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Our Competitive Strategy





Our management team has developed and implemented a business strategy designed to grow our
company, maximize return on invested capital and increase revenues. Our goal is to maintain a leadership position in our industry as well as pursue significant growth opportunities based on the following competitive strategies. However, there can be
no assurance that we will maintain a leadership position or experience significant growth as a result of these strategies.





Superior Customer Service and Strong Customer Relationships.We will position ourselves as a high quality patient
service provider rather than solely as an operator of equipment and on the basis of value-added services. We will differentiate ourselves from potential competitors by professionally marketing our services to those hospitals and physicians who
determine such services are beneficial for their patients.





Become the Dominant Provider of Mobile PET Services.As of June 30, 2001, we are licensed and actively operating mobile PET systems in California,
Florida, Indiana, Kentucky, New Jersey, New York, Ohio, Oregon, Texas, Iowa, Oklahoma and Missouri, and we are also licensed in Pennsylvania and Louisiana. After June 30, 2001, we became licensed in Nevada, South Dakota, Washington and Connecticut,
and commenced active operations in Pennsylvania and Nevada. As we grow, we believe we will benefit from (i) significant equipment purchasing savings; (ii) attractive service and maintenance contracts from our primary equipment suppliers; (iii)
strong name recognition and a reputation for quality service; (iv) financial flexibility and access to lower-cost capital; and (v) the ability to efficiently deploy systems in a manner which maximizes utilization while satisfying our customer
requirements.





Secure Exclusive, Long-term
Contracts with Key Hospitals in Attractive Markets.We generate significantly all of our revenues from exclusive, long-term contracts with hospitals and other health care providers on a fee for service basis. Our marketing
focus is currently directed on key market segments throughout the U.S.





We target 40 hospitals in each of our geographic regions which we believe require access to PET services. These targeted hospitals need to remain competitive in their respective
health care markets or may lack sufficient patient volumes to justify the purchase of a stationary PET system. We have pursued securing long-term contracts with several high profile university hospitals, which offer the potential of establishing
market presence and name recognition for our company. We have also developed a Total Solutions strategy which will utilize our senior executives and our Medical Advisory Board members to help our customers during the start-up phases at
their facilities. Our Total Solutions approach includes physician education and a focused marketing effort to increase utilization. Our Total Solutions approach also enables us to provide consultation in the areas of billing
and third party contracts.





Substantial Operating
Leverage.Because of the significant amount of fixed costs associated with operating a PET system, we can benefit from operating leverage, with increased utilization rates resulting in increases in operating earnings and
margins.





Favorable Payment
Terms.    A majority of our billings are direct to hospitals. The hospitals, in turn, generally pay us prior to collecting from patients and third party payors. Accordingly, our exposure to uncollectable patient receivables
is minimized.





Experienced Management
Team.Our senior management team has considerable industry experience. Our senior and operating managers have successfully developed and implemented educational, operating and financial strategies with previous health care
companies.





Increase Scan
Volumes.    We believe that the demand for PET procedures will continue to grow as new applications are developed and PET continues to gain increased acceptance resulting in replacing and/or supplementing other diagnostic
imaging technologies. We have an opportunity to achieve a growing level of patient procedures by both adding new customers and increasing the number of patient procedures performed for these customers.




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Maximize Return on Invested Capital.    We will
actively manage the utilization of our PET systems to maximize our return on capital (i.e., the amount of cash flow generated by each system relative to the carrying value of such system). We hope to maximize our return on capital through
operating leverage which may be realized by billing our customers on a per-patient basis, so that as patient flows increase our revenues also increase, but without a significant corresponding increase in our operating costs. We estimate
that, on average, a system can be utilized for approximately eight years in a high demand market when properly maintained and upgraded, after which time the system can either be utilized in a market with less demand or traded in for a new system.





Identify Attractive Strategic
Acquisitions.    Although our managements initial operational focus is directed toward geographically expanding our business through internal growth rather than by acquisitions, we may attempt to identify attractive
strategic acquisition opportunities that may arise as well as our ability to (i) access additional and lower cost financial resources; (ii) realize significant synergies, operating expense reduction and overhead cost savings; and (iii) expand into
new geographic markets.





Customer Support





As part of our professional services, we provide several levels of support to a hospital or
health care provider, including (i) developing commercial and clinical marketing materials; (ii) sponsoring clinical lectures; and (iii) offering educational over-read services. In addition, consulting services for billing, collections, and
third-party contracts are available on request. We believe that these services play a key role in our ability to sign up routes over competitors, retain accounts and build patient procedures.





Sales and Marketing





Our sales force consists of six regional business development representatives. These personnel identify, qualify and contact candidates for our services. Each regional business
development representative has overall management and revenue responsibility for a specific region of the country.





Direct marketing to referring physicians plays a primary role in our ability to increase patient procedures. Four regional educational specialists focus on developing increased
scan volumes by introducing our PET services to referring physicians and keeping such physicians apprised of PETs capabilities. In addition, certain key executive officers spend a portion of their time marketing our services. We have also
assembled a Medical Advisory Board comprised of leading physicians who assist in educational programs directed to the medical community which enhance our ability to attract and increase patient procedures.





Our target market includes hospitals located in metropolitan areas that have an on-site
oncology department or have affiliated oncology service relationships. We believe there are approximately 2,000 hospitals with 250 beds or more in the U.S. that meet this criteria. Our sales and marketing focus has been directed at the eight major
markets of Southern California, New York, Texas, Northern California, Eastern Pennsylvania, Chicago, Boston and Florida. At any given time, our regional business development representatives have targeted approximately 40 hospitals in each market.





Employees





At June 30, 2001, the Company employed 63 people on a full-time basis and had a total of 67 employees. None of these employees is
subject to a collective bargaining agreement and there is no union representation within the Company. The Company maintains various employee benefit plans and believes its employee relations are good.




10


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ITEM 2.    
PROPERTIES





Our corporate
offices are located at 2150 West Washington Street, Suite 110 San Diego, California 92110, where we lease 5,687 square feet for $9,953 per month, plus annual increases in future years. This lease runs through March 31, 2004.





In addition, we maintain an operations base at 2750 N. Texas Street,
Fairfield, California 94533, where we lease 1,056 square feet for $1,426 per month. This lease began on September 18, 2000 and runs through September 18, 2001.





A wholly-owned subsidiary of the Company, London PET Centre Ltd., intends to enter into a sublease with London Radiosurgical
Centre Ltd., on or about November, 2001, pursuant to which London PET Centre Ltd. shall sublease approximately 2000 square feet in a medical office building located at 154 Harley Street, London, England. This sublease shall be for £$3,333
(approximately $4,832) per month plus annual increases in future years. The sublease shall run through October 9, 2022, with termination rights after October 9, 2007.





ITEM 3.    
LEGAL PROCEEDINGS





The
Company is currently involved in Twenty-Five Forty LLC v. Mobile PET Systems, Inc., an abandonment of lease case. On February 27, 2001, Twenty-Five-Forty, LLC filed suit against the Company in the Superior Court for the State of California (San
Diego) for damages for breach of contract, alleging that the Company abandoned a sub-lease that the Company had entered into with Twenty-Five Forty LLC. The monthly rent under the sub-lease was $2,990, and the space was re-let by the end of May,
2001. The amount at issue is approximately $9,000$10,000 plus fees and costs.





The Company filed a cross-complaint against Twenty-Five Forty LLC for intentional and negligent misrepresentation. The cross-complaint alleges, among other things, that Twenty-Five
Forty LLC fraudulently induced the Company to enter into the contract and accordingly the lease contract is void. Twenty-Five Forty LLC has not yet answered the cross-complaint.





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





None.




11


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PART II





ITEM 5.    
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS





Our Common Stock currently trades on the OTC Bulletin Board, under the symbol MBPT.





From October 1999 until August 2000, our Common Stock was traded on the National Quotation Bureau, LLC Pink Sheets.
The following table sets forth, for the two most recent fiscal years indicated, the high and low closing bid prices for our Common Stock as reported on the OTC Bulletin Board and the Pink Sheets. The quotation for the Common Stock traded
on the OTC Bulletin Board and the Pink Sheets may reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.





Mobile Pet Systems, Inc.

High

LowFISCAL YEAR 1999FIRST QUARTER (7/1/999/30/99)

5.000

2.500SECOND QUARTER (10/1/9912/31/99)

2.625

1.550THIRD QUARTER (1/1/003/31/00)

6.500

1.625FOURTH QUARTER (4/1/006/30/00)

4.250

2.187FISCAL YEAR 2000FIRST QUARTER (7/1/009/30/00)

3.750

2.00SECOND QUARTER (10/1/0012/31/00)

3.125

0.750THIRD QUARTER (1/1/013/31/01)

1.093

0.437FOURTH QUARTER (4/1/016/30/01)

1.0625

0.420





As of June
30, 2001, our common shares were held by 284 shareholders of record, not including the holders that have their shares held in a depository trust in street name. The transfer agent of our common stock is OTC Corporate Transfer Service
Co., P.O. Box 591, Hicksville, NY 11802.





Pursuant
to NASD Rule 6530, our common stock was delisted from the OTC Bulletin Board on October 19, 1999 because on that date, we had not satisfied the requirements to become an issuer required to make current filings pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (Exchange Act). We were relisted on the OTC Bulletin Board in August 2000 when we met these requirements.





Dividend Policy





We have never declared or paid cash dividends on our common stock. We currently anticipate that we will retain all future earnings for use in the operation and expansion of the
business and do not anticipate paying any cash dividends in the foreseeable future. The ability of the Company to pay dividends may also be affected by various provisions of Delaware law, which establish certain financial requirements that may limit
the ability of the Company to declare and pay dividends.





Recent Sales of Unregistered Securities





In October 2000 we issued 25,000 shares of
common stock as a result of the exercise of previously granted stock options issued to a member of our medical advisory board in reliance on Section 4(2) of the Securities Act of 1933, as amended (Act). The exercise price was $1.90 per share, for a
total of $47,500.





In November and December, 2000 we
issued 767,514 shares of common stock to York, LLC upon the conversion of Series A Preferred Shares valued at $875,000 and cumulative preferred dividends values at $20,099. This insurance was in reliance on 4(2) of the Act and Regulation S under the
Act.




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In January, 2001 we
borrowed $250,000 from Bernd Steudle pursuant to a promissory note, bearing interest at 8.5% per year. On February 5, 2001 we borrowed an additional $500,000 from Mr. Steudle, also pursuant to a promissory note, bearing interest at 8.5% per year. We
issued warrants in connection with each of these notes. On March 30, 2001, we executed an agreement with Mr. Steudle to cancel the prior notes and enter into a new promissory note, in the original principal amount of $750,000, bearing interest at
8.5% per year. This agreement also cancelled the prior warrants, and resulted in the issuance of three new warrants: (i) exercisable to purchase 750,000 shares of common stock at any time before March 20, 2002 at a price of $1.00 per share; (ii)
exercisable to purchase 150,000 shares of common stock at any time before March 20, 2003 at a price of $0.50 per share; and (iii) exercisable to purchase 150,000 shares of common stock at any time before January 31, 2003 at a price of $0.50 per
share. On May 17, 2001 we issued 1,875,000 common shares in exchange for the cancellation of the $750,000 promissory note. These issuances were pursuant to Section 4(2) of the Act or Regulation S under the Act. The warrants were not affected by this
cancellation of the promissory note.


We issued 1,590,584 common shares to York, LLC pursuant to
tranche notices dated September 30, 2000 and January 31, 2001 issued by us to York, LLC under the Securities Purchase Agreement between us and York, LLC in reliance on Section 4(2) of the Act and Regulation S under the Act. This resulted
in proceeds of $1,000,000 to us.





As previously
reported in a Current Report on Form 8-K,filed under the Exchange Act on May 30, 2001 we entered into a settlement agreement of litigation between us, York, LLC and certain other parties which provided for, among other items: (i) the issuance to
York, LLC of a warrant to purchase 400,000 common shares at a price of $0.70 per share, exercisable within 5 years; (ii) the delivery of 723,981 common shares pursuant to a tranche notice dated March 2001; (iii) payment by York, LLC to
us of $570,000 as pre-funding for the purchase of common shares pursuant to tranche notices from us to York, LLC under the Securities Purchase Agreement as modified by the settlement agreement. These issuances were pursuant to Section 4(2) of the
Act and Regulation S under the Act.





On June 4, 2001
we completed a private placement for of 2,720,000 shares of common stock and 544,000 warrants to purchase common stock exercisable for a period of one year at $0.50 per share, in reliance on Section 4(2) of the Act and Regulation S under the Act.
The proceeds of this offering was $1,360,000.





On
June 6, 2001 we issued 403,350 shares of common stock at a price of $0.50 per share in satisfaction of an obligation to pay $201,675 to certain legal advisors for services previously rendered to us pursuant to Section 4(2) of the Act.





Between June 15 and June 30, 2001 we sold 2,000,000
shares of common stock and 1,000,000 warrants to purchase common stock exercisable for a period of 6 months at $0.35 per share, in reliance on Section 4(2) of the Act and Regulation S under the Act. The proceeds of this offering was $700,000.





On October 8, 2001, effective as of September 21,
2001, we entered into a Consulting Agreement with American Financial Communications, Inc. (AFC), to provide investment relations and other services. In connection with this agreement we are obligated to issue 2,500,000 common shares as a
non-refundable retainer, subject to the terms and conditions set forth in that agreement. We are also obligated to file a registration statement for such shares no later than October 31, 2002. We are also obligated to issue 200,000 options to
purchase common shares at a price of $1.00 per share for a term of 4 years, and to pay finders fees (i) equal to 2.5% of the gross funding provided by a lender or equity purchaser with no preexisting relationship with the Company and introduced by
AFC, and (ii) equal to 2.0% of the gross consideration of an acquisition introduced by AFC and not having a preexisting relationship with the Company. These issuances were pursuant to 4(2) of the Act and Regulation S under the Act. The voting rights
to the 2,500,000 common shares and the 200,000 option shares are granted to the Board of Directors during the ownership of the shares by AFC.




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|ITEM 6. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------




Overview





Mobile PET Systems, Inc. is a medical service provider of Positron Emission Tomography (PET) imaging services in the United States and United Kingdom. PET is a molecular imaging
procedure used to diagnose and stage cancer, heart disease and neurological deficits. Our medical service business enables hospitals and other healthcare professionals the ability to access, offer and provide this advanced diagnostic imaging patient
service efficiently and without risk.





We provide
under a service agreement, hospitals and physicians access to our state-of-the-art dedicated PET imaging systems, which are integrated into mobile coaches or in a stationary PET facility. We provide licensed technical personnel who operate the
equipment and perform the technical PET imaging procedure, daily operations and logistical management, marketing, education and peripheral support services. All patient imaging procedures are implemented under the direction of a licensed staff
physician who is provided by the medical institution.





As of June 30, 2001 we were providing our services to 72 accounts which consisted of hospitals and physicians in the United States. We also operated a wholly owned subsidiary The
London PET Centre Ltd., the only private sector stationary PET facility in the United Kingdom. We believe there are and will be significant opportunities to develop and operate additional mobile and stationary PET facilities in the United States,
United Kingdom and in key European markets.





We have
measured the financial position and results of operations of our United Kingdom subsidiaries using local currency as the functional currency. We have translated our assets and liabilities into U.S. dollars at the rates of exchange at the balance
sheet date. We have translated our statements of operations using the average exchange rates prevailing throughout the reporting period. We have accumulated the translation gains or losses resulting from the changes in the exchange rates from
quarter-to-quarter in a separate component of shareholders1 equity. We have reflected the transaction gains and losses in the cash flow as the effect of exchange rate changes on cash.





Our consolidated revenues for the three months and twelve months ended June 30, 2001 were
$2,895,447 and $7,163,311, respectively, compared to the three and twelve months ended June 30, 2000, in which we had revenues of $499,199 and $1,122,969. During the twelve months ended June 30, 2001, we emerged from our development stage period in
the United States, establishing the management and operating infrastructure to provide PET imaging services to hospitals and other health care professionals. Prior to that date, our efforts were principally focused on capitalization, organizational
and business development activities.





We continue
our efforts to develop and expand our service business by developing, deploying and operating additional mobile and stationary PET systems. As of June 30, 2001 we had 14 mobile systems operating throughout the United States and 1 stationary facility
in the United Kingdom. We anticipate we will continue to incur additional losses as we pursue our development efforts. Assuming we continue our unit deployment growth and achieve targeted unit revenues, we believe cash flow will be sufficient to
cover our cost of services on a monthly basis commencing in the first quarter of fiscal 2002.





Our future revenues will principally be a function of the number of operating units in service, the volume of patient procedures and the fees earned per procedure. We generate
substantially all our revenues from our service agreements with hospitals and other health care providers. We have an excellent record of account collections, however there can be no assurance that this trend will continue and, accordingly, we have
established an allowance for uncollectable accounts receivable. Lower reimbursement by public and private insurers may also impact the revenues the Company can generate from its operations.




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The principal components
of our operating overheads costs consists of salaries and benefits paid to employees, marketing, equipment leasing, equipment service and maintenance, insurance and transportation costs. Because the majority of these costs are fixed, increased
revenues as a result of increased patient procedures may provide higher profitability, while lower patient procedures may result in lower profitability. There can be no assurance that we will be able to maintain or increase the number of patient
procedures.





Since our inception we have incurred
significant losses. Through June 30, 2001, we have incurred a net loss of $18,524,842. For the three months and twelve months ended June 30, 2001, we experienced a consolidated net loss from operations of $1,473,853 and $7,605,413 respectively,
compared to a consolidated net loss from operations of $3,441,875 and $6,295,011 for the three months ended June 30, 2000. We anticipate that our operating losses during the first quarter fiscal 2002 should decrease from current levels as we
decrease per unit operating costs by deploying additional mobile units or stationary sites, realize higher utilization of our services and subsequent growth in revenues. We have implemented cost reductions by reducing administrative and travel
expense and by negotiating higher discounts for new equipment, service and radio tracers. However, we can give no assurances that our efforts will have the desired effects. As a result, in order to achieve and maintain profitability, we will need to
continue to increase revenues and effectively manage our operating overhead.





During the twelve months ended June 30, 2001, we have raised $5,868,620 of new equity capital through private placements, the issuance of preferred stock and warrants to purchase
common stock.





Factors That May Affect Future Results





The discussion and analysis of our financial condition and results of operations should be read
in conjunction with the financial statements and the related notes. This Annual Report on Form 10-KSB contains forward-looking statements based upon current expectations that involve risks and uncertainties, including those identified below. For
this purpose, any statements contained in it that are not statements of historical fact should be regarded as forward-looking statements within the meaning of the Act and the Exchange Act. For example, the words believes,
anticipates, plans, intends, will, may and expects, or any variation of these words including the negative of these words, are intended to identify forward-looking statements.
Readers are cautioned not to place undue reliance on any forward-looking statement contained herein, which speak only as of the date hereof. We undertake no obligation to publicly release the result of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events.





We have lost money since inception, expect future losses and may never become profitable.





Since inception, we have incurred significant losses. We expect to continue to incur net losses
until sales generate sufficient revenues to fund our continuing operations. We may fail to achieve significant revenues from sales or achieve or sustain profitability. There can be no assurance of when, if ever, we will be profitable or be able to
maintain profitability.





Our substantial
indebtedness could restrict our operations and make us more vulnerable to adverse economic conditions.





We are a highly leveraged company and our substantial indebtedness could have important consequences. For example, it could:





| |  |  | make it more difficult for us to satisfy our obligations to our creditors;
| | - |  | --------------------------------------------------------------------------




| |  |  | require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to
fund working capital, capital expenditures and acquisitions and for other general corporate purposes;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | increase our vulnerability to economic downturns and competitive pressures in our industry;
| | - |  | -------------------------------------------------------------------------------------------



15


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| |  |  | increase our vulnerability to interest rate fluctuations because much of our debt is at variable interest rates;
| | - |  | ----------------------------------------------------------------------------------------------------------------




| |  |  | place us at a competitive disadvantage compared to our competitors that have less debt in relation to cash flow; and
| | - |  | --------------------------------------------------------------------------------------------------------------------




| |  |  | limit our flexibility in planning for, or reacting to, changes in our business and our industry.
| | - |  | ------------------------------------------------------------------------------------------------




We may be unable to generate or borrow sufficient cash to make payments on our indebtedness or
to refinance our indebtedness on acceptable terms.





Our ability to make payments on our indebtedness will depend on our ability to generate cash flow in the future which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are beyond our control. In addition, future borrowings may not be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other cash needs. We
may not be able to timely service all of our indebtedness.





Our services may not be accepted by the medical community or by patients, which may prevent us from ever becoming profitable.





The acceptance of PET technology may be adversely affected by its high cost, concerns by
patients and physicians relating to its safety and efficacy, and the substantial market acceptance of other diagnostic tools such as MRIs and CT scans. We have a limited sales force and will need to hire additional technologists and sales and
marketing personnel to increase the general acceptance of PET services. Of all the factors affecting our profitability, the failure of PET services to achieve broad market acceptance may likely have the greatest negative impact on our business,
financial condition and results of operations and our profitability.





If we do not become profitable, we may not be able to continue our operations.





Our future revenues and profitability depend in part on our ability to demonstrate to hospitals the potential cost and performance advantages of the
PET system over traditional diagnostic imaging systems. To date, commercial sales of PET services have been limited. We do not know if PET services or mobile PET service can be successfully commercialized on a broad basis. Our ability to achieve
profitability in the future will depend in part on our ability to successfully market and sell PET services on a wide scale.





The issuance of shares under outstanding convertible preferred stock may depress our stock.





Our Series A and B Convertible Preferred Stock (the Series A and B Stock) is
convertible into shares of our common stock at floating rates based upon formulas tied to the market price of our common stock. As such, the lower our stock price is at the time the shares of Series A and B Stock convert, the more shares of our
common stock will have to be issued as a result of the conversion. For example, if the market price of our common stock were to fall by 50% from present levels, the holders of Series A and B Stock would be entitled to convert such stock for twice as
many shares of our common stock as they would at todays level. The conversion of such stock when our common stock price is low may greatly increase the number of outstanding shares of our common stock, which may cause our stock price to fall
further. That, in turn, would allow the holders of the Series A and B Stock to convert their remaining shares into even greater amounts of our common stock. The sale of such shares could yet further depress our stock price. In addition, downward
price pressure caused by the sale of shares of our common stock issued on the conversion of the Series A and B Stock could encourage short sales by the holders of the Series A and B Stock and others, placing yet more downward pressure on the price
of our common stock.





We will need to obtain
additional financing in the near future.




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Our capital requirements
associated with our expanding operations have been and will continue to be substantial. We will require additional financing to execute our business plan. No assurance can be given that we will be able to obtain additional financing when needed, or
that, if available, such financing will be on terms acceptable to us. In any such financing, the interests of our existing security holders could be substantially diluted. If adequate funds were either not available or not available on acceptable
terms, our business, revenues, financial condition and results of operations would suffer. If we raise additional funds through the issuance of equity or convertible securities, the percentage ownership of our stockholders will be reduced. Moreover,
these securities may have powers, preferences and rights that are senior to those of the rights of our common stock.





We depend on a small number of suppliers, the loss of which could adversely affect our business.





We purchase our PET systems from a limited group of qualified suppliers. CTI of Knoxville Tenn, Siemens Medical Systems, Inc. of
Islin N.J. and GE Medical Systems, Milwaukee, Wisc. While we believe that alternative suppliers could be found for the PET system, there can be no assurance that any supplier could be replaced in a timely manner. Any interruption in the supply
and/or delivery of the PET system could materially harm our ability to expand our revenues and, thereby adversely affect our financial condition and results from operations.





We may be unable to provide adequate support to our customers, and this may adversely affect our relationship with them.





We have limited experience with widespread
deployment of our products and services to a diverse customer base, and there can be no assurance that we will have adequate personnel to provide the level of support that our customers may require during initial product deployment or on an ongoing
basis. An inability to provide sufficient support to our customers could have an adverse affect on our reputation and relationship with our customers, prevent us from gaining new customers, and adversely affect our business, financial condition or
results of operations.





Our foreign sales are
subject to risks, which could negatively affect our sales and business.





An increasing portion of our sales may be made in foreign markets. The primary risks to which we are exposed due to our foreign sales are the difficulty and expense of maintaining
foreign sales distribution channels, political and economic instability in foreign markets and governmental quotas and other regulations. There is also a risk due to the effect of exchange rate changes on the foreign currency we receive.





The regulation of medical devices worldwide also
continues to develop, and it is possible that new laws or regulations could be enacted, which would have an adverse effect on our business. In addition, we may experience additional difficulties in providing prompt and cost effective service of PET
scans in foreign countries. We do not carry insurance against these risks. The occurrence of any one or more of these events may individually or in the aggregate have an adverse effect upon our business, financial condition and results of
operations.





The PET system may become
technologically obsolete and our business could be harmed.





The markets in which our PET services compete are subject to rapid technological change as well as the potential development of alternative diagnostic imaging techniques or
products. These changes could render the PET system technologically or economically obsolete, or cause a reduction in the value of, or reduce the need for, PET systems. Should such change occur, there could be no assurance that we will be able to
acquire the new or improved systems, which may be required to service our customers?





If we are unable to obtain additional funding our business operations will be harmed.




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We believe that our
available short-term assets and investment income will be sufficient to meet our operating expenses and capital expenditures through the current fiscal year. We do not know if additional financing will be available when needed, or if it is
available, if it will be available on acceptable terms. Insufficient funds may prevent us from implementing our business strategy or may require us to delay, scale back or eliminate certain contracts for the provision of PET services.





If our client contracts are not renewed or are
terminated early, our business and financial results would be harmed.





Upon expiration of our clients contracts, we are subject to the risk that clients will cease using our PET systems and purchase or lease their own PET systems, use our
competitors PET systems or rely on alternate imaging technologies. Approximately six percent of our client contracts expire in 2001, seven percent in 2002, twenty-two percent in 2003, seventeen percent in 2004, thirty-eight percent in 2005 and
ten percent in 2006. Moreover, one-third of our client contracts permit the client, upon typically 180 days notice, to terminate the contract without cause, and two-thirds of our client contracts permit the client, upon typically 180
days notice, to terminate the contract if the client obtains a fixed site for a PET system. In addition, a portion of our contracts does not have minimum usage requirements.





Complying with federal and state regulations is an expensive and time-consuming process, and any failure to comply could
result in substantial penalties.





We are, directly
or indirectly through our clients, subject to extensive regulation by both the federal government and the states in which we conduct our business. The laws that directly or indirectly affect our ability to operate our business include the following:





| |  |  | the federal Medicare and Medicaid Anti-Kickback Law, which prohibits persons from soliciting, receiving or providing remuneration, directly or indirectly, to induce
either the referral of an individual, or furnishing or arranging for a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the federal False Claims Act, which imposes civil and criminal liability on individuals and entities who submit false or fraudulent claims for payment to the
government;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the federal Health Insurance Portability and Accountability Act of 1996, which prohibits executing a scheme to defraud any healthcare benefit program, including
private payers;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the federal False Statements Statute, which prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false
statement in connection with the delivery of or payment for healthcare benefits, items or services;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the federal physician self-referral prohibition commonly known as the Stark Law which, in the absence of a statutory or regulatory exception, prohibits the referral of
Medicare patients by a physician to an entity for the provision of certain designated health services, including MRI and other imaging services, if the physician or a member of the physicians immediate family has an ownership interest in, or a
compensation arrangement with, the entity;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | state law equivalents of the foregoing;
| | - |  | ---------------------------------------




| |  |  | state laws that prohibit the practice of medicine by non-physicians and fee-splitting arrangements between physicians and non-physicians; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | federal and state laws governing the diagnostic imaging equipment we use in our business concerning patient safety, equipment operating specifications and radiation
exposure levels.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




If our
operations are found to be in violation of any of the laws described in this risk factor or the other governmental regulations to which we or our clients are subject, we may be subject to the applicable penalty




18


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associated with the violation, including civil and criminal penalties, damages, fines and the curtailment of our operations. Any penalties, damages, fines or curtailment of our operations would
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.





The
loss of any of our key managers could adversely affect our business, including our ability to develop and market our products.





We depend to a considerable degree on a limited number of key personnel. The loss of the services of key members of our management could harm our
business. Our success will also depend, among other factors, on the successful recruitment and retention of qualified sales persons, technologists and other personnel. It is impossible to predict the availability of qualified sales persons and
technologists or the compensation levels that will be required to hire them. In particular, there is a very high demand for qualified technologists who are necessary to operate our systems. We may not be able to hire and retain a sufficient number
of technologists, and we may be required to pay bonuses and higher salaries to our technologists, which would increase our expenses. The loss of the services of any member of our senior management or our inability to hire qualified sales persons and
skilled technologists at economically reasonable compensation levels could adversely affect our ability to operate and grow our business.





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





Many of our competitors have substantially greater financial, marketing and manufacturing
resources and experience than us. Furthermore, we expect that other companies will enter the mobile and stationary PET market, particularly as PET systems gain increasing market acceptance. Our competitors may be able to develop technologies,
procedures or products that are more effective or economical than ours, or that would render the PET system obsolete or noncompetitive. Some of our customers may be capable of providing the same services to their patients directly by purchasing or
leasing their own imaging systems. In addition, the hospital industry has been experiencing a trend towards consolidation, which trend will reduce our potential customer base and increase competition for available customers.





A successful liability claim asserted against us due to a defect in the PET
system in excess of our insurance coverage would harm our business.





The provision of mobile PET shared services involves the inherent risk of professional and product liability claims against us. We currently maintain commercial general liability
insurance coverage in the amount of $2 million per incident and medical professional liability insurance in the amount of $2 million per incident, but this insurance is expensive, subject to various coverage exclusions and may not be obtainable in
the future on terms acceptable to us. We do not know whether claims against us arising from our use of the PET system will be successfully defended or that our insurance will be sufficient to cover liabilities arising from these claims. A successful
claim against us in excess of our insurance coverage could materially harm our business.





Our PET service requires the use of radioactive materials, which could subject us to regulation, related costs and delays and potential liabilities for injuries or violations of
environmental, health and safety laws.





Our PET
service involves the controlled storage, use and disposal of material containing radioactive isotopes. While this material has a short half-life, meaning it quickly breaks down into inert, or non-radioactive substances, using these materials
presents the risk of accidental environmental contamination and physical injury. We are subject to federal, state and local regulations governing the use, storage, handling and disposal of materials and waste products. Although we believe that our
safety procedures for handling and disposing of these




19


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hazardous materials comply with the standards prescribed by law and regulation, we cannot completely eliminate the risk of accidental contamination or injury from those hazardous materials. In
the event of an accident, we could be held liable for any damages that result, and any liability could exceed the limits or fall outside the coverage of our insurance. We may not be able to maintain insurance on acceptable terms, or at all. We could
incur significant costs and the diversion of our managements attention in order to comply with current or future environmental, health and safety laws and regulations.





There is uncertainty relating to third party reimbursement, which is critical to market acceptance of our services.





PET services are generally purchased by hospitals,
which then bill various third-party payers, such as government programs, and private insurance plans, for the procedures conducted using the PET system. Third-party payers carefully review, and are increasingly challenging, the prices charged for
medical products and services, and scrutinizing whether to cover new products and evaluating the level of reimbursement for covered products. While we believe that the hospitals using the PET system have generally been reimbursed, payers may deny
coverage and reimbursement for the PET system if they determine that the device was not reasonable and necessary for the purpose for which it was used, was investigational or not cost-effective. As a result, we cannot assure that reimbursement from
third-party payers for use of the PET system will be available or, if available, that reimbursement will not be limited. If third-party reimbursement of these procedures is not available, it will be more difficult for us to offer our services on a
profitable basis. Moreover initiatives are periodically proposed which, if implemented, would have the effect of substantially decreasing reimbursement rates for diagnostic imaging services. We cannot guarantee that these or similar initiatives will
not be adopted in the future. Any change in the rates of or conditions for reimbursement could substantially reduce the number of procedures for which these healthcare providers can obtain reimbursement or the amounts reimbursed to our clients for
services provided by us. Because unfavorable reimbursement policies have constricted, and may continue to constrict, the profit margins of the hospitals and clinics we bill directly, we have lowered, and may continue to need to lower, our fees to
retain existing clients and attract new ones. These reductions could have a significant adverse effect on our revenues and financial results by decreasing demand for our services or creating downward pricing pressure.





The impact of recently promulgated federal regulations could have a negative
impact on the attractiveness of our services to some of our clients.





Recently promulgated federal regulations affect the ability of a Medicare provider such as a hospital to include a service or facility as provider-based for purposes of Medicare
reimbursement. Historically, provider-based status has allowed a provider to obtain more favorable Medicare reimbursement for services like the ones we provide. While the Medicare, Medicaid and SCHIP Benefits and Improvement Act of 2000 offers some
relief for facilities recognized as provider-based on October 1, 2000, under these new regulations, some of our clients may have difficulty qualifying our services for provider-based status. If a client cannot obtain provider-based status for our
services, then the provider might decide not to contract or to continue to contract with us or might acquire a fixed base PET system.





The application or repeal of state certificate of need regulations could harm our business and financial results.





Some states require a certificate of need or similar regulatory approval
prior to the acquisition of high-cost capital items, including diagnostic imaging systems, or provision of diagnostic imaging services by us or our clients. While currently only one of the seventeen states in which we operate require a certificate
of need, more states are adopting similar licensing requirements. In many cases, a limited number of these certificates are available in a given state. If we are unable to obtain the applicable certificate or approval or additional certificates or
approvals necessary to expand our operations, these regulations may limit or preclude our operations in the relevant jurisdictions. Conversely, states in which we have obtained or will obtain a certificate




20


---

of need may repeal existing certificate of need regulations or liberalize exemptions from the regulations. The repeal of certificate of need regulations in states in which we have obtained a
certificate of need or a certificate of need exemption would lower barriers to entry for competition in those states and could adversely affect our business.





If we fail to comply with various licensing, certification and accreditation standards, we may be subject to loss of licensing,
certification or accreditation, which would adversely affect our operations.





All of the states in which we operate require that the imaging technologists that operate our systems be licensed or certified. In the healthcare industry, various types of
organizations are accredited to meet certain Medicare certification requirements, expedite third-party payment, and fulfill state licensure requirements. Some managed care providers prefer to contract with accredited organizations. There can be no
assurances that we will be able to obtain accreditation with the applicable organizations. Any lapse in our licenses, certifications or accreditations, or those of our technologists, could increase our costs and adversely affect our operations and
financial results.





Our revenues may fluctuate or be
unpredictable and this may harm our financial results.





The amount and timing of revenues that we may derive from our business will fluctuate based on, among other variables:





| |  |  | variations in the rate at which clients renew their contracts; and
| | - |  | ------------------------------------------------------------------




| |  |  | changes in the number of days of service we can offer with respect to a given system due to equipment malfunctions or the seasonal factors discussed below.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------




In addition, we experience
seasonality in the sale of our services. For example, our sales typically decline from our third fiscal quarter to our fourth fiscal quarter. First and fourth quarter revenues are typically lower than those from the second and third quarters. First
quarter revenue is affected primarily by fewer calendar days and inclement weather, the results of which are fewer patient scans during the period. Fourth quarter revenue is affected primarily by holiday and client and patient vacation schedules and
inclement weather, the results of which are fewer patient scans during the period. We may not be able to reduce our expenses, including our debt service obligations, quickly enough to respond to these declines in revenue, which would make our
business difficult to operate and would harm our financial results. In addition, we may be unable to adjust our expenditures if revenues in a particular period fail to meet our expectations, which would harm our operating results for that period.





Managed care organizations may prevent healthcare
providers from using our services, which would cause us to lose current and prospective clients.





Healthcare providers participating as providers under managed care plans may be required to refer diagnostic imaging tests to specific imaging service providers depending on the
plan in which each covered patient is enrolled. These requirements currently inhibit healthcare providers from using our diagnostic imaging services in some cases. The proliferation of managed care may prevent an increasing number of healthcare
providers from using our services in the future, which would cause our revenues to decline.





We may be unable to effectively maintain our systems or generate revenue when our systems are not working.





Timely, effective service is essential to maintaining our reputation and high utilization rates on our systems. Repairs to
one of our systems can take up to two weeks and result in a loss of revenue. Our warranties and maintenance contracts do not fully compensate us for loss of revenue when our systems are not working. The principal components of our operating costs
include depreciation; salaries paid to technologists and drivers,




21


---

annual system maintenance costs, insurance and transportation costs. Because the majority of these expenses are fixed, a reduction in the number of scans performed due to out-of-service equipment
will result in lower revenues and margins. The equipment manufacturers perform repairs of our equipment for us. We cannot guarantee that these manufacturers will be able to perform repairs or supply needed parts in a timely manner. Thus, if we
experience greater than anticipated system malfunctions or if we are unable to promptly obtain the service necessary to keep our systems functioning effectively, our revenues could decline and our ability to provide services would be harmed.





We have a limited operating history. Our prospects
must be considered in light of the risks, uncertainty, expenses and difficulties frequently encountered by new companies, particularly in new and rapidly evolving markets such as those for the services we provide.





We maintain cash with various banks in excess of federally insured limits.





The Federal Deposit Insurance Corporation
(FDIC) insures deposits up to $100,000 in virtually all United States banks and savings associations. In the event an FDIC-insured bank fails and depositors lose their money, the FDIC pays depositors up to $100,000 of the money lost.
Although our funds are deposited in accounts with FDIC-insured banks, the amounts of cash in these accounts exceed federally insured limits. In the event of a failure of one of our banks where our funds were lost, we could only recover from the FDIC
up to $100,000 of the funds lost. The loss of the excess funds could have a material adverse effect on our business.





Results of Operations





During the
period ended December 31, 1999, we placed our first mobile unit into operation, which generated revenues and operating costs in addition to those costs related to establishing the initial management and operating infrastructure to provide PET
systems and services for health care providers on a mobile, shared user basis.





For the three months and twelve months ended June 30, 2001, our net loss from operations was $1,473,853 and $7,605,413 respectively, compared to our net loss from operations of
$3,441,875 and $6,295,011 respectively, for the three and twelve months ended June 30, 2000. Our net loss available to common shareholders, after preferred stock dividend, was $2,190,546 or $0.13c per share, for the three months and $10,293,541 or
$0.61c per share, for the twelve months ended June 30, 2001, compared to the net loss of $3,530,558 or $0.25c per share, for the three months and the net loss of $7,797,554 or $0.56c per share, for the twelve months ended June 30, 2000.





We took delivery on our first PET unit in July 1999
and began accruing revenues in August 1999. For the three months and twelve months ended June 30, 2001, we had fourteen mobile units and one fixed site accepted and placed into service, generating revenues of $2,895,447 and $7,163,311, respectively,
and incurring cost of services of $(89,593) and $3,108,237, respectively, compared to $499,199 and $1,122,969 in revenues and $91,360 and $675,697 in cost of services for the three and twelve months, respectively, ended June 30, 2000. This
substantial difference in revenues and costs is largely attributable to the number of units, which were in service during the applicable periods. As a result of these activities, accounts receivables increased to $2,056,752, net of allowances for
doubtful accounts, as of June 30, 2001, as compared to accounts receivables of $472,733, net of allowances for doubtful accounts, as of June 30, 2000. The costs of service revenues represent salaries paid to technologists and drivers, system
maintenance, transportation and insurance on our mobile PET systems.





General and administrative expenses for the three months and twelve months ended June 30, 2001 were $4,458,893 and $11,660,487, respectively, as compared to $3,849,714 for the
three months and $6,742,283 for the twelve months ended June 30, 2000. We incurred increased general and administrative expenses due primarily to the growth in staff as payroll expenses increased from $780,193.84 and $1,923,877.23 for the three




22


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and twelve months ended June 30, 2000, respectively, to $1,522,577 and $5,5,192,982, respectively, for the three and twelve months ended June 30, 2001. Depreciation expense increased from
$259,728 and $490,215, respectively, for the three and twelve months ended June 30, 2000 to $770,160 and $2,353,268, respectively, for the three and twelve months ended June 30, 2001 mainly due to the increase in mobile PET units deployed to
fourteen at June 30, 2001 compared to three units at June 30, 2000. In addition, we continue to incur costs in building our infrastructure and incur costs in connection with business development advertising and marketing our mobile PET services.





Our interest income was $3,090 and $32,137,
respectively, for the three and twelve months ended June 30, 2001, as compared to $34,345 and $89,838, respectively, for the three and nine months ended June 30, 2000. The reduction in interest was caused by the reduction of cash in money market and
other bank accounts from $521,033 to $63,080. Our interest expense of $908,937 and $2,235,478, respectively, for the three and twelve months ended June 30, 2001, as compared to the interest expense of $127,191 and $389,297, respectively, for the
three and twelve months ended June 30, 2000, was principally due to the capitalization of our equipment leases of image scanners, coaches and computer equipment.





Liquidity and Capital Resources





At June 30, 2001, our total assets were $22,131,698, compared to $10,001,903 at June 30, 2000. Our current assets at June 30, 2001 totaled $3,444,980 and our current liabilities
were $8,001,835, as compared to June 30, 2000, that reflected current assets of $2,873,972 and current liabilities of $2,141,463. Shareholders equity at June 30, 2001 decreased to $(591,721) from $3,123,674, due primarily to the issuance of 20
shares of Series B Convertible Preferred Stock and warrants for $885,000, net of issuance costs, stock subscriptions of $547,500 and a net loss of $2,395,502 and $9,815,016 incurred in the three and twelve months, respectively, ended June 30, 2001.
In the comparable three and twelve months ended June 30, 2000, shareholders equity was primarily the result of 51 shares of common stock issued from subscriptions paid in the amount of $285,000, net of offering costs, and a three and twelve
months net loss of $3,530,558 and $6,591,907, respectively.





Our foreign currency translation adjustment in shareholders equity amounted to $(320,357) at June 30, 2001 compared to $(42,938) at June 30, 2000. We have reflected the
transaction gains and losses in the cash flow as the effect of exchange rate changes on cash of $(57,966) and $3,935 for the three and twelve months ended June 30, 2001, compared to $(40,310) and $(45,997) for the three and twelve months ended June
30, 2000.





Our net cash used in investing activities
for the three and twelve months ended June 30, 2001 was $(160,744) and $(323,710), as compared to $(267,127) and $(612,512) in the three and twelve months ended June 30, 2000. This difference is primarily a result of the $323,710 we invested in
computers and related equipment for our business and personnel growth, compared to $267,127 and $1,165,051 for the three and twelve months ended June 30, 2000 and the fact that there were no proceeds from sale of equipment in the three and twelve
month period ended June 30, 2001 compared to $0 for the three months and $552,539 for the twelve months ended June 30, 2000.





The net cash provided by our financing activities for the three and twelve months ended June 30, 2001 was $1,748,218 and $5,040,805, a result of:
loan proceeds of $1,333,753 less the repayment of loans totaling $9,327; preferred stock issued of $1,385,000; common stock issued of $3,618,650 less payments on obligations under capital leases of $1,287,271, compared to $(129,813) and $5,486,392
for the three and twelve months ended June 30, 2000 as a result of preferred stock issued of $2,700,000; common stock issued of $2,949,283 and payments on obligations under capital lease of $(162,891).




23


---




ITEM 7.    FINANCIAL STATEMENTS





INDEPENDENT AUDITORS REPORT





|To | The Board of Directors
|-- | ----------------------

|Mo | bile PET Systems, Inc.
|-- | ----------------------




We have audited the consolidated balance sheets of Mobile PET Systems, Inc. and subsidiaries as of June 30, 2001 and 2000, and the related consolidated statements of operations, shareholders equity and
cash flows for the years then ended. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the
financial statements of The London PET Centre Limited, Mobile PET Leasing Limited, and Mobile PET Systems (UK) Limited, United Kingdom private limited companies, which statements reflect total assets of $2,212,989 as of June 30, 2000 and total
revenues of $8,349 for the periods December 10, 1999 and December 17, 1999 to June 30, 2000, respectively. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts
included for The London PET Centre Limited, Mobile PET Leasing Limited, and Mobile PET Systems (UK) Limited, is based solely on the reports of the other auditors.





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





In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mobile PET Systems, Inc. and its subsidiaries as of June 30, 2001 and 2000, and the results of its operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.





| | PE | TERSON & CO.
| | -- | ------------




|San | Diego, California
|--- | -----------------

|Au | gust 28, 2001
|-- | -------------



24


---




MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


JUNE 30,
2001 AND 2000





2001

2000ASSETSCurrent assetsCash

$          63,080


$       521,033Accounts receivable, net of allowance for doubtful accounts of $116,000at June 30, 2001 and 2000

2,056,752


472,733Due from London Radiosurgical Centre, Ltd

116


13,317Other receivables

5,023


308,163Prepaid expenses

838,048


241,762Deposits and other assets

481,961


1,316,964Total current assets

3,444,980


2,873,972Property and equipment, net

17,708,992


6,133,711Other assetsAccrued interest receivable

10,573


42,957Due from London PET Centre, Ltd

422,283


421,783Subordinated equity participation

200,000


200,000Restricted cash

344,870


329,480Total assets

$22,131,698


$10,001,903LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable

$   2,413,170


$       638,500Current portion of long-term debt

18,071


Loans payable

475,000


Accrued and other liabilities

1,164,543


475,853Income taxes payable

1,600


800Other liabilities

222,394


Obligations under capital leasecurrent

3,707,057


1,026,310Total current liabilities

8,001,835


2,141,463Noncurrent liabilitiesObligations under capital lease

14,640,229


4,724,052Long-term debt

81,355


Deferred revenue




12,714Total liabilities

22,723,419


6,878,229Shareholders equity (deficit)Preferred stock; $0.0001 par value; 10,000,000 shares authorized;64and 60 shares issued and outstanding at
June 30, 2001 and 2000,                respectively

3,801,421


3,000,000Common stock; $0.0001 par value; 90,000,000 sharesauthorized; 25,484,086 and 14,944,658 shares
issuedandoutstanding at June 30, 2001 and 2000,
respectively

2,549


1,495Additional paid in capital

14,449,508


8,580,888Accumulated deficit

(18,524,842
)

(8,415,771
)Foreign currency translation adjustment

(320,357
)

(42,938
)Total shareholders equity (deficit)

(591,721
)

3,123,674Total liabilities and shareholders
equity (deficit)

$22,131,698


$10,001,903




25


---




MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS


For the Year Ended June 30, 2001 and 2000





2001

2000Service revenues

$   7,163,311


$1,122,969Cost of service revenues

3,108,237


675,697Gross profit

4,055,074


447,272ExpensesGeneral and administrative

11,660,487


6,742,283Total expenses

11,660,487


6,742,283Loss from operations

(7,605,413
)

(6,295,011
)Other income (expense)Interest income

32,137


89,838Other income

(4,662
)

4,163Interest expense

(2,235,478
)

(389,297
)Total other income (expense)

(2,208,003
)

(295,296
)Loss before provision for income taxes

(9,813,416
)

(6,590,307
)Provision for income taxes

1,600


1,600Net loss

(9,815,016
)

(6,591,907
)Preferred stock dividend

(478,525
)

(1,205,647
)Net lossavailable to common shareholders

$(10,293,541
)

$(7,797,554
)Loss per sharebasic

$               (0.61
)

$            (0.56
)Loss per sharediluted

$               (0.61
)

$            (0.56
)




26


---

MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


For the Year Ended June 30, 2001 and
2000





Preferred Stock

Common Stock

Additional Paid In Capital

Accumulated Deficit

Foreign Currency Translation Adjustment

Total Shareholders EquityShares

Amount

Shares

AmountBalanceJune 30, 1999









12,844,658

1,285

4,545,998


(1,823,864
)




2,723,419Common stock issued from subscriptions paid, net
             of offering costs









515,000

51

284,949








285,000Common stock issued in private placement, net of
             offering costs









1,550,000

155

2,664,128








2,664,283Common stock issued for services









35,000

4

109,371








109,375Preferred stock issued in private placement, net of
             offering costs


60



3,000,000






(300,000
)







2,700,000Options issued as compensation













1,276,442








1,276,442Net loss
















(6,591,907
)




(6,591,907
)Foreign currency translation adjustment



















(42,938
)

(42,938
)BalanceJune 30, 2000


60



3,000,000


14,944,658

1,495

8,580,888


(8,415,771
)

(42,938
)

3,123,674Preferred stock issued in private placement, net of
             offering costs


30



1,500,000






(115,000
)







1,385,000Recapitalization of preferred stock






621,456






(347,500
)

(273,956
)




Common stock issued in private placement, net of
             offering costs









3,735,584

374

1,868,276








1,868,650Common stock issued through conversion of
             preferred stock


(26
)


(1,320,035
)

1,743,735

175

1,319,860








Common stock issued through conversion of
             preferred stock dividends









47,778

4

20,095


(20,099
)




Common stock issued through conversion of debt









1,875,000

188

749,812








750,000Common stock issued through settlement agreement









2,733,981

273

749,727








750,000Common stock subscribed, net of offering costs













1,000,000








1,000,000Common stock issued for services









403,350

40

201,635








201,675Options issued as compensation













413,915








413,915Convertible debt intrinsic beneficial conversion
             feature













7,800








7,800Net loss
















(9,815,016
)




(9,815,016
)Foreign currency translation adjustment



















(277,419
)

(277,419
)BalanceJune 30, 2001


64



$3,801,421


25,484,086

$2,549

$14,449,508


$(18,524,842
)

$(320,357
)

$(591,721
)




27


---




MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


For the Year Ended June 30, 2001 and 2000





2001

2000Cash flows from operating activitiesNet loss

$  (9,815,016
)

$(6,591,907
)Adjustments to reconcile net loss to net cashused in operating
activitiesDepreciation and amortization

2,353,268


490,215Gain on sale of asset




(14,127
)Interest

7,800Compensation for options to purchase common stock

413,915


1,276,442Common stock issued for services

201,675


109,375(Increase) decrease in operating assetsAccounts
receivable

(1,585,446
)

(472,787
)Due from
London Radiosurgical Centre, Ltd.

34,904


(428,261
)Prepaid
expenses

(596,286
)

(223,772
)Deposits and
other assets

842,814


(777,798
)Restricted
cash

(15,390
)

(77,108
)Accrued
interest receivable

32,384


(42,957
)Increase (decrease) in operating liabilitiesAccounts
payable

1,780,771


557,512Income taxes
payable

800


Accrued and
other liabilities

1,177,538


91,219Deferred
revenue

(12,714
)

12,714Net cash used in operating activities

(5,178,983
)

(6,091,240
)Cash flows from investing activitiesCapital expenditures

(323,710
)

(1,165,051
)Proceeds from sale of equipment




552,539Net cash used in investing activities

(323,710
)

(612,512
)Cash flows from financing activitiesProceeds from loan

1,333,753


50,000Repayment of loan

(9,327
)

(50,000
)Payments on obligations under capital lease

(1,287,271
)

(162,891
)Preferred stock issued

1,385,000


2,700,000Common stock issued


3,618,650


2,949,283Net cash provided by financing activities

5,040,805


5,486,392Net (decrease) increase in cash

(461,888
)

(1,217,360
)Effect of exchange rate changes on cash

3,935


(45,997
)Cashbeginning of year

521,033


1,784,390Cashend of year

$         63,080


$    521,033SUPPLEMENTAL DISCLOSURESInterest paid

$   2,202,797


$    391,664Income taxes paid




$          1,600Income taxes refunded




$          2,750NON CASH INVESTING ACTIVITIESEquipment under capital lease

$13,730,169


$5,946,810NON CASH FINANCING ACTIVITIESPreferred stock dividendbeneficial
conversion feature

$       478,525


$1,205,647Obligations under capital lease

$13,730,169


$5,946,810Conversion of debt to equity

$       750,000







28


---




MOBILE PET SYSTEMS, INC.





NOTES TO FINANCIAL STATEMENTS





Note 1The Company





Mobile PET Systems, Inc. and subsidiaries (the Company) were organized to provide Positron Emission Tomography (PET) systems and services to hospitals and
other health care providers on a mobile, shared user basis. The Companys PET services include the provision of high technology imaging systems, technologists to operate the imaging systems, the management of day-to-day operations and
educational and marketing support. The Company has operations in the United States and the United Kingdom.





Note 2Summary of Significant Accounting Policies





| | Basis of Presentation
| | ---------------------




The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.





| | Cash and Cash Equivalents
| | -------------------------




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





| | Property, Equipment and Leasehold Improvements
| | ----------------------------------------------




Property and equipment are recorded at cost less depreciation and amortization. Depreciation and amortization are accounted for
on the straight-line method based on estimated useful lives. The amortization of leasehold improvements is based on the shorter of the lease term or the life of the improvement. Betterments and large renewals, which extend the life of an asset, are
capitalized; whereas, maintenance and repairs and small renewals are expensed as incurred.





| | Foreign Currency Translation
| | ----------------------------




The financial statements of all foreign subsidiaries were prepared in their respective local currencies and translated into U.S. dollars based on
the current exchange rate at the end of the period for the balance sheet and a weighted-average rate for the period on the statement of operations. Translation adjustments are reflected as foreign currency translation adjustments in
shareholders equity and accordingly have no effect on net loss.





| | 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 disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.





| | Advertising
| | -----------




Advertising costs incurred for major new campaigns are expensed in the year in which the advertising takes place. Other advertising costs are
expensed when incurred. Advertising expense for the years ended June 30, 2001 and 2000 was $234,280 and $501,855, respectively.




29


---








| | Income Taxes
| | ------------




The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. This
statement requires an asset and liability approach to account for income taxes. The Company provides deferred income taxes for temporary differences that will result in taxable or deductible amounts in future years based on the reporting of certain
costs in different periods for financial and income tax purposes.





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




The Company has adopted SFAS No. 123 Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 Accounting for Stock Issued to Employees, and
provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 has been applied. The Company has elected to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123.





| | Reclassifications
| | -----------------




Certain reclassifications have been made in the June 30, 2000 financial statements to conform to the June 30, 2001 presentation.





Note 3Acquisitions





Mobile PET Systems, Inc. was incorporated in the State of Nevada on December 1, 1998. On December 22, 1998, Mobile P.E.T Systems, Inc.s
shareholders exchanged all of the 7,000,000 shares of outstanding common stock for 7,000,000 shares of common stock in Colony International Incorporated, (formerly American Coin and Stamp, Inc.), incorporated in the State of Delaware on August 21,
1995 and its wholly owned subsidiary Colony International Incorporated, incorporated in the State of Nevada on April 25, 1995. This exchange of shares has been accounted for as a reverse merger, under the purchase method of accounting. Accordingly,
the combination of the Mobile PET Systems, Inc. and Colony International Incorporated and subsidiary is recorded as a recapitalization of the shareholders equity of Mobile PET Systems, Inc., the surviving corporation and for accounting
purposes the financial statements presented are those of Mobile PET Systems, Inc.





On December 10, 1999, the Company incorporated a wholly owned subsidiary, The London PET Centre Limited, a United Kingdom private limited company. On December 17, 1999 the Company
incorporated two wholly owned subsidiaries, Mobile PET Leasing Limited, a United Kingdom private limited company and Mobile PET Systems (UK) Limited, a United Kingdom private limited company.





On March 15, 2001, the Company incorporated a wholly owned subsidiary, Radiodiagnostics
Corporation, a Nevada corporation.




30


---








Note 4Property and Equipment





Property and equipment at June 30, 2001 and 2000 consist of the following:





June 30,2001

2000Computer equipment

$   1,064,891


$    597,907Office furniture and fixtures

171,456


56,581Office equipment

12,572


7,092Equipment

19,277,520


5,946,81020,526,619


6,608,390Less accumulated depreciation

(2,817,627
)

(474,679
)$17,708,992


$6,133,711





Depreciation expense for the years ended June 30, 2001 and 2000 was $2,353,267 and $490,215, respectively.





Note 5Capitalization





| | Preferred Stock
| | ---------------




On January 20, 2000, the Company authorized for issuance ten million (10,000,000) shares of preferred stock having one hundredth of a cent ($0.0001)
par value per share. On March 3, 2000 the Company designated and issued sixty (60) shares 8% Cumulative Convertible Redeemable Preferred, Series A Stock (Series A) for cash in the amount of $2,700,000, net of acquisition fees. In
addition, under this Securities Purchase Agreement the Company issued 120,000 warrants to purchase shares of common stock at an exercise price of $5 per share, which expire in March 2003. The shares of Series A Stock have no voting rights, have an
original liquidation value of $50,000 per share, and accrue dividends at a rate of eight percent (8%) per annum per share on the liquidation value payable upon conversion. On May 30, 2001 the liquidation value was increased to $58,937 when the
Company entered into a Settlement Agreement and Conditional Release of a lawsuit surrounding the Securities Purchase Agreement. The total liquidation value of the shares outstanding at June 30, 2001 and 2000 in the amount of $2,033,318 and
$3,000,000, respectively is classified on the Companys balance sheet as preferred stock. Cumulative preferred dividends are payable upon conversion and at June 30, 2001 there are cumulative preferred dividends in arrears in the amount of
$60,137 or $1,522 per share. In the event of any liquidation, dissolution or winding up of the affairs of the Company, holders of the Series A Stock shall be paid the liquidation value plus all accrued dividends at that date before any payment to
other shareholders. At the option of the holders, the Series A Stock and the cumulative preferred dividends in arrears are convertible into shares of common stock determined by dividing $58,937 by the conversion price of the lesser of $5 or 75% of
the average of the closing bid price of common stock during the five (5) trading days immediately prior to the conversion date. If the Company fails to convert or is unable to issue shares of common stock, the holder may redeem the Series A Stock
for cash in an amount equal to the fair value of the shares of common stock that would have been converted. The sixty (60) shares of Series A Stock provide an intrinsic value of beneficial conversion feature of approximately $1,206,000. During the
year ended June 30, 2001, the holders converted twenty and one half (201⁄2) shares of Series A into 1,108,264 shares of common stock.





On September 21, 2000, the Company designated and subsequently issued thirty (30) shares 8% Cumulative Convertible Redeemable Preferred, Series B
Stock (Series B) for cash in the amount of $1,385,000, net of acquisition fees. In addition, under this Securities Purchase Agreement the Company issued 50,000 warrants to




31


---





purchase shares of common stock at an exercise price of $3 per share and 29,851 warrants to purchase shares of common stock at an exercise price of $2.5125 per share. The warrants expire on
September 30, 2005. The shares of Series B Stock have no voting rights, have an original liquidation value of $50,000 per share, and accrue dividends at a rate of eight percent (8%) per annum per share on the liquidation value payable upon
conversion. On May 30, 2001 the liquidation value was increased to $58,937 when the Company entered into a Settlement Agreement and Conditional Release of a lawsuit surrounding the Securities Purchase Agreement. The total liquidation value of the
shares outstanding at June 30, 2001 and 2000 in the amount of $1,768,103 and $1,500,000, respectively is classified on the Companys balance sheet as preferred stock. Cumulative preferred dividends are payable upon conversion and at June 30,
2001 there are cumulative preferred dividends in arrears in the amount of $3,808 or $127 per share. In the event of any liquidation, dissolution or winding up of the affairs of the Company, holders of the Series B Stock shall be paid, pari
passu with holders of the Series A Stock, the liquidation value plus all accrued dividends at the date of liquidation, dissolution or winding up of the affairs before any payment to other shareholders. At the option of the holders, the Series B
Stock and the cumulative preferred dividends in arrears are convertible into shares of common stock determined by dividing $58,937 by the conversion price of the lesser of $3 or 75% of the average of the closing bid price of common stock during the
five (5) trading days immediately prior to the conversion date. If the Company fails to convert or is unable to issue shares of common stock, the holder may redeem the Series B Stock for cash in an amount equal to the fair value of the shares of
common stock that would have been converted. The thirty (30) shares of Series B Stock issued provide an intrinsic value of beneficial conversion feature of approximately $414,580. During the year ended June 30, 2001, the holders converted five (5)
shares of Series A into 635,471 shares of common stock.





| | Common Stock
| | ------------




The Company has authorized for issuance ninety million (90,000,000) shares of common stock, having one hundredth of a cent ($0.0001) par value per
share. On December 1, 1998 (date of recommencement) the Company had 10,328,395 shares of common stock issued and outstanding. Prior to December 22, 1998 the Company authorized a 50 to 1 reverse stock split, leaving 206,759 shares (after adjustment
for fractional shares). Immediately after the reverse stock split the Company issued 3,937,899 shares for cash in the amount of $98,447. On December 22, 1998 the Company acquired Mobile PET Systems, Inc. in a non-cash, stock for stock transaction by
issuing 7,000,000 shares of the Companys stock in exchange for 7,000,000 shares of Mobile PET Systems, Inc. common stock and subsequently changing its name to Mobile PET Systems, Inc. On February 5, 1999 and May 12, 1999 the Company issued
common stock in non-cash transactions as follows: 200,000 shares in connection with employment valued at $250,000. During the period January 21, 1999 to June 30, 2000 the Company issued additional shares of common stock in cash transactions:
1,500,000 shares from the exercise of stock options for cash in the amount of $1,800,000, and 2,065,000 shares for cash in the amount of $4,521,283. On May 12, 2000 the Company issued 35,000 shares of common stock in a non-cash transaction in
connection with services valued at $109,375.





During
the year ended June 30, 2001 the Company issued shares of common stock in cash transactions: 3,735,584 shares for cash in the amount of $1,868,650; and 2,733,981 shares for cash in the amount of $750,000 according to the terms of a settlement
agreement between the Company and holders of the Series A and Series B Stock. Also during the year ended June 30, 2001 the Company issued shares of common stock in non-cash transactions: 1,743,735 shares through the conversion of Series A Stock
valued at $1,320,035; 47,778 shares through the conversion of Series A Stock dividends in arrears valued at $20,099; 1,875,000 shares through the conversion of debt valued at $750,000; and 403,350 shares for legal services valued at $201,675.





At June 30, 2001 the Company has a paid
subscription to issue 2,600,000 shares of common stock in the amount of $1,000,000.




32


---








| | Stock Options
| | -------------




The Companys Board of Directors and shareholders adopted the 1999 Stock Option Plan pursuant to which incentive stock options or nonstatutory
stock options to purchase up to 8,000,000 shares of common stock may be granted to employees, directors and consultants. Stock options expire on June 30, 2002, with some options extending to 2005 and vesting over service periods that range from zero
to four years.





As of June 30, 2001, the Company has
granted options to purchase 5,050,750 shares of common stock as follows:





Exercise Price

Number of Shares

Vested SharesOutstanding, June 30, 1999

$1.90$4.46

1,735,000


975,000Granted

$1.00$4.63

4,252,986


2,619,000Exercised






Cancelled






Outstanding, June 30, 2000

$1.00$4.63

5,987,986


3,594,000Granted

$  .45$3.75

1,187,250


1,140,003Exercised






Cancelled

$1.70$3.75

(2,124,486
)

(1,277,000
)Outstanding, June 30, 2001



5,050,750


3,457,003





The Company
accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, under which no compensation cost for stock options is recognized
for the stock option awards granted at or above fair market value. However, during the years ended June 30, 2001 and 2000 the Company recognized compensation expense using the intrinsic value method of $413,915 and $1,276,442, respectively.





Had compensation expense for the Companys
1999 Stock Option Plan been determined based upon fair values at the grant dates for awards under the plan in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the Companys net loss and loss per share would
have been increased to the pro forma amounts indicated below. Additional stock option awards are anticipated in future years.





June 30,2001

2000Net lossAsreported

$   (9,815,016
)

$(6,591,907
)Proforma

(10,734,944
)

(8,134,981
)Net lossavailable to common shareholdersAsreported

$(10,293,541
)

$(7,797,554
)Proforma

(11,213,469
)

(9,340,628
)Loss per shareAsreported

$                   (.61
)

$             (0.56
)Proforma

$                   (.67
)

$             (0.67
)





| | Warrants
| | --------




At June 30, 2001 warrants were outstanding for 4,115,352 common stock at exercise prices between $0.35 to $5.00 per share and the average of the
last reported sale price of the common stock for the five trading days preceding the issue date. These warrants expire between March 2002 and February 2009.




33


---








Note 6Related Party Transactions





| | Subordinated Equity Participation
| | ---------------------------------




During the year ended June 30, 2001, the Company entered into a Memorandum of Agreement and retroactive to June 1, 1999
restructured an 8% interest in a subordinated equity participation in London Radiosurgical Centre Ltd (LRC), a foreign corporation with a common shareholder, officer and director. The market value of the subordinated equity participation
is not readily determinable, and is recorded at cost in the amount of $200,000, which management believes approximates fair value. The original agreement provided for distributions of cash, if any, including interest at a rate of 15% per annum, up
to the amount of the investment plus accrued interest, after which the Company was to receive its proportionate share of 60% of net distributable income. According to the terms of the participation agreement, net income available for distribution is
equal to net income less equipment financing payments, operating expenses, reserve capital and taxes.





The Memorandum of Agreement provides for a distribution to the Company of 8.42% of LRCs net distributable cash flow, until a total of $210,573 has been distributed and then
the distribution of 5.05% of net distributable cash flow, subject to future dilution. The Memorandum of Agreement stopped the accrual of interest at June 1, 1999. At the date of the Memorandum of Agreement, the Company canceled $47,447 of accrued
interest from the original investment and at June 30, 2001 and 2000 accrued interest on the investment was $10,573 and $42,957, respectively. The related shareholder, officer and director personally guarantee the investment.





| | Due from London Radiosurgical Centre, Ltd
| | -----------------------------------------




During the year ended June 30, 2001 and 2000, the Company advanced without interest $500 and $405,129, respectively to LRC for
working capital during LRCs start up period. At June 30, 2001, and 2000 the balance due from London Radiosurgical Centre, Ltd was $422,283 and $421,783, respectively. The advances are covered by a continuing corporate and personal guarantee.





In addition, LRC provides office space under normal
commercial terms to the Companys subsidiaries. During the years ended June 30, 2001 and 2000 the Company charged LRC approximately $240,791 and $262,092 in administrative expenses and LRC made cash payments of $227,590 and $261,976. At June
30, 2001 and 2000 there is a balance due from LRC of $116 and $13,317, respectively.





| | Loans
| | -----




In December 1999, the Company received a non-interest bearing bridge loan from a shareholder in the amount of $50,000. The balance was repaid in
April 2000.





On August 23, 2000, the Company
received an eight percent (8%) bridge loan from a director and shareholder in the amount of $200,000, with an original due date of October 11, 2000. The loans due date has been extended several times and is currently extended to October 1,
2001. At June 30, 2001 and 2000, there is a balance of accrued interest in the amount of $13,589 and $9,600, respectively.





On October 24 2000, the Company received an eight percent (8%) bridge loan from an officer, director and shareholder in the amount of $100,000,
which was due on or before November 30, 2000. This loans due date has been extended to June 1, 2001, and is currently past due. At June 30, 2001, there is a balance of accrued interest in the amount of $5,458.




34


---








On January
12, 2001, the Company received an eight percent (8%) bridge loan from an officer, director and shareholder in the amount of $25,000, with an original due date of March 12, 2001. The note has been extended several times and is currently extended to
October 1, 2001. At June 30, 2001, there is a balance of accrued interest in the amount of $926.





On January 17, 2001, the Company received an eight percent (8%) bridge loan from an officer, director and shareholder in the amount of $150,000, with an original due date of March
12, 2001. The note has been extended several times and is currently extended to October 1, 2001. At June 30, 2001, there is a balance of accrued interest in the amount of $5,391.





On February 5, 2001, the Company received an eight and one-half percent (8.5%) bridge loan from
a shareholder in the amount of $500,000. At the option of the holder, the principal and accrued interest was convertible into shares of common stock at a conversion price of $1 per share. The loan had a beneficial conversion feature in the amount of
$7,800, which was recorded as debt discount and amortized as interest expense through the date the option expired. On March 20, 2001, the Company received an additional bridge loan in the amount of $250,000, cancelled the note dated February 5, 2001
in the amount of $500,000, and issued a new convertible ten percent (10%) note in the amount of $750,000. At the option of the holder, the principal and accrued interest is convertible into shares of common stock at a conversion price of $.40 per
share. The new loan did not have a beneficial conversion feature. On June 14, 2001, the holder converted the loan into 1,875,000 shares of common stock.





Note 7Securities Purchase Agreement





On March 3, 2000, the Company entered into a Securities Purchase Agreement. As part of the Agreement, the Company issued 60 shares of 8% Cumulative Convertible Redeemable
Preferred, Series A Stock for cash in the amount of $2,700,000, net of acquisition fees and 120,000 warrants to purchase shares of common stock at an exercise price of $5.00 per share, which expire in March 2003. The buyer of the preferred stock
agreed to purchase shares of common stock of the Company in tranches, for an aggregate purchase price of up to $10,000,000, at a price equal to eighty five percent (85%) of the average closing bid price five (5) consecutive days immediately prior to
the Company providing a tranche notice to the buyer. During the year ended June 30, 2001 the Company received $1,075,000, net of offering costs and issued 2,703,093 shares of common stock. There is an aggregate commitment remaining in the amount of
$8,925,000 at June 30, 2001.





Note 8Employment Agreements





The Company has employment and compensation agreements with key officers and
employees of the Company. The agreements vary in terms providing annual salaries and options to purchase shares of common stock, which may or may not be contingent upon individual or Company stock performance.





Note 9Income Taxes





At June 30, 2001 the Company has a net operating loss carryforwards for tax purposes of approximately $12,500,000, which expires through the year
2020. The Internal Revenue Code contains provisions, which may limit the loss carryforward available if significant changes in shareholder ownership of the Company occur.




35


---








The
components of the provision for income taxes for the years ended June 30, 2001 and 2000 are as follows:





June 30,2001

2000CurrentForeign

$     

$     Federal



State

1,600

1,6001,600

1,600DeferredForeign



Federal



State





Provision for income taxes

$1,600

$1,600





The
components of the net deferred tax assets were as follows:





June 30,2001

2000Deferred tax assetsNon-cash compensation

$     266,794


$     610,782Organization and startup costs

91,115


155,949State tax benefit and other

450,577


274,728Net operating loss carryforward

5,345,795


1,876,3576,154,282


2,917,816Deferred tax liabilitiesDepreciation

376,292


44,6885,777,990


2,873,128Less valuation allowance

(5,777,990
)

(2,873,128
)Net deferred tax assets

$                


$                





Note 10Long Term Debt





Long term debt at June 30, 2001 and 2000 consists of the following:





2001

2000Promissory Note with interest at a rate of 11% per annum, due in monthly
     installments of $2,343, with the first payment beginning on January 1, 2001,      with a variable 5% to 1% prepayment penalty

$99,426


$ Less current portion

(18,071
)

Long term debt, net of current portion

$81,355


$ 




36


---








The
maturities of long term debt for each of the succeeding five years subsequent to June 30, 2001, are as follows:





June 30,2002

$18,0712003

21,1622004

22,4802005

25,0962006

13,617$99,426





Note 11Commitments





In July 1999, the Company purchased a mobile coach for cash in the amount of
$279,390. In December 1999, the Company sold the mobile coach to a leasing company for cash in the amount of $279,390 and entered into a five-year capital lease agreement.





In February 2000, the Company purchased a mobile coach for cash in the amount of $273,149. In March 2000, the Company sold the
mobile coach to a leasing company for cash in the amount of $273,149 and entered into a five-year capital lease agreement.





Equipment under capital lease is included in property and equipment as follows:





June 30,2001

2000Equipment

$19,676,979


$5,946,810Less accumulated amortization

(2,556,790
)

(449,428
)Net capital lease assets

$17,120,189


$5,497,382





The Company
leases office space under a non-cancelable operating lease. The office lease expires in April 2005. The Company leases certain other PET equipment under capital leases. The equipment leases expire through January 2006.





Rent expense for the year ended June 30, 2001 and 2000 was $209,586 and
$47,217, respectively.




37


---








The
following is a schedule by year of the future minimum lease payments at June 30, 2001:





June 30,

Capital Lease

Operating Leases2002

$   6,324,291


$    963,6142003

6,157,716


1,217,5652004

6,157,716


1,191,1512005

5,444,391


1,100,7892006

1,858,617


879,92325,942,732


$5,353,042Less amount representing interest at 12.07%

(7,595,446
)Present value of minimum lease payments (including current portion of
     $3,371,732)

$18,347,286





The capital
leases are secured by the Companys assets. There is restricted cash in the amount of $344,870 reserved for these lease commitments. The chief executive officer of the Company personally guarantees one of the leases.





Note 12Concentration of Credit Risk





The Company maintains cash with various major financial institutions in excess of the Federal Deposit Insurance Corporation
limits.





The Companys mobile PET scanners are
purchased from two suppliers and primarily leased from three leasing companies. The Company routinely assesses the financial strength of its suppliers and its leasing companies. Management believes the concentration of credit risks are limited.





Note 13Earnings (Loss) Per Share





The computations of basic and diluted earnings per share from continuing operations for the
year ended June 30, 2001 and 2000 were as follows:





June 30,2001

2000Loss per sharebasicNumerator:Net lossavailable to Common shareholders

$(10,293,541
)

$   (7,797,554
)Denominator:Weighted-average shares

16,740,203


13,906,885Loss per sharebasic

$                   (.61
)

$                   (.56
)Loss per sharedilutedNumerator:Net lossavailable to Common shareholders

$(10,293,541
)

$   (7,797,554
)Denominator:Weightedaverage shares

16,740,203


13,906,885Loss per sharediluted

$                   (.61
)

$                   (.56
)




38


---








The
weighted average shares listed below were not included in the computation of diluted loss per share because to do so would have been antidilutive for the year ended June 30, 2001 and 2000:





June 30,2001

2000Cumulative convertible redeemable preferred stock common stock equivalent

962,302

674,252Stock options

4,629,014

2,769,790Warrants

1,568,419

543,062





Note 14Deposits and Other Assets





Deposits and other assets consist of the following at June 30, 2001 and
2000:





2001

2000Equipment depositsMobile PET Units

$385,580

$1,057,875Equipment rental depositsother

49,000

49,000Lease deposits



174,089Other

47,381

36,000$481,961

$1,316,964





Equipment
depositsMobile PET Units are refundable upon the Company securing lease financing or may be applied to subsequent equipment orders.





Note 15Subsequent Events





| | Warrants
| | --------




In July 2001 warrants were issued to a shareholder of the Company to purchase 1,142,857 shares of common stock at an exercise price of $.35 per
share. These warrants expire in July 2003.





In
August 2001 warrants were issued to a shareholder of the Company to purchase 642,857 shares of common stock at an exercise price of $.35 per share. These warrants expire in August 2003.




39


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ITEM 8.    
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND


| | FINANCIAL DISCLOSURE
| | --------------------




We have not had any disputes or disagreements with Peterson & Co., our independent outside auditors, since Peterson & Co. was first engaged
on December 1, 1998. Peterson & Co. was the auditor of Mobile PET or its predecessor Mobile P.E.T. Systems, Inc. for two years immediately prior to its acquisition by Colony International Incorporated, and has continued as our auditor since the
acquisition.




40


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PART III





|ITEM 9. | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
|------- | ---------------------------------------------------------------------------------------------------------------------




The following table sets forth certain information with respect to our directors and executive officers as of June 30, 2001.





Name

Age

PositionPaul J. Crowe


51


Chairman of the Board, Chief Executive Officer, President, DirectorRobert C. Bush


73


DirectorBrent Nelson


38


Director(1)K.Ivan F. Gothner


42


Director(1)Thomas G. Brown


56


Director(1)Anthony Turnbull


56


Chief Financial Officer, Secretary, TreasurerJames Corlett


57


Vice PresidentOperationsEdmund Yochum


50


Vice PresidentBusiness Development


---

|(1) |  | Resigned as a director effective October 2001.
|--- |  | ----------------------------------------------




Paul J. Crowe has served as our Chairman, Chief Executive Officer and President since December 1998. Mr. Crowe has over 30 years of business
experience in sales, marketing, finance and management of high-tech medical instrumentation and services for the health care industry. Mr. Crowe has served in sales, marketing and senior management positions for Ritter/Sybron Corporation, Philips
Medical Systems, Rohe Ultrasound and Diasonics MRI. From 1987 to 1991, Mr. Crowe served as President and Chief Executive Officer of Paul J. Crowe & Associates, Inc., a company which developed and operated diagnostic MRI imaging facilities and
mobile MRI routes. Mr. Crowe is currently President and CEO of NeuroTechnologies International, Inc. and President of Radiosurgical Centers Corporation, businesses involved in the development and operation of Gamma Knife radiosurgery centers.





Robert C. Bush was appointed to serve as a director in
March 2000. Since 1991, Mr. Bush has served as a consultant to, and private investor in, several medical and technology companies. From 1982 to 1990, Mr. Bush served as President and CEO of Sonics Research Corporation.





Brent Nelsonserved as a director from December 1998 until October 2001. Mr.
Nelson is the founder and managing director of Northwest Capital Partners L.L.C., a Bellevue, Washington-based venture capital firm that provides capital to private and public companies. Mr. Nelson has over 15 years of experience in corporate and
project financing.





K. Ivan F. Gothner served as a director
from May 2000 until October 2001. Mr. Gothner is Managing Director of Adirondack Capital, LLC, a private merchant banking firm, which focuses on serving small and mid-size growth companies, which he founded in April 1997. Mr. Gothner also served as
managing Director of First United Equities Corporation (First United) from 1995 to 1997. From 1994 to 1995, Mr. Gothner served as the Executive Vice President and interim Chief Operating Officer of Breasy Medical Equipment (USA) Inc. Mr.
Gothner is also a director of Laminaire Corporation, a publicly-traded company, Ashton Technology Group Inc. and Gomez Advances.







41


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Thomas G. Brown served as our Chief Financial Officer from April 1999
until August 2001 and as a director from April 1999 until October 2001. Since 1996 Mr. Brown has served as managing director of Wyndham Capital Corporation, an investment banking firm that sources capital for private and public companies as it
relates to the financing of internal and external growth opportunities. In 1993 Mr. Brown co-founded Ablum, Brown & Company, a company that assisted leveraged buyout firms in the procurement of senior and subordinated capital, as well as growth
capital for private businesses. In addition, Mr. Brown has served as a securities analyst and in the corporate finance department of several New York Stock Exchange member firms. Mr. Brown is a Chartered Financial Analyst (CFA).





Anthony Turnbull served as our Vice PresidentFinance from
January 2001 until August 2001, at which time he was elected to serve as Chief Financial Officer, Secretary, and Treasurer. Mr. Turnbull has over 16 years of experience as a financial controller and a total of 38 years of experience in accounting.
Prior to joining the Company, Mr. Turnbull served as financial controller for some of the largest manufacturing companies in the world, namely Kraft Foods, General Foods and Stauffer Chemicals. In the late 1980s Mr. Turnbull worked as the
Chief Financial Officer for Ride Snowboards and McCain Traffic Supply.





James Corlett has served as our Vice PresidentOperations since June 2001. He previously had served as our as our Vice PresidentAdministration since March 2001,
as our Vice PresidentMobile Operations since June 1999, and as our Vice PresidentSales since December 1998. Mr. Corlett has over 16 years of experience in the application of mobile services to high technology. Mr. Corlett was one of the
pioneers in the development of mobile MRI Services in the U.S. market for American Shared Hospital Services in the 1980s.





Edmund Yochum, has served as our Vice PresidentBusiness Development since January 2000. Before joining us he had served as Vice
President of Sales at MagView Medical Software since April 1996, and from 1989 to 1996 he was Vice President of Sales at Diagnostic Ultrasound.





Unless otherwise stated, all directors hold office until the next annual meeting of stockholders and until their successors are elected. Officers
are elected to serve, subject to the discretion of the Board of Directors, until their successors are appointed.





SECTION 16(a)  BENEFICIAL OWNERSHIP REPORTING COMPLIANCE





Section 16(a) of the 1934 Act requires the Companys directors and executive officers, and persons who own more than ten percent of a registered class of the Companys
equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they file.





To the Companys knowledge, based solely on a review of the copies of such reports and any amendments thereto furnished to the Company, during the fiscal year ended June 30,
2001, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with, except Mr. Crowe, Mr. Bush and Mr. Corlett each filed late an initial report, Mr. Crowe filed late
three (3) statements of change in beneficial ownership showing eight (8) transactions, and Mr. Crowe, Mr. Corlett and Mr. Vandecar each filed late annual statements with the SEC.





ITEM 10.    
EXECUTIVE COMPENSATION





Executive compensation is designed to provide incentives for those senior members of management who bear responsibility for our goals and achievements. Our compensation philosophy
is based on a base salary, with opportunity for significant bonuses to reward outstanding performance, and a stock option program.




42


---




Executive Officer Compensation





The following table sets forth compensation information for services rendered to the Company by certain
executive officers and others in all capacities during each of the prior two years. Other then as set forth below, no executive officers or other employees salary and bonus exceeded $100,000 in any of the applicable years. The following
information includes the dollar value of base salaries, draws, bonus awards, the number of stock options granted and certain other compensation, if any, whether paid or deferred.





SUMMARY COMPENSATION TABLE





Annual Compensation

Long Term Compensation(a)

(b)

(c)

(d)

(e)

(f)

(g)Name and Principal Position as of 6/30/01

Year Ending

Salary ($)

Bonus ($)

Other Annual Compensation ($)

Securities Underlying Options (#)

All Other Compensation ($) (1)Paul J Crowe

06/30/2001

200,000







0



3,000.00Chief Executive

06/30/2000

179,167.00

25,000.00


7,200.00


400,000Officer

06/30/1999

100,000.00




1,800.00


100,000Thomas G. Brown

06/30/2001

112,500.00







0Chief Financial

06/30/2000

110,000.00







3,000,000
(2)Officer

06/30/1999

15,000.00







350,000
(2)Anthony Turnbull

06/30/2001

30,769.28







30,000Vice PresidentFinanceEdmund Yochum

06/30/2001

130,000.00

14,618.59


35,381.41


370,000



3,600.00Vice PresidentBusiness      Develpment

06/30/2000

53,884.59







100,000



3,600.00Steve Vandecar

06/30/2001

117,269.59







150,000



2,450.00Vice President

06/30/2000

26,923.05







100,000



1,400.00OperationsJames Corlett

06/30/2001

127,019.21







400,000



3,600.00Vice President

06/30/2000

84,282.05




3,000.00


300,000



7,800.00Administration

06/30/1999

17,708.35




3,000.00


300,000


---

|(1) |  | All Other Compensation consists of auto allowances for Paul Crowe, Edmund Yochum, Steve Vandecar and James Corlett. These auto allowances ceased in December 2000.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(2) |  | Cancelled October 2001.
|--- |  | -----------------------



43


---




The following table sets forth the
options granted, if any, to the persons named in the Summary Compensation Table during the Companys fiscal year ended June 30, 2001.





LIST OF STOCK OPTIONS ISSUED TO DIRECTORS & OFFICERS


JULY 1, 2000 THROUGH JUNE 30, 2001





(a)

(b)

(c)

(d)

(e)Name and Job Title as of 6/30/01

Number of Securities Underlying Options Granted

% of Total Options Granted to Employees in Fiscal Year

Exercise or Base Price ($/Sh)

Expiration DateAnthony Turnbull Vice PresidentFinance


30,000
*



2.17%



0.562


2/28/05Edmund Yochum


100,000
**



7.23%



2.00


5/23/04Vice PresidentBusiness


150,000
***



10.85%



0.875


1/14/05Development


20,000




1.45%



1.031


1/18/04Steve Vandecar


50,000




3.62%



2.37%


11/19/04Vice PresidentOperations


100,000




7.23%



0.562


02/28/04James Corlett Vice PresidentOperations


100,000




7.23%



2.500


08/10/04Total


550,000




39.79%


---

*

Vesting 25% on 3/1/02 and the balance in 36 equal monthly installments thereafter.**

All vested.***

Vested 25% on 1/15/02 and the balance in 36 equal monthly installments thereafter.

Vesting 1/3each year.

Based on options to purchase 1,382,250 common shares granted during year.

Although Mr. Vandecar served as Vice PresidentOperations during the fiscal year ending June 30, 2001, he was not an officer or employee of the Company as
of June 30, 2001. Mr. Vandecar subsequently rejoined the Company in a new position prior to his previously granted options lapsing.




44


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The following table sets forth
information concerning the value of all exercisable and unexercisable options held by each person named in the Summary Compensation Table as of the Companys fiscal year ended June 30, 2001. Based on a closing price of $0.43 for the
Companys common shares as of June 30, 2001, none of the listed persons held In-The-Money options. None of the listed persons exercised any options during the fiscal year ending June 30, 2001.





FISCAL YEAR-END OPTION VALUES


AS OF JUNE 30, 2001





Name and Job Title as of 6/30/01

Number of Securities  Underlying Unexercised  Options as of June 30, 2001Exercisable

UnexercisablePaul Crowe Chief Executive Officer


500,000



0Thomas G. Brown(1) Chief Financial Officer


650,000



0Anthony Turnbull Vice PresidentFinance


0



30,000Edmund Yochum Vice PresidentBusiness Development


206,667



163,333Steve Vandecar(2) Vice PresidentOperations


100,000



150,000James Corlett Vice PresidentOperations


200,000



200,000


---

|(1) |  | All 650,000 options held by Mr. Brown were cancelled in October 2001.
|--- |  | ---------------------------------------------------------------------

|(2) |  | Although Mr. Vandecar served as Vice PresidentOperations during the fiscal year ending June 30, 2001, he was not an officer or employee of the Company as of June 30,
2001. Mr. Vandecar subsequently rejoined the Company in a new position prior to his previously granted options lapsing.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




We believe that the Company will only retain executives of caliber and experience if they are offered competitive compensation packages. Because the Company
cannot afford to pay high cash salaries, the granting of options is a critical component of the overall compensation paid to our officers. We believe it is uncompetitive and a disincentive to set the exercise price of options at unreasonable
premiums over the market price of the shares on the date of grant. Similarly, a decline in the price of the shares over a period when both the Companys business operations and prospects are improving, and our executives have made significant
contributions, but which is not offset by a reduction in the exercise price, is, we believe, unfair to those executives. A decline in our share price results in an effective increase in the premium of the exercise price over the market price which
penalizes the executives, and is potentially harmful to the Company if the executive then takes the view that their overall compensation package is becoming uncompetitive. We will continue to review the exercise prices and vesting dates of options
granted to our employees and may reprice and/or change vesting dates as we deem appropriate based on the prevailing price of our shares and the Companys business operations and prospects.





Employment and Consulting Agreements





On January 1, 1999, we entered into a five-year Employment Agreement with Paul J. Crowe, our Chief Executive Officer. Pursuant to this Employment Agreement Mr. Crowe currently
receives a salary of $200,000 per year, which beginning in the calendar year 2000 shall be increased by 10% if the average market price of our stock in December of the preceding year has increased by at least 10% above the average market price of
our stock in December of the second preceding year. The Employment Agreement also provides that the Board of Directors will review and evaluate Mr. Crowes performance annually and consider awarding him a discretionary bonus.





Thomas G. Brown was compensated for his service as our Chief Financial Officer under
a two-year non-exclusive Consulting Agreement dated April 1, 1999. The Consulting Agreement required that Mr. Brown devote




45


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as much time to our companys affairs as was reasonably necessary, but he was not required to spend more than two to three days per week on our premises. Under the Consulting Agreement, Mr.
Brown received a one-time grant of 100,000 shares of our Common Stock and an option to purchase 250,000 additional shares of our Common Stock at an exercise price $2.50 per share. He also received a salary of $10,000 per month. The Consulting
Agreement was not renewed and Mr. Brown ceased to be our Chief Financial Officer in April 2001.





On January 6, 1999, we entered into an Employment Agreement with James Corlett, our Vice PresidentOperations. Upon executing the Employment Agreement, Mr. Corlett received a
signing bonus consisting of 100,000 shares of our Common Stock. The Employment Agreement also provided for a salary to Mr. Corlett of $85,000 per year, which has since been increased to $130,000 per year. In addition, Mr. Corlett received an option
to purchase 300,000 shares of our Common Stock, vesting 100,000 shares at the end of each of the first three years during the term of the Employment Agreement. The exercise price of these options is $1.91 per share. Mr. Corlett was granted
additional options this year as indicated above.





We entered into a
Consulting Agreement dated January 29, 1999 with Michael Baybak and Company, Inc., a California corporation (Baybak). The Consulting Agreement provides that Baybak will provide major media consulting services for us. The Consulting
Agreement was initially for a period of fifteen (15) months and provided for compensation in the form of an option to purchase 150,000 shares of our Common Stock at an exercise price of $2.50 per share. These options expire on January 29, 2004. In
August 2000, the Consulting Agreement was extended for an additional twelve (12) month period, commencing April 29, 2000. No additional consideration was provided to Baybak in connection with the extension. The extension expired in April 2001.


We entered into a Consultancy Agreement with Dr. Piers Nicholas Plowman dated September 9, 1999. The Consultancy
Agreement provides that Dr. Plowman will oversee our operations in London, England. The Consultancy Agreement ends on December 31, 2000. Under the terms of the Consultancy Agreement, Dr. Plowman may receive (i) 50,000 options to purchase our shares
of Common Stock at an exercise price of $3.00 per share; (ii) 25,000 options to purchase our shares of Common Stock at an exercise price of $1.00 per share; (iii) the right to subscribe for 10,000 shares of Common Stock at the trading price; (iv)
the right to subscribe for up to 130,000 shares of Common Stock at prices ranging from $1.00 to $3.00 per share; and (v) a management fee equal to 5% of the net profit of our operations in England.





Director Compensation





In April 1999, we granted each of our directors an option to purchase 100,000 shares of our Common Stock. In addition, our directors are reimbursed for expenses actually incurred
in connection with attending meetings of the Board of Directors.





Medical Advisory Board Compensation





We compensate members of our Medical Advisory Board by granting them options to
acquire our Common Stock under our 1999 Stock Option Plan. Members of the Medical Advisory Board typically receive 25,000 options to purchase our Common Stock for their first year of service and 10,000 options to purchase our Common Stock for each
subsequent year of service. The exercise prices for options issued to the Medical Advisory Board range between $2.76 to $3.50 per share.





1999 Stock Option Plan





Our
1999 Stock Option Plan (the 1999 Plan) authorizes us to grant to our directors, employees, consultants and advisors both incentive and non-qualified stock options to purchase shares of our Common Stock. As of June 30, 2001 we have
reserved 8,000,000 shares for issuance under the 1999 Plan, of which 4,880,750 shares were subject to outstanding options and 3,119,250 shares remained available for future grants. Our Board of Directors or a committee appointed by the Board (the
Plan Administrator) administers the




46


---

1999 Plan. The Plan Administrator selects the recipients to whom options are granted and determines the number of shares to be awarded. Options granted under the 1999 Plan are exercisable at a
price determined by the Plan Administrator at the time of the grant, but in no event will the option price for any incentive stock option be lower than the fair market value for our Common Stock on the date of the grant. Options become exercisable
at such times and in such installments as the Plan Administrator provides in the terms of each individual option agreement. In general, the Plan Administrator is given broad discretion to issue options and to accept a wide variety of consideration
(including shares of Common Stock of the Company and promissory notes) in payment for the exercise price of options. The 1999 Plan was originally authorized by the Board of Directors and shareholders of Mobile Nevada. Our Board of Directors adopted
the 1999 Plan after the acquisition of Mobile Nevada by Colony Delaware.




47


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ITEM 11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





The following table sets forth certain information regarding beneficial ownership of our Stock as of October
17, 2001, (a) by each person who is known by us to own beneficially more than 5% of any class of our securities, (b) by each of our directors, and (c) by all of our officers and directors as a group.





Title of Class

Name and Address of Beneficial Owner

Amount and Nature of Beneficial Owner

Percentage of Class (1)BENEFICIAL OWNERS OF MORE THEN 5% OF ANY CLASS OF SECURITIESSer. A Preferred

York, LLC c/o Thomas Kernaghan & Co. 365 Bay Street, Suite 1000, 10th Floor Toronto, Ontario M5H2V2 CANADA


34



100%Ser. B Preferred

York, LLC c/o Thomas Kernaghan & Co. 365 Bay Street, Suite 1000, 10th Floor Toronto, Ontario M5H2V2 CANADA


60



100%Common

Paul J. Crowe c/o Mobile PET Systems, Inc. 2150 W. Washington St., Ste. 110 San Diego, California 92110


4,881,808(2)



13.67%Common

Bernd Steudle Elsässer Straße #7 Pforzheim D-75173 GERMANY


4,449,000(3)



12.63%Common

American Financial Communications, Inc. 495 Miller Ave. 3rd Floor Mill Valley, California 94941


2,700,000(4)



7.62%Common

Brent Nelson 10900 NE 8th Street, Suite 900 Bellevue, Washington 98004


1,800,000(5)



5.10%OFFICERS AND DIRECTORSCommon

Paul Crowe


See above



See aboveCommon

Robert C. Bush c/o Mobile PET Systems, Inc. 2150 W. Washington St., Ste. 110 San Diego, California 92110


302,000(6)



0.85%Common

James Corlett c/o Mobile PET Systems, Inc. 2150 W. Washington St., Ste. 110 San Diego, California 92110


333,333(7)



0.94%Common

Steve Vandecar c/o Mobile PET Systems, Inc. 2150 W. Washington St., Ste. 110 San Diego, California 92110


100,000(8)



0.28%Common

Edmund Yochum c/o Mobile PET Systems, Inc. 2150 W. Washington St., Ste. 110 San Diego, California 92110


210,467(9)



0.56%Common

TOTAL FOR ALL EXECUTIVE OFFICERS AND DIRECTORS


5,827,608



16.03%


---

|All | shares are owned directly unless otherwise indicated.
|--- | -----------------------------------------------------

|(1) |  | Based on a total of 35,224,338 outstanding shares of Common Stock as of October 17, 2001. Percentages are calculated based upon 35,224,338 shares of Common Stock outstanding
and the number of shares of Common Stock issuable upon exercise of options or conversion of warrants as of October 17, 2001 or within 60 days of that date for the person or persons indicated.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



48


---

|(2) |  | Includes 500,000 shares issuable upon the exercise of stock options and 80,000 shares issuable upon conversion of warrants.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes 1,234,000 shares issuable upon the conversion of warrants.
|--- |  | -------------------------------------------------------------------

|(4) |  | Includes 200,000 shares issuable upon the exercise of stock options.
|--- |  | --------------------------------------------------------------------

|(5) |  | Includes 100,000 shares issuable upon the exercise of stock options.
|--- |  | --------------------------------------------------------------------

|(6) |  | Includes 100,000 shares issuable upon the exercise of stock options and 50,000 shares issuable upon the conversion of warrants.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Includes 23,333 shares issuable upon the exercise of stock options
|--- |  | ------------------------------------------------------------------

|(8) |  | Includes 100,000 shares issuable upon the exercise of stock options.
|--- |  | --------------------------------------------------------------------

|(9) |  | Includes 206,667 shares issuable upon the exercise of stock options.
|--- |  | --------------------------------------------------------------------




ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





Brent Nelson, a director of our company from December 1998 until October 2001, is the President of Northwest Capital Partners, LLC. On December 15, 1998, we entered into a
Consulting Agreement under which Northwest agreed to advise us financially and assist us in arranging financing for our business operations. The Consulting Agreement has a three-year term, and Northwest has a right of first refusal to consult with
the Company regarding financings throughout the duration of the Consulting Agreement. The Consulting Agreement provides for payment of monthly consulting fees to Northwest in the amount of $5,000 per month. Commencing in April of 1999, Northwest has
waived payment of these monthly fees. The fee provision is subject to extension for 36 months upon the closing of certain financing transactions set forth in the Consulting Agreement. Pursuant to the Consulting Agreement, in December 1998 Northwest
was granted 1,200,000 shares of our Common Stock in exchange for its services in arranging interim financing for us. These shares were not assigned a specific value upon issuance because they were considered a cost of raising capital, and were
reported as a deduction from the proceeds from the issuance of stock, rather than as an asset or expense. In addition, Northwest will receive an additional 1,000,000 shares of our common stock if our market capitalization reaches $100,000,000 or
more. These shares would be subject to registration concurrently with our first public offering of stock after their issuance. Northwests obligations under the Consulting Agreement are subject to certain conditions to be performed by us,
including refraining from modifying our capital structure without Northwests prior written consent. In addition, the Consulting Agreement provides that for three years after the date that our common stock commences trading on the OTC Bulletin
Board, if we desire to issue new shares of stock or any of our officers or directors who hold 5% or more of our common stock (Principal Stockholders) desire to transfer their shares of our stock to a third party, we and the Principal
Stockholders are required to first offer such shares to us (if applicable), to Northwest, and then to the Principal Stockholders. The Consulting Agreement also requires our officers and directors and the Principal Stockholders to agree that for a
period of twelve months after our common stock commences trading on the OTC Bulletin Board, the Principal Stockholders will not sell any of their shares of common stock without Northwests prior written consent, which will not be unreasonably
withheld. Finally, the Consulting Agreement provides that Northwest is entitled to nominate a director for our board of directors for a period of five years. The Companys position is that all of its obligations under this agreement have been
terminated.





In December 1999, we entered into an oral agreement
for a loan in the amount of $50,000 from Northwest Capital Partners, LLC. The loan is non-interest bearing and is payable not later than six months from the date of the agreement, December 20, 1999. We repaid the loan in April 2000.




49


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Paul J. Crowe, the CEO and a
director of our company, is the Chairman, a director and majority shareholder of the London Radiosurgical Centre Ltd. (LRC). Effective July 30, 1999, we loaned $137,319.09 to the London Radiosurgical Centre pursuant to a Promissory Note
dated September 1, 1999. The Promissory Note provides that the unpaid principal balance on the loan bears interest at the rate of eight percent (8%) per year. The loan was originally due to be repaid on October 28, 1999. We have extended the
repayment date for the loan to November 1, 2001.





The Company
entered into a Memorandum of Agreement, effective as of June 1, 1999, which restructured an 8% interest in a subordinated equity participation in LRC. The subordinated equity participation is recorded at cost in the amount of $200,000. According to
the terms of the restructured agreement, net distributable cash flow is equal to net income less equipment financing payments, operating expenses, reserve capital and taxes. LRC shall distribute to the Company of 8.42% of LRCs net
distributable cash flow, until a total of $210,573 has been distributed and then distribute 5.05% of net distributable cash flow, subject to future dilution. Mr. Crowe personally guarantees the investment.





In addition, LRC provides office space under normal commercial terms to the Companys subsidiaries.
During the year ended June 30, 2001 the Company charged LRC approximately $240,791 in administrative expenses and LRC made cash payments of $227,590. At June 30, 2001 there is a balance due from LRC of $116.





During the year ended June 30, 2001 and 2000, the Company advanced without interest $500 and $405,129,
respectively, to London PET Centre, Ltd. (LPC) for working capital during LPCs start up period. At June 30, 2001 the balance due from LPC was $422,283. The advances are covered by a continuing corporate and personal guarantee by
Mr. Crowe.





In January 12, 2001, Paul J. Crowe loaned the Company
$25,000 at a rate of eight percent (8%) per year, evidenced by a promissory note with a due date of March 12, 2001. In connection with this loan the Company issued Mr. Crowe a warrant to purchase 5,000 shares of common stock at $1.05 per share,
expiring January 12, 2004. This note was extended on March 23, 2001 and became due June 30, 2001. The Company issued Mr. Crowe a warrant to purchase 5,000 additional shares of common stock at $0.44 per share, expiring January 12, 2004 in connection
with this extension. The note has been extended several more times without the issuance of additional warrants and is currently due on November 1, 2001.





In January 17, 2001, Paul J. Crowe loaned the Company $150,000 at a rate of eight percent (8%) per year, evidenced by a promissory note with a due date of
March 17, 2001. In connection with this loan the Company issued Mr. Crowe a warrant to purchase 35,000 shares of common stock at $0.88 per share, expiring January 17, 2004. This note was extended on March 23, 2001 and became due June 30, 2001. The
Company issued Mr. Crowe a warrant to purchase 35,000 additional shares of common stock at $0.44 per share, expiring January 17, 2001 in connection with this extension. The note has been extended several more times without issuance of additional
warrants and is currently due on November 1, 2001.





K. Ivan F.
Gothner was a director of the Company between May 2000 and October 2001. He is also the managing director of Adirondack Capital, LLC, a private merchant banking firm. In November 1999, we entered into an agreement with Adirondack Capital, LLC in
connection with its role as a financial advisor to us. As compensation for services rendered by Adirondack, we agreed to pay Adirondack a monthly cash retainer of $3,000. In addition, we issued to Adirondack, or its designee, a warrant to purchase
50,000 shares of our common stock. The warrant expires on December 31, 2006 and has an exercise price of $2.00 per share. This warrant was cancelled in October 2001.





In March 2000, Adirondack was paid $300,000 as a fee relating to the placement of the Series A Convertible Preferred Stock. In addition,
Adirondack, or its designee, was issued a warrant to purchase 300,000 shares of our Common Stock at a price of $3.00 per share. This warrant was cancelled in October 2001.




50


---




On October 12, 2001, the Company
entered into a Mutual General Release with Mr. Gothner and Adirondack providing for: (i) a mutual general release, except for the Companys continued obligation to indemnify Mr. Gothner from claims or liabilities arising from his service as a
director, provided such acts were within the scope of, and did not conflict with, his duties and responsibilities as a director; (ii) payment by us to Mr. Gothner of $2,340 to reimburse him for expenses; (iii) delivery of a promissory note by us to
Adirondack in the principal amount of $253,050, bearing no interest, payable $14,000 per month commencing October 15, 2001; and (iv) cancellation of all Adirondacks rights to acquire stock in the Company by way of options, warrants or
otherwise. Mr. Gothner also resigned as a director of the Company effective immediately.





On August 22, 2000, Robert Bush loaned the Company $200,000 at a rate of eight percent (8%) per year, evidenced by a subordinated note. This loan was renegotiated and under the
terms of the new loan, dated October 11, 2000, it became an eight percent (8%) loan in the amount of $200,000 due on or before December 11, 2000. This loans due date has been extended several times. On March 23, 2001 the Company issued Mr.
Bush a warrant to purchase 50,000 shares of common stock at a price of $0.44 per share, expiring August 31, 2003 in connection with one of these extensions. The note is currently due November 1, 2001.





On October 19, 2000, Thomas G. Brown provided the Company with an eight percent (8%) loan in the amount
of $100,000, which was due on or before November 30, 2000. In connection with this loan the Company issued Mr. Brown a warrant to purchase 25,000 shares of common stock at a price of $2.50 per share, expiring August 31, 2003. On March 23, 2001 this
loans due date was extended to June 1, 2001. The Company issued an additional warrant to purchase 25,000 shares of common stock at a price of $0.44 per share, expiring August 31, 2003, to Mr. Brown in connection with this extension.





On September 12, 2001, Mr. Brown filed suit against the Company in
the Superior Court of the State of California (County of Orange) for damages for default in the repayment of this promissory note and certain other claims. On October 12, 2001, the Company entered into a General Release with Mr. Brown providing for:
(i) a mutual general release, except for (a) Mr. Browns continued liability for acts or omissions conflicting with or outside his duties and responsibilities to the Company or otherwise constituting a breach of his fiduciary relationship with
the Company and (b) the Companys obligation to pay certain charge card accounts maintained in Mr. Browns name to be used for Company expenses, and to indemnify, defend and hold harmless Mr. Brown for claims or liabilities relating
thereto; (ii) cancellation by Mr. Brown of the original $100,000 promissory note; (iii) delivery of a second promissory note by us to Mr. Brown in the principal amount of $100,000, bearing 8% interest, payable $10,000 per month commencing November
1, 2001; (iv) payment by us on October 8, 2001 of $27,715.10 representing a principal payment of $20,000 and accrued interest in the amount of $7,715.10; (v) payment by us of $6,194.02 for the balance due under Mr. Browns Consulting Agreement
dated April 1, 1999; (vi) cancellation of all of Mr. Browns rights to acquire stock in the Company by way of options (Mr. Browns existing warrants remain in force); and (vii) Mr. Browns assignment to Neurotechnologies
International, Inc. of his entire ownership interest in Neurotechnologies International, Inc. Paul Crowe is currently President and CEO of NeuroTechnologies International, Inc. Mr. Brown also resigned as a director and officer of the Company and all
its affiliates, Neurotechnologies International, Inc. and all its affiliates and The London Radiosurgical Centre Ltd. and all its affiliates, effective immediately.




51


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ITEM 13.    EXHIBITS AND REPORTS ON FORM 8-K





(a)  Listing of Exhibits





The following exhibits are included as part of this Form 10-KSB, except those exhibits marked as having previously been filed with the Securities and Exchange Commission and which
are incorporated by reference to another registration statement, report or document. References to the Company in this Exhibit List mean Mobile PET Systems, Inc., a Delaware corporation.





Exhibit No.

Description

Reference2.1

Acquisition Agreement between Colony International, Inc. and the
Company


(1
)2.2

Acquisition Agreement between American Coin and Stamp Ventures, Inc. and Colony
     International, Inc.


(1
)3.1

Certificate of Incorporation, as amended


(2
)3.2

Amended and Restated Bylaws


(1
)3.3

Certificate of Designation of Series A Convertible Preferred
Stock


(3
)3.4

Certificate of Designation of Series B Convertible Preferred Stock


(8
)10.1

Equipment Lease No. 4125 with Finova Capital Corporation; Addendum I to      Equipment
Lease No. 4125; Addendum Nos. One and Two to Lease Schedule      No. 4125.01


(1
)10.2

Security Agreement with Finova Capital
Corporation


(1
)10.3

Common Stock Purchase Warrant with Finova Capital Corporation


(1
)10.4

Continuing Personal Guaranty between Paul J. Crowe and Finova Capital Corporation


(1
)10.5

Collateral Assignment of Agreements by the Company to Finova Capital Corporation


(1
)10.6

Subordination Agreement with Finova Capital
Corporation


(1
)10.7

Office Space Lease Agreement between Shelter Cove Marina, Ltd./San Diego Unified      Port
District and the Company


(1
)10.8

Form of Positron Emission Tomography Mobile Services Agreement


(1
)10.9

Promissory Note with The London Radiosurgical Centre, Ltd.


(1
)10.10

Letter Agreement with The London Radiosurgical Centre, Ltd.


(1
)10.11

Employment Agreement with Mr. Crowe


(1
)10.12

Employment Agreement with Mr. Corlett, as amended


(1
)10.13

Consulting Agreement with Mr. Brown


(1
)10.14

Consulting Agreement with Northwest Capital Partners,
LLC


(1
)10.15

Consulting Agreement with Michael Baybak and Company, Inc.


(1
)10.16

Consultancy Agreement with Dr. Piers Nicholas Plowman


(1
)10.17

1999 Stock Option Plan


(10
)10.18

Securities Purchase Agreement with York LLC


(4
)10.19

Sale/Leaseback Agreements with Finova Capital Corporation  Lease Schedule      No.
4125.01


(5
)




52


---

Exhibit No.

Description

Reference10.20

Sale/Leaseback Agreements with Finova Capital CorporationLease Schedule      No.
4125.02; Addendum No. One to Lease Schedule No. 4125.02; Bill of Sale for      one Calumet Coach


(4
)10.21

Sale/Leaseback Agreements with Finova Capital CorporationLease Schedule      No.
4125.02A; Lease Schedule No. 4125.02B; Addendum No. One to Lease      Schedule No. 4125.02B


(5
)10.22

Sale/Leaseback Agreements with Finova Capital CorporationAmendment No. One to
     Lease Schedule No. 4125; Lease Schedule No. 4125.03A; Amendment No. One to      Lease Schedule No. 4125.03A; Lease Schedule No. 4125.03B; Amendment No. One
     to Lease Schedule No. 4125.03B


(6
)10.23

Sale/Leaseback Agreements with Finova Capital CorporationAddendum No. One to
     Lease Schedule No. 4125.03B


(7
)10.24

Master Hire Purchase Agreement between IGE Medical Services Limited and the      Company


(5
)10.25

Office Space Lease Agreement between Shelter Cove Marina, Ltd. and the
     Company


(7
)10.26

Sales Office Sublease between Twenty-Five-Forty, LLC and the Company


(8
)10.27

Agreements between GE Healthcare Financial Services and the CompanyMaster
     Masterline (coach); Master Leaseline (scanner)


(8
)10.28

Positron Emission Tomography Mobile Services Agreement between the Company and      Salem
Hospital; First and Second Amendments


(8
)10.29

PET Imaging Services Agreement with Redwood Regional Medical Group;
     Amendment


(8
)10.30

Purchase Agreement between York LLC and the Company dated September 21,
     2000


(8
)10.31

Common Stock Purchase Warrant between York LLC and the Company dated      September 21,
2000


(8
)10.32

Form of Corporate and Personal Guaranty of Neurotechnologies International, Inc. and
     Paul Crowe, respectively, for the debt of London Radiosurgical Centres, Ltd. to the      Company dated July 1, 2000


(8
)10.33

Strategic Partnership Agreement dated December 19, 2000 between 43 GE Medical      Systems,
a division of General Electric Company, and Mobile PET Systems, Inc.


(9
)10.34

Consulting Agreement effective as of September 21, 2001, between Mobile PET      Systems,
Inc. and American Financial Communications, Inc.


(11
)21

Subsidiaries of the Registrant


(11
)23.1

Consent of Independent Accountants


(11
)


---

|(1) |  | Previously filed as an Exhibit to the Companys Form 10SB filed with the Securities and Exchange Commission on October 19, 1999.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Previously filed as an Exhibit to the Companys Form 10SB, Amendment No. 1, filed with the Securities and Exchange Commission on February 9, 2000.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Previously filed as an Exhibit to the Companys Form 10SB, Amendment No. 2, filed with the Securities and Exchange Commission on March 16, 2000.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Previously filed as an Exhibit to the Companys Form 10-QSB, Amendment No. 1, for the period ended December 31, 1999, filed with the Securities and Exchange Commission on
March 16, 2000.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



53


---

|(5) |  | Previously filed as an Exhibit to the Companys Form 10-QSB for the period ended March 31, 2000, filed with the Securities and Exchange Commission on May 22, 2000.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Previously filed as an Exhibit to the Companys Form 10-QSB, Amendment No. 3, for the period ended December 31, 1999, filed with the Securities and Exchange Commission on
May 31, 2000.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Previously filed as an Exhibit to the Companys Form 10-QSB, Amendment No. 1, for the period ended March 31, 2000, filed with the Securities and Exchange Commission on May
31, 2000.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Previously filed as an Exhibit to the Companys Form 10-KSB for the fiscal year ended June 30, 2000, filed with the SEC on October 11, 2000.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Previously filed as an Exhibit to the Companys Form 10-QSB, for the period ended March 31, 2001, filed with the SEC on May 23, 2001.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | Previously filed as an Exhibit to the Companys Form 10SB, filed with the Securities and Exchange Commission on October 19, 1999, and subsequently amended by vote of the
shareholders, held April 6, 2001, as reported on the Companys Form 10-QSB for the period ended March 31, 2001, filed with the SEC on May 23, 2001.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) |  | Previously filed as an Exhibit to the Companys Form 10-KSB for the fiscal year ended June 30, 2001, filed with the SEC on October 15, 2001.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------




(b)  Reports On Form 8-K





Form 8-K filed with the SEC on January 29, 2001, covering Amendment No. 1 to
Securities Purchase Agreement between York LLC and the Company, dated as of December 7, 2000.





Form 8-K filed with the SEC on July 23, 2001, covering the settlement of certain pending lawsuits pursuant to that certain Settlement Agreement and Conditional Release, dated May
30, 2001.




54


---

SIGNATURES





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





| | MO | BILE PET SYSTEMS, INC.
| | -- | ----------------------




| | By | : /s/    PAUL J.
CROWE
| | -- | ----------------------

| | Pau | l J. Crowe, President
| | --- | ---------------------




| | Da | te: October 29, 2001
| | -- | --------------------




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





| | By | : /S/    PAUL J.
CROWE
| | -- | ----------------------

| | Pau | l J. Crowe, President, Chief Executive Officer and Director
| | --- | -----------------------------------------------------------




| | Da | te: October 29, 2001
| | -- | --------------------




| | By | : /S/    ANTHONY
TURNBULL
| | -- | -------------------------

| | An | thony Turnbull, Chief Financial Officer, Secretary and Treasurer
| | -- | ----------------------------------------------------------------




| | Da | te: October 29, 2001
| | -- | --------------------




| | By | : /S/    ROBERT C.
BUSH
| | -- | -----------------------

| | Ro | bert C. Bush, Director
| | -- | ----------------------




| | Da | te: October 29, 2001
| | -- | --------------------






55