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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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Form 10-KSB





(Mark One)


|x |  | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------




| |  | For the fiscal year ended June 30, 2002
| |  | ---------------------------------------




| ̈ |  | TRANSITION REPORT 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 ending June 30, 2002 were $17,603,130.





The aggregate
market value of voting common shares held by non-affiliates of the registrant was $12,359,032 as of September 25, 2002 (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, without regard to derivative securities holdings).





There were 55,027,982 shares outstanding of
the registrants Common Stock as of September 25, 2002.





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

12ITEM 4

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

12PART II

13ITEM 5

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

13ITEM 6

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

16ITEM 7

FINANCIAL STATEMENTS

26ITEM 8

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

45PART III

45ITEM 13

EXHIBITS AND REPORTS ON FORM 8-K

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PART I





ITEM 1.

BUSINESS





Business Development





Mobile PET Systems, Inc. was incorporated in the State of Delaware on August 21, 1985. The Company commenced its current molecular imaging operations and changed its name
to Mobile PET Systems, Inc. in or about January 1999.





General Business





Mobile PET Systems, Inc. is a national provider of Positron Emission Tomography (PET) imaging services. PET produces 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 services to
hospitals and other healthcare providers in selected marketplaces in the United States. We have also provided fixed site services in the United Kingdom. We sold our United Kingdom operations in July 2002.





We provide use of our PET imaging systems integrated on mobile coaches or in fixed facilities. We typically provide the technical
personnel who implement the PET procedure under the direction of hospital physicians. In some cases, we train hospital technical personnel to implement the PET procedures. Our contracted services provide hospitals and other healthcare providers
access to this advanced diagnostic imaging technology so they can offer these services to their community.





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; 233 Broadway, New York, New York 10279; 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. One study projects total revenues from dedicated PET systems in the
United States to grow from a base of approximately $17 million in 1997 to more then $880 million in 2007.





The
installed base of PET systems in the United States has grown from approximately 188 units in 1999 to 348 units in 2000, and is projected to grow to approximately 894 units in 2002 and 3430 units in 2007. In 2000 an analysis of approximately 67% of
the United States installed base of systems indicated approximately 50% were installed in hospital facilities, 36% 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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The PET Technology and Procedure





State-of-the-art PET imaging systems (similar in appearance to a CT scanner) are comprised of high speed computers, integrated work stations, patient exam tables and full
ring detector gantrys.





Performing an actual PET procedure requires the introduction of a radioisotope by
intravenous injection. After absorption of the radioisotope, which takes approximately 45 minutes, the patient is positioned on the exam table. The exam table automatically travels through the full ring detector gantry and detects signals emitted
from the patient. The actual scanning procedure takes about 30-40 minutes. Upon completion, 3D full body diagnostic images ready for physician interpretation are produced on the computer.





A PET scan produces metabolic information of the body, unlike CT or MRI which produce only anatomical information. Metabolic changes are the first indication of disease.
PET scans are primarily utilized for the primary diagnosis and staging of cancer, heart disease and functional disorders.





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 3D whole body images of all of the body with one examination;
| | - |  | ----------------------------------------------------------------------




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




| |  |  | Provides more accurate initial staging of disease;
| | - |  | --------------------------------------------------




| |  |  | Provides staging of disease following therapy or surgery;
| | - |  | ---------------------------------------------------------




| |  |  | 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 staff physicians and patients to provide PET services. Increasingly, such health care providers are utilizing third parties, like our company, to provide technology-driven patient services.





The American Cancer Society reports that approximately 8.9 million Americans had a history of cancer in 1997 and nearly 1.3 million new
incidences are expected to be diagnosed in 2002 (Cancer Facts & Figures 2002, American Cancer Society, Inc., pages 1 and 4, available at www.cancer.org.). PET is currently recognized as one of the only metabolic diagnostic imaging
procedures powerful enough to accurately diagnose and stage 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




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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, 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 disease. PET 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 from visible symptoms. In addition, PET scans can differentiate Alzheimers from other types of dementia or depression. Before PET, the only way
to definitively diagnose Alzheimers was through an autopsy. PET scans can also detect Parkinsons disease. A labeled acid is used in 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 would be modified.





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




Our Services





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





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.




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We offer a comprehensive value added approach for our clients which includes:





| |  |  | A Medical Advisory Board to present 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Clinical website www.petadvances.comfor patient and physician information;
| | - |  | --------------------------------------------------------------------------




| |  |  | Electronic data transmission compliant with new HIPAA regulations;
| | - |  | ------------------------------------------------------------------




| |  |  | Facilitated planning and support to accommodate PET for fixed site development for our clients;
| | - |  | -----------------------------------------------------------------------------------------------




| |  |  | Strategic education plan supported by regional specialists who educate referring physicians; and
| | - |  | ------------------------------------------------------------------------------------------------




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




As of June 30, 2002, we had fifteen mobile units in operation, of which nine are CTI/Siemens Medical Systems ECAT-EXACT  PET systems, one is a CTI/Siemens Medical Systems ECAT-Accel  PET system, and five are General Electric Medical Systems-ADVANCE/NxI  PET Imaging Systems. Our one fixed site location was located in London, England, and was sold in July 2002. Three of the systems are under
capital leases with Finova Capital Corporation, three are under capital leases with Siemens Medical Systems, Inc., seven are under capital leases with General Electric, and three 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.





The most commonly used radiotracer is fluorodeoxy glucose (FDG). We obtain FDG from multiple sources, including Eastern Isotopes, Positron, Cox Nuclear Pharmacy, P.E.T. Net Pharmaceuticals and Syncor. While we have multiple sources,
FDG is highly perishable and we may not have multiple sources for each of our operating sites or routes.





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.





The Company is
licensed to provide PET services in 24 states. Regulatory and licensing requirements in many states 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.





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 the risk of technological obsolescence; (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 Mobile Services Agreement. These agreements generally have standardized provisions, which are subject to minor modifications based on the needs of a particular customer. Under these agreements, we provide use of our mobile PET system, along with a
minimum of one PET trained licensed Nuclear Medicine Technologist, for a specified number of days per week. Fees are based on a per-patient basis or a flat daily rate. A minimum number of PET exams per day are usually required.




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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 three or five-year term, which is subject to automatic renewal for a similar term. The agreements may be terminated for certain causes, or in
some cases without cause, generally on 180 days notice, as described in each of the agreements. Grounds for termination may include 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 generally require that we exclusively perform all PET services on our
customers sites. As of June 30, 2002, we had agreements with over 75 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 subsidiaries or joint ventures. We can start services using one of our mobile units during the development stage of a stationary site building awareness, patient values and a referral physician base.





Independent Diagnostic Testing Facility.    An Independent Diagnostic Testing Facility (IDTF) is a freestanding
or mobile PET unit that operates independently of a hospital. Operating as an IDTF allows the Company to enter into a long-term space rental agreement with a hospital, with the Company acting as the sole managing entity, or managing partner in the
case of a joint venture. This allows the Company to retain full decision making authority, bill insurance and Medicare directly at higher reimbursements rates, and use our experience in marketing and referral building to increase scan volumes.





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, except those generated by IDTFs, are paid directly by the hospital. As a result, we should realize a higher level of accounts receivable turnover and a lower allowance for uncollected receivables. 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 of the imaging procedure we provide. 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, 2002, 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. 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 Hodgkins and non-Hodgkins lymphoma in place of a gallium scan or lymphangiogram; and identification of metastases in melanoma recurrence in place of gallium studies.




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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. Effective August 1, 2000, reimbursement for APC 981 for FDG-PET oncology studies are set at $2,249.50, and include 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).





The expansion of Medicare reimbursement for PET clinical indications is outlined in the chart below:





Clinical indications

Permitted Reimbursements

Date ApprovedRb82 Cardiac Perfusion

In place of or following inconclusive SPECT

March 4, 1995Lung Cancer

Characterization of solitary pulmonary nodule

January 1, 1998Initial staging of lung cancerColorectal Cancer

Detection of the location of recurrent colorectal cancer in patients with rising CEA levels

July 1, 1999Lymphoma

Staging of lymphoma (Hodgkins and non-Hodgkins)Melanoma

Detection of recurrent melanomaLung Cancer (non-small cell)

Diagnosis, initial staging and restaging

July 1, 2001Colorectal Cancer

Diagnosis, initial staging and restagingMelanoma

Diagnosis, staging and restaging. Not covered to evaluate regional lymph nodesLymphoma

Diagnosis, initial staging and restagingHead & Neck Cancers

Diagnosis, initial staging and restagingEsophageal Cancer

Diagnosis, initial staging and restaging




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Clinical indications

Permitted Reimbursements

Date ApprovedEpilepsy Refractory Seizures

Pre-surgical evaluationFDG Myocardial Viability

Metabolic assessment after inconclusive SPECTLung Cancer SPN

Characterization definition changeBreast Cancer

Staging, restaging and response to therapy/treatment

October 1, 2002FDG Myocardial Viability

Primary or initial study for determining cardiac viability prior to revascularization





The implication of the foregoing CMS approvals is that a promising
medical surgery 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 and procedure for 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 new standard of health care for the diagnosis, staging and restaging of disease.





A majority of private insurers and HMOs currently reimburse for PET according to their own policies. Many industry observers believe with expanded reimbursement approved 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, a federal regulation commonly known as the
Stark Law imposes 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, thereby restricting physician referrals for PET services by an
investor-physician or a physician who has a compensation arrangement.





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.




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Our operations are also subject to Certificate of Need (CON) laws or regulations
in certain states. CON laws require we obtain approval from state authorities before commencing operations in certain states. Depending on the specific requirements of these various laws, this may make it difficult for us to expand our operations in
certain states. These laws may also make it more difficult for competitors to expand into areas where we hold a CON.





Our operations are subject to generally applicable environmental laws. Our equipment, operations and the materials we use generally do not require special handling or licensure as hazardous material, toxic
waste or medical waste. Our operations are subject to applicable Federal and State laws governing the use, possession and transportation of radioactive materials. We are subject to quarterly audits by qualified medical physicists
and periodic inspections.





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, as well as several regional competitors. We believe that we currently have the largest dedicated fleet of 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.





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 shared services and on the basis of value-added services. We will differentiate ourselves from potential competitors by professionally developing
our services with those hospitals and physicians who determine such services are beneficial for their patients.





Scheduling Services.    The Company offers scheduling and insurance pre-certification approval services to facilitate patient through-put and prompt payment. As of June 30, 2002, we provide twelve major
medical centers and our IDTF site with this service.




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Become the Dominant Provider of PET Services.    As of
June 30, 2002, we are licensed and actively operating mobile PET systems in 22 states and we are also licensed but not yet operating in two others. 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.





In each of our
geographic regions, we approach hospitals, imaging centers and medical groups which we believe require access to PET services. These prospective customers 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 Value Added 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 approach includes physician
education and a focused marketing effort to increase utilization. Our value added services include billing and collections, patient scheduling and third party contracting.





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 and has successfully founded, developed and executed 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, reimbursement
approvals expand and PET continues to gain increased acceptance by physicians resulting in replacing and/or supplementing other diagnostic imaging technologies. We have an opportunity to increase patient procedures by adding new customers, offering
new services (i.e. cardiac and breast imaging), which can increase the number of patient procedures performed.





Maximize Return on Invested Capital.    We seek to 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 focus is directed toward geographically expanding our business through organic growth rather than by acquisition, we may attempt to identify attractive strategic acquisition
opportunities that may arise improving our ability to (i) access lower cost




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financial resources; (ii) realize significant synergies from operating expense reduction and overhead cost savings; (iii) expand into new geographic markets; and (iv) increase top line growth.





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, value added services for billing, collections, and third-party contracting are available on request. We believe that these services play a key role in our ability to attract new business,
retain accounts and build patient procedures. We can provide patient scheduling services, billing and collection services for customers, which provide the company with additional service revenue.





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 and a Senior Vice President of Business Development manages them.





Direct education 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 referring physicians and their staff to our PET services and 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, enhancing our ability to attract and increase patient procedures.





Our target market includes
hospitals that have an on-site radiology and 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 these 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 are
working on approximately 20 to 30 business opportunities in each market.





Employees





At September 15, 2002, the Company employed 69 people on a full-time basis, with 15 people on a part-time basis for a total of 84
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 benefits plans and believes its employee relations are good.





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.





Until February 2002, we maintained an operations base at 2750 N. Texas Street, Fairfield, California 94533, where we leased 1,056 square feet for $1,426 per month. This
lease began on September 18, 2000. The lease has been terminated and the office has been closed.





In March 2002
the Company opened an office in the greater Palm Springs area as an Independent Diagnostic Treatment Facility, entering into a Professional Services Agreement and renting office space from a local hospital on a month to month basis.




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A wholly-owned subsidiary of the Company, London PET Centre Ltd., entered into a
sublease with London Radiosurgical Centre Ltd., in November, 2001, pursuant to which London PET Centre Ltd. subleased approximately 2000 square feet in a medical office building located at 154 Harley Street, London, England. This sublease was for
£3,333 (approximately $4,832) per month plus half the costs for electrical, maintenance, etc., and annual increases in future years. The sublease runs through October 9, 2022, with termination rights after October 9, 2007. The stock of the
London PET Centre was sold to Integrated Healthcare Management, SA, an unrelated Luxembourg company as of July 12, 2002, and the Company is no longer responsible for obligations under this lease.





ITEM 3.

LEGAL PROCEEDINGS





From time to time the Company becomes involved in legal
proceedings, either as a plaintiff or defendant. The Company is currently involved in several such proceedings to enforce the termination provisions or minimum number of procedure provisions of its service contracts. The Company believes none of
these proceedings, either alone or in aggregate, are material.





On May 10, 2002 the Company was served with a
summons and complaint, filed April 29, 2002 in the Chancery Court for Knox County, Tennessee. This action by P.E.T. Net Pharmaceuticals, Inc. seeks to recover $567,101 for failure to pay for isotopes and radiopharmaceuticals delivered pursuant to a
Preferred Provider Radiopharmaceutical Supply Agreement dated June 5, 2000. The Company has informed P.E.T. Net Pharmaceuticals, Inc. in the past that the Company did not believe it was being charged in accordance with the terms of the Preferred
Provider Radiopharmaceutical Supply Agreement. In September 2002 the Company agreed to settle this claim for a lesser amount.





Although there is currently no pending legal proceeding, the Company received notice, dated April 4, 2002, from Finova Capital Corporation of an Event of Default relating to certain violations of Debt Service Ratio covenants
contained in Capital Equipment Leases with the Company.





The Company received written notice, dated March 19,
2002, from Siemens Financial Services of an Event of Default relating to failure to make equipment lease payments when due. These payments were made current in July 2002 and Siemens has withdrawn the notice of default.





ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





None.




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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, markdown or commission and may not necessarily represent actual transactions.





Mobile PET Systems, Inc.

High Bid

Low BidFISCAL YEAR 2000-2001FIRST QUARTER (7/1/00-9/30/00)

3.7500

2.0000SECOND QUARTER (10/1/00-12/31/00)

3.1250

0.7500THIRD QUARTER (1/1/01-3/31/01)

1.0930

0.4370FOURTH QUARTER (4/1/01-6/31/01)

1.0625

0.4200FISCAL YEAR 2001-2002FIRST QUARTER (7/1/01-9/30/01)

0.6700

0.3500SECOND QUARTER (10/1/01-12/31/01)

0.8800

0.5600THIRD QUARTER (1/1/02-3/31/02)

0.7500

0.4000FOURTH QUARTER ( 4/1/02-6/31/02)

0.7300

0.4900





As of June 30, 2002, our common shares were held by 300
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.




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Equity Compensation Plans





As of June 30, 2002, we have issued the following equity compensation under plans or individual arrangements:





(a)

(b)

(c)Plan Category

Number of securities to be issued upon exercise of outstanding options, warrants and rights

Weighted-average exercise price of outstanding options, warrants and rights

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected
in column(a))Equity compensation plans approved by security holders(1)

4,082,709

$1.70

3,917,291Equity compensation plans not approved by security holders(2)

2,183,762

$0.72

-0-Total

6,266,471

$1.36

3,917,291


---

|(1) |  | The Companys only equity compensation plan approved by security holders is its 1999 Stock Option Plan.
|--- |  | -------------------------------------------------------------------------------------------------------

|(2) |  | The Company has entered into certain compensation arrangements from time to time. The Company has issued individual warrants to purchase common stock to
consultants and service providers, including the Companys Medical Advisory Board, and to officers and directors who have provided services or advanced credit to the Company. The number shown for this category includes (i) only warrants issued
for compensation to consultants and service providers and (ii) all warrants issued to officers and directors, whether as compensation for services, advancing credit, or otherwise. Not included are warrants issued to vendors or to purchasers of the
Companys stock in connection with the sale of such stock or warrants issued after June 30, 2002. As of June 30, 2002, the Company had issued warrants to purchase a total of 10,564,327 common shares (including those shown above), at a
weighted-average exercise price of $0.59.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Recent Sales of Unregistered Securities





As previously reported, during the period between April 1, 2002 and April 15, 2002, we sold an additional 2,728,571 shares of common stock
and 1,364,286 warrants to purchase common stock exercisable for a period of 2 years at $0.35 per shares, in reliance on Section 4(2) of the Act. The total proceeds of this offering was $955,000.





At the April 5, 2002 meeting of the board of directors, effective March 22, 2002, the Company approved the issuance to Mr. Crowe of a warrant to purchase
1,366,510 shares of common stock at a price of $0.58 per share, exercisable at any time before March 22, 2005. This warrant was issued in consideration for his continuing guarantee of certain Company obligations. This issuance was made pursuant to
Section 4(2) of the Act.





As previously reported, on or about April 10, 2002, we received a notice to convert
three (3) shares of Series B Preferred Stock into 414,934 shares of Common Stock. These conversions were in reliance on Section 4(2) of the Act. The re-sale of these common shares is the subject of an SB-2 registration statement.





On or about June 11, 2002, we issued to three members of our Medical Advisory Board warrants to purchase 163,000
shares of our common stock at a price of $0.58 per share. These warrants are immediately exercisable and will expire in five years. This issuance was in reliance on Section 4(2) of the Act.





On or about June 11, 2002, in consideration for renewal of a loan to the Company, we issued to Paul Crowe, a director and officer, a warrant to purchase 26,305 shares of
our common stock at a price of $0.59 per share. These warrants are immediately exercisable and will expire in five years. This issuance was in reliance on Section 4(2) of the Act.





As previously reported, on July 31, 2002, we sold 10,000,000 shares of common stock and warrants to purchase 3,000,000 Common Shares, all for a price of $6,000,000,
pursuant to a Securities Purchase Agreement dated July 12, 2002 by and between Mobile PET, Ivan Bradbury and Integrated Healthcare Management, S.A., a




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Luxembourg company. The warrants are exercisable at any time until July 31, 2007 at a price of $0.448 per share (representing 80% of the average closing price of Common Shares for the 5 trading
days before the closing date of July 31, 2002). Mr. Bradbury, as purchaser under the Securities Purchase Agreement, assigned his rights to Dragon Nominees Limited (Dragon), a company organized under the laws of England and Wales.
Registration rights for the common shares sold and issuable upon exercise of the warrant were also granted. This issuance was in reliance on Section 4(2) of the Act.





As previously reported, also on July 31, 2002, we sold 1,250,000 common shares and warrants to purchase 375,000 common shares. We received $750,000 in connection with this
transaction, $500,000 of which had been previously advanced. That previous advance was restricted for use in connection with the redemption of our preferred stock, and was required to be returned if not so used, and this part of the transaction also
resulted in modifying the terms of a previous sale of common shares and warrants for that portion of the consideration previously advanced. The warrants sold in this transaction are exercisable at any time until July 31, 2007 at a price of $0.448
per share (representing 80% of the average closing price of Common Shares for the 5 trading days before the closing date of July 31, 2002). Registration rights for the common shares sold and issuable upon exercise of the warrant were also granted.





As previously reported, also on July 31, 2002, we entered into and consummated a Redemption Agreement with York,
LLC to redeem all of our outstanding Series A and Series B 8% Cumulative Convertible Redeemable Preferred Stock. We paid $3,784,071.97 to York, LLC in connection with this redemption ($500,000 of which had previously been advanced). As a result, we
have no preferred stock outstanding. As part of this transaction we agreed to re-price certain existing warrants held by York, LLC to purchase 199,851 common shares. Before re-pricing, these warrants had exercise prices varying between $5.00 per
share to $2.5125 per share and expire in February, September and November of 2005. After the re-pricing such warrants may be exercised for $1.00 per share. No change was made in the expiration date of these warrants. This issuance was in reliance on
Section 4(2) of the Act.





On July 1, 2002, we entered into an employment agreement with Thomas H. Insley pursuant
to which he became our Chief Financial Officer. Pursuant to the terms of that agreement, we agreed to grant Mr. Insley a warrant to purchase 1,000,000 common shares at a price of $0.60 per share. This warrant will vest at a rate of 16,667 shares per
month, commencing August 1, 2002. The warrant will be exercisable until July 1, 2008. This issuance was in reliance on Section 4(2) of the Act. The formal warrant document has not yet been prepared.





On September 9, 2002 we issued 114,286 common shares to Windsor Capital valued at $60,000 pursuant to the previously reported contractual
arrangement with them for financial consulting services rendered from August 2002 through February 2003. This issuance was in reliance on Section 4(2) of the Act.





On September 12, 2002, we entered into an agreement with a former director resolving claims asserted by the former director under a consulting contract. This agreement
provided for the Company to issue 500,000 shares of common stock, having a fair market value of $225,000 as of the date the agreement was executed, and a release of the former directors claims against us. This issuance was made pursuant to
Section 4(2) of the Act.




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ITEM 6.

MANAGEMENT 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. 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 and provide this advanced diagnostic imaging patient service.





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





As of June 30, 2002 we were providing our services to over 75 accounts, which consisted of hospitals and physicians in the United States.
We believe there are and will be significant opportunities to develop and operate additional mobile and stationary PET facilities.





As of June 30, 2002 we owned and operated the only private sector stationary PET facility in the United Kingdom. We sold this facility in July 2002. We have measured the financial position and results of operations of
our United Kingdom subsidiaries using local currency as the functional currency. We translated our assets and liabilities into U.S. dollars at the rates of exchange at the balance sheet date and 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 shareholders equity.
Transaction gains and losses are reflected in the statements of cash flows as the effect of exchange rate changes on cash.





Our consolidated revenues for the year ended June 30, 2002 were $17,603,130, compared to the year ended June 30, 2001, in which we had revenues of $7,163,312.





We continue our efforts to develop and expand our service business by developing, deploying and operating additional mobile and stationary PET or PET/CT systems. As of June
30, 2002 we had 15 mobile systems operating throughout the United States and 1 stationary PET facility, which was sold in July 2002, in the United Kingdom.





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.





The principal components of our operating overhead costs consist 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, 2002, we have incurred a cumulative net loss of $23,204,517. For the year ended June 30, 2002, we incurred a consolidated loss




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from operations of $2,646,873, compared to a consolidated loss from operations of $7,397,099 for the year ended June 30, 2001. Our consolidated net loss for the year ended June 30, 2002 was
$4,836,720, compared to a consolidated net loss for the year ended June 30, 2001 of $9,611,796. We anticipate that our operating losses during fiscal 2003 should decrease from current levels as we decrease per unit operating costs, deploy additional
mobile units or stationary sites, realize higher utilization of our services and subsequently grow our revenues. We have implemented cost reductions by reducing administrative and travel expense and by negotiating higher discounts for service and
radiotracers. 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 year ended June 30, 2002 we have raised $4,230,000 of new equity capital through private
placements, the issuance of common 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 in the past and may lose money in the future.





We have incurred
significant losses since our formation. We may not be able to generate sufficient revenues from sales to fund continuing operations or achieve 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;
| | - |  | -------------------------------------------------------------------------------------------




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




Certain of our indebtedness is secured by equipment and other assets of the Company. If the Company defaults and the creditors foreclose,
the Company and its operations could be materially and adversely effected.




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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.





Acceptance of our services by the medical community or by patients may not grow, which may impair our future sales and profitability.





High cost, concerns by patients and physicians relating to safety and efficacy, and the substantial acceptance of other diagnostic tools such as MRIs or CT scans may
interfere with the growing acceptance of PET technology. We have a limited sales force and may need to hire additional technologists and sales and marketing personnel to grow the acceptance of PET services. We believe PET technology is now accepted
as a valid diagnostic and staging tool for certain conditions, but we cannot promise this acceptance will continue to expand to other conditions.





Our ability to continue operations depends on our ability to achieve profitability.





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. Our ability to experience profitability in the
future will depend in part on our ability to successfully market and sell PET services on a wide scale. If we are unable to do so, we will be unable to grow revenues and achieve profitability.





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





Our capital requirements associated with our 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.





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





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.





We have a significant number of shares that are eligible for future sale.





Virtually all of the Companys outstanding stock was issued and sold pursuant to exemptions from registration with the Securities and
Exchange Commission and state securities agencies. These shares and shares held by our affiliates are considered restricted securities and may be resold pursuant to an effective registration statement or in compliance with SEC Rule 144.
Rule 144 generally provides that a person holding restricted securities for one year from the date the securities were purchased from the issuer, or from an affiliate of the issuer, and fully paid, may sell limited quantities of the securities to
the public without registration, provided




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certain public information with respect to the issuer is available. Pursuant to Rule 144, securities held by non-affiliates for more than two years may generally be sold without reference to the
current public information or broker transaction requirements, or the volume limitations. A significant number of shares are currently available for resale pursuant to Rule 144 and more shares will become so in the future.





In addition, the Company has granted registration rights in connection with the sale of a significant number of its shares. The exercise
of such rights would require the Company to prepare and file one or more registration statements for the resale of the Companys shares.





The resale of formerly restricted shares, whether pursuant to Rule 144 or a registration statement, could have a material negative impact upon the market price for the common shares.





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, TN, Siemens Medical Systems, Inc. of Iselin NJ
and GE Medical Systems of Milwaukee, WS. 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.





The most commonly used radiotracer is fluorodeoxy glucose (FDG). We obtain FDG from multiple sources, however, FDG is highly perishable and we may not have multiple sources for each of our operating
sites or routes. Any interruption in the supply and/or delivery of FDG could materially harm our ability to expand out 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.





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 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 seventeen percent of our client contracts
expire in 2002, fifteen percent in 2003, twenty-six percent in 2004, twenty-six percent in 2005, and sixteen percent in 2006. Moreover, approximately one-third of our client contracts permit the client, upon typically 180 days notice, to terminate
the




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contract without cause, and approximately 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 our clients or we are subject, we may be subject to the applicable penalty 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




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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 or 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 or retain qualified sales persons and skilled technologists at economically reasonable compensation levels could adverse 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 and marketing 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.





Providing mobile PET shared services involves the inherent risk of professional and product liability claims against us. We currently
maintain commercial general liability, including medical professional liability, insurance coverage in the amount of $1 million per incident and $3 million in the aggregate, 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 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.




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





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 states in which we operate requires 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 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.




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




We may experience seasonality in the sale of our services. For example, first quarter revenues
may be affected by client and patient vacation schedules. Second quarter revenues may be affected by client and patient holiday and vacation schedules and inclement weather, the results of which may be fewer patient scans during the period. Third
quarter revenues may be affected by fewer calendar days and inclement weather, the results of which may be 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 factors, 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 majority of our operating costs are fixed, so 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.




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We have a relatively limited operating history.





Our prospects must be considered in connection with the risks, uncertainty, expenses and difficulties frequently encountered by relatively
new companies, particularly in new and rapidly evolving markets such as those for the services we provide.





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





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





We took delivery on our first PET unit in July 1999 and began accruing revenues in August 1999. During the
year ended June 30, 2002 , we had fifteen mobile units and one fixed site in service, generating revenues of $17,603,130, and incurring cost of services of $10,908,826, compared to $7,163,312 in revenues and $5,183,434 in cost of services for the
year ended June 30, 2001. This substantial difference in revenues and costs is largely attributable to the addition of one unit early in the year ended June 30, 2002 plus far better utilization of each existing unit. In addition, greater efficiency
in managing mobile unit operating costs, which consist primarily of salaries paid to technologists and drivers, system maintenance, transportation and insurance on our mobile PET systems, resulted in an improvement in our gross profit from 27.6% for
the year ended June 30, 2001 to 38.0% for the year ended June 30, 2002. As a result of these activities, accounts receivable increased to $3,419,701, net of allowance for doubtful accounts, as of June 30, 2002, as compared to accounts receivable of
$2,056,752, net of allowance for doubtful accounts, as of June 30, 2001.





Our loss from operations was $2,646,873
for the year ended June 30, 2002 compared to our loss from operations of $7,397,099 for the year ended June 30, 2001.





General and administrative expenses for the year ended June 30, 2002 were $7,659,790 as compared to $6,009,284 for the year ended June 30, 2001. The increase resulted primarily from increased investor relations fees of $916,359
(including non-cash charges of $875,000 related to common stock issued as a fee for such services), increased professional and consulting fees of $422,857 (including non-cash charges of $225,000 related to the settlement of a consulting contract),
increased expenses of the London PET Centre of $102,602 and increased late and other finance fees of $260,635.





Selling and marketing expenses for the year ended June 30, 2002 were $1,681,387 as compared to $3,367,693 for the year ended June 30, 2001. The decrease resulted primarily from a substantial reduction in our sales force during the
year ended June 30, 2002, which reduced salaries by $1,180,833 and travel costs by $563,018.





Liquidity and Capital Resources





At June 30, 2002, our total assets were $20,876,584, compared to $21,947,273 at June 30, 2001. Our current
assets at June 30, 2002 totaled $5,037,607 and our current liabilities were $12,581,697, as compared to June 30, 2001, which reflected current assets of $3,444,272 and current liabilities of $8,149,809 current liabilities include obligations under
capital leases expected to be paid within the next fiscal year, as well as lease obligations currently in default. Shareholders' equity at June 30, 2002 increased to $(379,795) from $(388,501) at June 30, 2001, due mainly to common stock issued in
private placements of $4,230,000 and for services of $1,060,251, offset by our net loss.





Our cash increased by
$23,367 during the year ended June 30, 2002. This resulted from net cash provided by financing activities, primarily the sale of common stock, reduced by payments against leases and loans, of




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$1,178,845, offset by cash used in operations of $615,475 and investing activities, primarily capital expenditures for computers and related equipment, of $540,003.





In July 2002, we sold our London operations for $2,200,000. We also sold 11,250,000 shares of our common stock, and warrants to purchase
3,375,000 shares of common stock, in two private placements for $6,750,000 (although $500,000 of this had been received and recorded in the previous fiscal quarter). We used $3,784,072 of these proceeds to redeem all our outstanding Series A and
Series B Preferred Stock. The remainder will be used for working capital purposes.




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ITEM 7.

FINANCIAL STATEMENTS





INDEPENDENT AUDITORS REPORT





To The Board of Directors


and Shareholders of


Mobile PET Systems, Inc.





We have audited the consolidated balance sheets of Mobile PET Systems, Inc. and subsidiaries as of June 30, 2002 and 2001, 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 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, 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, 2002 and 2001, 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.





PETERSON & CO.





San Diego, California


September 25, 2002




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##### Table of Contents

MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


June 30, 2002 and 2001





2002


2001ASSETSCurrent assetsCash

$
94,143


$
63,080Accounts receivable, net of allowance for doubtful accounts of $116,000 and $116,000 at June 30, 2002 and 2001,
respectively


3,419,701



2,056,752Prepaid expenses


676,076



838,164Deposits and other assets


847,687



486,276Total current assets


5,037,607



3,444,272Property and equipment, net


15,146,597



17,708,992Other assetsAccrued interest receivable


10,573



10,573Due from London Radiosurgical Centre, Ltd


129,317



238,566Subordinated equity participation


200,000



200,000Restricted cash


352,490



344,870Total assets

$
20,876,584


$
21,947,273LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilitiesAccounts payable

$
4,315,483


$
2,413,170Current portion of long-term debt


27,730



18,071Loans payable to related parties


504,650



475,000Accrued and other liabilities


793,134



1,256,482Other liabilities


301,448



38,703Obligations under capital leasecurrent


6,639,252



3,948,383Total current liabilities


12,581,697



8,149,809Noncurrent liabilitiesObligations under capital lease


8,602,488



14,104,610Long-term debt


72,194



81,355Total liabilities


21,256,379



22,335,774Shareholders equity (deficit)Preferred stock; 10,000,000 shares authorized:Preferred stock; Series A; 23 and 34 shares issued and outstanding at June 30, 2002 and 2001,
respectively


1,355,535



2,033,311Preferred stock; Series B; 27 and 30 shares issued and outstanding at June 30, 2002 and 2001,
respectively


1,591,299



1,768,110Common stock; $0.0001 par value; 90,000,000 shares authorized; 44,966,267 and 25,484,086 shares issued and outstanding
at June 30, 2002 and 2001, respectively


4,497



2,549Additional paid in capital


20,186,052



14,495,683Accumulated deficit


(23,204,517
)


(18,367,797
)Foreign currency translation adjustment


(312,661
)


(320,357
)Total shareholders equity (deficit)


(379,795
)


(388,501
)Total liabilities and shareholders equity (deficit)

$
20,876,584


$
21,947,273





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




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##### Table of Contents

MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS


For the Years Ended June 30, 2002 and 2001





2002


2001Service revenues

$
17,603,130


$
7,163,312Cost of service revenues


10,908,826



5,183,434Gross profit


6,694,304



1,979,878ExpensesSelling and marketing


1,681,387



3,367,693General and administrative


7,659,790



6,009,284Total expenses


9,341,177



9,376,977Loss from operations


(2,646,873
)


(7,397,099
)Other income (expense)Interest income


8,359



32,137Other expense


(29,389
)


(9,760
)Interest expense


(2,167,217
)


(2,235,474
)Total other income (expense)


(2,188,247
)


(2,213,097
)Loss before provision for income taxes


(4,835,120
)


(9,610,196
)Provision for income taxes


1,600



1,600Net loss


(4,836,720
)


(9,611,796
)Preferred stock dividend


236,625



478,525Net lossavailable to common shareholders

$
(5,073,345
)

$
(10,090,321
)Loss per sharebasic

$
(0.16
)

$
(0.60
)Loss per sharediluted

$
(0.16
)

$
(0.60
)











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




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##### Table of Contents

MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY


For the Years Ended June 30, 2002 and
2001





Preferred Stock


Common Stock

Additional Paid
In Capital


Accumulated Deficit


Foreign Currency Translation Adjustment


Total Shareholders EquityShares


Amount


Shares

AmountBalance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








3,710,584


371


1,820,779











1,821,150Common stock issued through exercise of options








25,000


3


47,497











47,500Common stock issued through conversion of preferred stock

(26
)


(1,320,035
)

1,716,157


171


1,319,864











Common stock issued through conversion of preferred dividends








75,356


8


66,266



(66,274
)






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


















(9,520,723
)






(9,520,723
)Foreign currency translation adjustment






















(278,153
)


(278,153
)Balance as originally reportedJune 30, 2001

64



3,801,421


25,484,086


2,549


14,495,683



(18,276,724
)


(321,091
)


(298,162
)Prior period adjustmentaccrued expenses


















(91,073
)


734



(90,339
)Balance as restatedJune 30, 2001

64



3,801,421


25,484,086


2,549


14,495,683



(18,367,797
)


(320,357
)


(388,501
)Common stock issued in private placements, net of offering costs








13,999,998


1,400


4,228,600











4,230,000Common stock issued through conversion of preferred stock

(14
)


(854,587
)

2,158,138


215


854,372











Common stock issued as finders fee








161,714


16


(16
)










Common stock issued for services








3,062,331


307


1,059,944











1,060,251Common stock issued as compensation








100,000


10


42,990











43,000Options and warrants issued as compensation and for services














(495,521
)










(495,521
)Net loss


















(4,836,720
)






(4,836,720
)Foreign currency translation adjustment






















7,696



7,696BalanceJune 30, 2002

50


$
2,946,834


44,966,267

$
4,497

$
20,186,052


$
(23,204,517
)

$
(312,661
)

$
(379,795
)





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




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##### Table of Contents

MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


For the Years Ended June 30, 2002 and 2001





2002


2001Cash flows from operating activitiesNet loss

$
(4,836,720
)

$
(9,611,796
)Adjustments to reconcile net loss to net cash used in operating activitiesDepreciation and amortization


3,102,398



2,353,268Interest






53,807Non cash stock option (credit) charge


(495,521
)


413,915Common stock issued for compensation


43,000



Common stock issued for services


1,060,251



201,675(Increase) decrease in operating assetsAccounts receivable


(1,362,949
)


(1,585,446
)Due from London Radiosurgical Centre, Ltd.


109,249



219,634Prepaid expenses


162,088



(596,403
)Deposits and other assets


(361,411
)


842,814Restricted cash


(7,620
)


(15,390
)Accrued interest receivable






32,384Increase (decrease) in operating liabilitiesAccounts payable


1,902,313



1,780,771Accrued and other liabilities


69,447



837,089Deferred revenue






(12,714
)Net cash used in operating activities


(615,475
)


(5,086,392
)Cash flows from investing activitiesCapital expenditures


(540,003
)


(326,471
)Net cash used in investing activities


(540,003
)


(326,471
)Cash flows from financing activitiesRepayments of loans


(317,502
)


(9,327
)Proceeds from loans


77,600



1,333,753Payments on obligations under capital lease


(2,811,253
)


(1,359,782
)Common stock issued


4,230,000



3,618,650Preferred stock issued






1,385,000Net cash provided by financing activities


1,178,845



4,968,294Net increase (decrease) in cash


23,367



(444,569
)Effect of exchange rate changes in cash


7,696



(13,384
)Cashbeginning of year


63,080



521,033Cashend of year

$
94,143


$
63,080SUPPLEMENTAL DISCLOSURESInterest paid

$
2,181,309


$
1,854,747Income taxes paid

$
1,600


$
NON CASH INVESTING ACTIVITIESEquipment under capital lease

$



$
13,730,169NON CASH FINANCING ACTIVITIESPreferred stock dividendbeneficial conversion feature

$
231,671


$
478,525Conversion of debt to equity

$



$
750,000Obligations under capital lease

$



$
13,730,169Conversion of liability to note payable

$
20,000


$






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




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##### Table of Contents

MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED 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 providing 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 a 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.





Revenue Recognition





Service revenues from health care organizations is recognized when services are rendered.





Service revenues from third party payors is reported at net realizable amounts. Revenue under third party payor agreements is
subject to adjustment. Provisions for estimated third party payor settlements are provided in the period the related services are rendered. Differences between estimated amounts and accrued and interim and final settlements are reported in
operations in the year of settlement.





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.




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##### Table of Contents



MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)







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, 2002 and 2001 was $101,931 and $234,280, respectively.





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.





Fair Value of Financial Instruments





The Companys financial instruments consist primarily of cash, accounts receivable, prepaid expenses, deposits, long-term equity participation investment, accounts payable, loans payable, obligations under capital lease and
notes payable. The Company believes the fair value of financial instruments approximate book value at June 30, 2002.





Reclassifications





Certain reclassifications have been made in the June 30, 2001 financial
statements to conform to June 30, 2002 presentation. Such reclassifications include separately identifying selling and marketing expenses as well as reclassifying from general and administrative expenses $1,984,124 to cost of service revenues and
$294,289 to interest expense. These changes had no impact on previously reported net loss or shareholders equity.





NOTE
3  ACQUISITIONS





Mobile PET Systems, Inc. was incorporated in the State of Nevada on December
1, 1998. On December 22, 1998, Mobile PET 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 was accounted for as a reverse
merger, under the purchase method of accounting. Accordingly, the combination of the




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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 3  ACQUISITIONS (Continued)




Mobile PET Systems, Inc. and Colony International Incorporated and subsidiary was 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. Mobile PET Systems (UK) Limited is currently inactive.





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





On October 12, 2001, the Company incorporated a wholly owned subsidiary, Molecular Imaging Corporation, a Delaware corporation.





On March 25, 2002, the Company formed wholly owned subsidiaries, MBPT #3 LLC and MBPT #4 LLC, Delaware Limited
Liability Companies and on April 3, 2002, the Company formed wholly owned subsidiaries, MBPT #1 LLC and MBPT #2 LLC, California Limited Liability Companies for the purpose of providing fixed site PET services. These limited liability companies are
currently inactive.





NOTE 4  PREPAID EXPENSES





Prepaid expenses consist of the following at June 30, 2002 and 2001:





2002

2001Prepaid equipment rent

$
503,986

$
547,990Other


172,090


290,174$
676,076

$
838,164





NOTE 5  PROPERTY AND EQUIPMENT





Property and equipment at June 30, 2002 and 2001 consist of the following:





2002


2001Computer equipment

$
1,421,843


$
1,064,891Office furniture and fixtures


211,610



171,456Office equipment


12,752



12,752Leasehold improvements


7,070



Equipment


19,413,346



19,277,52021,066,621



20,526,619Less accumulated depreciation


(5,920,024
)


(2,817,627
)$
15,146,597


$
17,708,992


|
|

Depreciation expense for the years June 30, 2002 and 2001 was $3,102,398 and $2,353,268, respectively.




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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 6  DEPOSITS AND OTHER ASSETS







Deposits and other assets consist of the following at June 30, 2002
and 2001:





2002

2001Equipment depositsMobile PET Units

$
325,580

$
385,580Equipment rental depositsother





49,000Preferred stock redemption deposit


500,000


Other


22,107


51,696$
847,687

$
486,276





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





NOTE 7  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, 2002 and 2001 in the amount of $1,355,535 and $2,033,311, respectively is classified on
the Companys balance sheet as preferred stock. Cumulative preferred dividends are payable upon conversion and at June 30, 2002 there are cumulative preferred dividends in arrears in the amount of $121,452 or $5,281 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. As of June 30, 2002 the holders converted cumulative
preferred dividends in the amount of $66,274 and converted 37 shares of Series A into 3,459,361 shares shares of common stock. There are 23 and 341/2shares of Series A, issued and outstanding at June 30, 2002 and 2001, respectively. As described in Note 19, on July 31, 2002 the Company entered into a redemption agreement to redeem all of the
Series A 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




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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 7  CAPITALIZATION (Continued)





Preferred Stock(Continued)




acquisition fees. In addition, under this Securities Purchase Agreement the Company issued 50,000 warrants to 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, 2002 and 2001 in the amount of $1,591,299 and $1,768,110, respectively is classified on the Companys balance
sheet as preferred stock. Cumulative preferred dividends are payable upon conversion and at June 30, 2002 there are cumulative preferred dividends in arrears in the amount of $127,529 or $4,723 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. As of June 30, 2002 the holders converted 3 shares of Series B into 414,934 shares of common stock. There are 27 shares and 30 shares of Series B, issued and outstanding at June 30, 2002 and 2001,
respectively. As described in Note 19, on July 31, 2002 the Company entered into a redemption agreement to redeem all of the Series B 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 June 30, 2002 and 2001 the Company had 44,966,267 and 25,484,086 shares of common stock issued and outstanding, respectively.





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: 1,716,157 shares through the conversion of Series A Stock valued at $1,320,035; and 75,356 shares through the conversion of Series A Stock dividends in arrears valued at
$66,274; 1,875,000 shares through the conversion of debt valued at $750,000; and 403,350 shares for legal services valued at $201,675.





During the year ended June 30, 2002 the Company issued shares of common stock in cash transactions: 11,399,998 shares for cash in the amount of $4,230,000. Also during the year ended June 30, 2002 the Company issued shares
of common stock in non-cash transactions: 2,158,138 shares through the conversion of Series A and B Stock valued at $854,587; 161,714 shares as a finders fee; 100,000 shares as compensation valued at $43,000; and 3,062,331 shares for services valued
at $1,060,251.




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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 7  CAPITALIZATION (Continued)







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 various dates, extending to June 14, 2006 and vest over various service periods.





As of June 30, 2002, the Company has granted options to purchase 4,082,709 shares of common stock as follows:





Exercise Price

Number of Shares


Vested SharesOutstanding, June 30, 2000

$1.00$4.63

5,988,000


2,662,000Granted

$.45$3.25

1,282,250


1,504,170Exercised



(25,000
)

(25,000
)Cancelled

$1.00$5.31

(2,364,500
)

(295,000
)Outstanding, June 30, 2001

$.45$4.63

4,880,750


3,846,170Granted

$.50$3.00

2,096,043


1,662,792Exercised






Cancelled

$1.00$4.63

(2,894,084
)

(2,240,917
)Outstanding, June 30, 2002

$.45$4.63

4,082,709


3,268,045





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, 2002 and 2001 the Company recognized compensation expense of $195,628 and $413,915, respectively. The estimate of compensation expense recorded for the year ended June 30, 2002 was
adjusted by decreasing compensation expense $986,769 for stock options returned to the Company related to compensation expense recorded on these options in previous years.





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 30,2002


2001Net lossAs reported

$
(4,836,720
)

$
(9,611,796
)Pro forma


(2,742,298
)


(10,531,724
)Net lossavailable to common shareholdersAs reported

$
(5,073,345
)

$
(10,090,321
)Pro forma


(2,978,923
)


(11,010,249
)Loss per shareAs reported

$
(0.16
)

$
(.60
)Pro forma

$
(0.09
)

$
(.67
)




36




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##### Table of Contents



MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 7  CAPITALIZATION (Continued)







Warrants





At June 30, 2002 warrants were outstanding to purchase 10,564,327 shares of common stock at exercise prices between $0.35 to $7.00 per share. These warrants expire
between December 31, 2002 and June 11, 2007. The Company recognized compensation expense to employees or directors of $295,620 during the year ended June 30, 2002.





NOTE 8  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, 2002 and 2001 accrued interest on the investment was $10,573. The related shareholder, officer and director personally guarantee the investment.





Due from London Radiosurgical Centre, Ltd





LRC provides office space and administrative expenses under normal commercial terms to The London PET Centre Limited. The London PET Centre Limited made cash payments of approximately $211,612 and
$228,637 to LRC and office space and administrative expense was approximately $320,861 and $240,791 during the years ended June 30, 2002 and 2001, respectively. During the years ended June 30, 2002 and 2001, the Company advanced without interest $0
and $500, respectively to LRC for working capital. The advances are covered by a continuing corporate and personal guarantee. There is a balance due from London Radiosurgical Centre, Ltd in the amount of $129,317 and $238,566 at June 30, 2002 and
2001, respectively.





Loans





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 the Company has agreed to make monthly payments of $10,000 per month beginning on January 8, 2002, until paid in full. At June 30, 2002 and 2001, the loan has a balance of
$160,000 and $200,000, respectively.




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##### Table of Contents



MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 8  RELATED PARTY TRANSACTIONS (Continued)





Loans(Continued)







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. The loan was extended to June 1, 2001. In October 2000, an eight percent (8%) promissory note was issued in the amount of
$100,000 in exchange for the loan. Principal, plus accrued interest is payable in installments: $20,000, plus accrued interest on October 8, 2001 and $10,000 plus accrued interest on the first day of each successive month. The loan was paid in full.





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, and extended to December 1, 2001. The loan was paid in December 2001.





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 now due on September 1, 2002. At June 30, 2002, accrued interest is $17,392.





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 option 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. The option expired
on March 22, 2001. 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 March 31, 2001 the balance of the note was $750,000, plus accrued interest in the amount of $7,267. 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 note into 1,875,000 shares of common stock.





On October 12, 2001, the Company converted $253,050 due to an individual and director of the Company into a promissory note without interest and payable in monthly installments of $14,000 per month
beginning on October 15, 2001, until paid in full. At June 30, 2002, the individual is no longer a director and the loan has a balance of $127,050.





On June 6, 2002, the Company received an eight percent (8%) bridge loan from an officer, director and shareholder in the amount of $77,600, due on demand. At June 30, 2002, the loan has a balance of
$67,600 and accrued interest is $371.





NOTE 9  SECURITIES PURCHASE AGREEMENT





On March 3, 2000, the Company entered into a Security Purchase Agreement, pursuant to which the Company issued 60 shares of 8% Cumulative
Convertible Redeemable Preferred, Series A Stock. On July 31, 2002 the Company entered into a redemption agreement to redeem all of the Series A Stock, described in Note 19. In addition, the buyer of the preferred stock agreed to purchase
shares of common stock of the Company in tranches, subject to certain limitations, 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




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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 9  SECURITIES PURCHASE AGREEMENT (Continued)




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 subsequently issued 2,703,093 shares of common
stock. There is an aggregate commitment remaining in the amount of $8,925,000 at June 30, 2002.





NOTE 10  INCOME TAXES





At June 30, 2002 the Company has a net operating loss carryforward for tax purposes of approximately
$15,125,000 which expires through the year 2022. The Internal Revenue Code contains provisions which may limit the loss carryforward available if significant changes in shareholder ownership of the Company occur.





The components of the provision for income taxes for the years ended June 30, 2002 and 2001 are as follows:





June 30,2002

2001CurrentForeign

$


$
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 30,2002


2001Deferred tax assetsNon-cash compensation

$
512,465


$
266,794Organization and start-up costs


91,115



91,115State tax benefit and other


803,310



441,682Net operating loss carryforward


6,583,850



5,219,5737,990,740



6,019,164Deferred tax liabilitiesDepreciation


491,186



376,2927,499,554



5,642,872Less valuation allowance


(7,499,554
)


(5,642,872
)Net deferred tax assets

$



$





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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 11  LONG TERM DEBT







Long term debt at June 30, 2002 and 2001 consists of the following:





2002


2001Promissory Note with no interest, due in monthly Installments of $500, with first payment beginning On February 1,
2002

$
17,000


$
Promissory 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, 2002, with a variable 5% to 1% prepayment penalty


82,924



99,426Less current portion


(27,730
)


(18,071
)Long term debt, net of current portion

$
72,194


$
81,355


The maturities of long term debt for each of the succeeding four years subsequent to June 30, 2002, are as
follows:





June 30,2003

$
27,7302004


28,4812005


30,0962006


13,617$
99,924





NOTE 12  COMMITMENTS





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





June 30,2002


2001Equipment

$
19,413,346


$
19,676,979Less accumulated amortization


(5,386,603
)


(2,556,790
)Net capital lease assets

$
14,026,743


$
17,120,189





The Company leases office space and certain PET equipment under
non-cancelable operating leases. The office lease expires in April 2005 and the equipment leases expire through May 2006.





Rent expense for the years ended June 30, 2002 was $182,530 and $209,586, respectively.





The
Company leases certain other PET equipment under capital leases. The equipment leases expire through March 2006. The capital leases are secured by the Companys assets. The chief executive officer of the Company has personally guaranteed
certain leases. Certain leases contain covenants that restrict the use of cash and require the Company to maintain financial ratios. The Company has been advised of its failure to maintain a debt service coverage ratio of not less than 1.25 to 1.00,
placing three leases in default. Obligations under capital lease current include $2,652,069 of lease obligations currently in default.




40




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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 12  COMMITMENTS (Continued)







At June 30, 2002 the Company was not in compliance with certain
provisions of three other capital lease agreements. In March 2002 the Company received a letter of default and acceleration. On August 19, 2002 the letter of default and acceleration was released due to payment.





The following is a schedule by year of the future minimum lease payments at June 30, 2002:





June 30,

Capital Lease


Operating Leases2003

$
8,313,650


$
1,367,6882004


4,341,852



1,156,3352005


4,341,852



1,062,2762006


1,804,362



885,6472007


322,025



19,123,741


$
4,471,946Less amount representing interest at 12.07%


(3,882,001
)Present value of minimum lease payments (including current portion of $6,639,252)

$
15,241,740





NOTE 13  RETIREMENT PLAN





On August 1, 2001 the Company established a defined contribution plan covering substantially all of its employees. Participation is
limited to all regular employees who meet specific age and service requirements. The Company made no contributions during the year ended June 30, 2002.





NOTE 14  CONCENTRATIONS OF CREDIT RISK





The Company maintains cash with
various major financial institutions in excess of the Federal Deposit Insurance Corporation limits. The Company continually monitors its position with the financial institutions and management believes the risk of incurring losses related to this
credit risk is remote.




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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 15  EARNINGS (LOSS) PER SHARE







The computations of basic and diluted earnings per share from
continuing operations for the years ended June 30, 2002 and 2001 were as follows:





June 30,2002


2001Loss per sharebasicNumerator:Net lossavailable to common shareholders

$
(5,073,345
)

$
(10,090,321
)Denominator:Weightedaverage shares


31,960,313



16,740,203Loss per sharebasic

$
(0.16
)

$
(0.60
)Loss per sharedilutedNumerator:Net lossavailable to common shareholders

$
(5,073,345
)

$
(10,090,321
)Denominator:Weightedaverage shares


31,960,313



16,740,203Loss per sharediluted

$
(0.16
)

$
(0.60
)





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 years ended June 30, 2002 and 2001:





June 30,2002

2001Cumulative convertible redeemable preferred stock common stock equivalent

966,624

962,302Employee stock options

6,177,688

4,629,014Warrants

6,005,310

1,568,419





NOTE 16  PRIOR PERIOD ADJUSTMENTS





The financial statements for the year ended June 30, 2001 have been restated to correct an error in recording additional accrued expenses.
The effect of the restatements is as follows:





As of and for the Year Ended Ended June 30, 2001

As Previously Reported


As RestatedAccrued and other liabilities

$
1,166,143


$
1,256,482Accumulated deficit


(18,276,724
)


(18,367,797
)Foreign currency translation adjustment


(321,091
)


(320,357
)Net loss


(9,520,723
)


(9,611,796
)Net lossavailable to common shareholders


(9,999,248
)


(10,090,321
)Loss per sharebasic


(0.60
)


(0.60
)Loss per sharediluted


(0.60
)


(0.60
)




42




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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 17  SUBSEQUENT EVENTS







Settlement of Claim





On September 12, 2002 the Company entered into an agreement to issue 50,000 shares of common stock resolving claims under a consulting
contract with a former director. The fair market value of the common stock issued in the amount of $225,000 has been accrued at June 30, 2002 and is included in general and administrative expenses.





Sale of Subsidiaries





On July 12, 2002 the Company, an officer and director entered into a Share Purchase Agreement with Integrated Healthcare Management, S.A. According to the terms of the Agreement, the Company received $2,200,000, less an
escrow deposit of $250,000 which is held pending confirmation of certain representations and warranties, in exchange for all of the common stock of Mobile P.E.T. Leasing Limited and The London P.E.T. Centre Limited, United Kingdom private limited
companies. The Agreement includes certain covenants restricting activities of the Company, officer and director for 3 years in the United Kingdom, Channel Islands, Isle of Man and the Republic of Ireland.





Security Purchase Agreement





On July 12, 2002 the Company entered into a Securities Purchase Agreement with an individual and Integrated Healthcare Management, S.A. On July 31, 2002, according to the terms of the agreement, the
Company received $6,000,000 in exchange for 10,000,000 shares of common stock and a warrant to purchase 3,000,000 shares of common stock at a price of $0.448 per share. The warrants expire on July 31, 2007.





Stock Purchase Agreement





On July 31, 2002 the Company entered into a Stock Purchase Agreement with a shareholder, a family member to a shareholder and director. According to the terms of the agreement, the Company received
$250,000 and canceled 1,428,571 shares of common stock and a warrant to purchase 714,286 shares of common stock at a price of $0.35 per share, which were issued on April 23, 2002 for cash in the amount $500,000, in exchange for 1,250,000 shares of
common stock and a warrant to purchase 375,000 shares of common stock at a price of $0.448 per share. The warrant expires on July 31, 2007. This transaction was a condition precedent to the Security Purchase Agreement dated July 12, 2002 with an
individual and Integrated Healthcare Management, S.A.





Redemption of Preferred Stock





On July 31, 2002 the Company entered into a Redemption Agreement with York LLC to redeem all of the outstanding Preferred
Series A and Series B Stock for $3,784,072. In addition, the Company agreed to re-price certain existing warrants held by York LLC. Accordingly, warrants to purchase 199,851 shares of common stock at a price between $5.00 and $2.5125 per shares and
expiring between September and November 2005 were re-priced and the warrants may now be exercised at a price of $1.00 per share.





Pro Forma Information (Unaudited)





The pro forma information represents historical amounts
restated to show the financial position of the Company at June 30, 2002 and the statement operations for the year then ended after the sale of subsidiaries, security/stock purchase, and redemption of preferred stock.




43




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##### Table of Contents



MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





NOTE 17  SUBSEQUENT EVENTS (Continued)







The pro forma results are presented for informational purposes only
and do not purport to be indicative of the results of operations which would actually have been obtained if the transactions had occurred, or which may exist or be obtained in the future. The pro forma balance sheet is presented as if the
transactions had occurred as of June 30, 2002 and the pro forma statement of operations, excluding the gain on the sale of subsidiary is presented as if the transactions had occurred on July 1, 2001. The pro forma information reflects the use of
$3,784,072 for the redemption of preferred stock, and does not reflect the use of the remaining balance.


Pro Forma Balance Sheet (Unaudited)





June 30, 2002


Sale of Subsidiaries


Stock Purchases

Redemption of Preferred Stock


Pro Forma June 30, 2002Cash

$
94,143


$
2,106,409


$
6,250,000

$
(3,284,072
)

$
5,166,480Other current assets


4,943,464



(197,210
)









4,246,254Property and equipment, net


15,146,597



(1,220,921
)









13,925,676Other assets


692,380










(500,000
)


692,380Total assets

$
20,876,584


$
688,278


$
6,250,000

$
(3,784,072
)

$
24,030,790Current liabilities

$
12,581,697


$
(1,107,712
)

$


$



$
11,473,985Noncurrent liabilities


8,674,682



(806,244
)









7,868,438Preferred stock


2,946,834










(2,946,834
)


Common stock


4,497







282






4,779Other shareholders equity (deficit)


(3,331,126
)


2,602,234



6,249,718


(837,238
)


4,683,588Total liabilities and shareholders equity

$
20,876,584


$
688,278


$
6,250,000

$
(3,784,072
)

$
24,030,790





In August 2002, certain obligations under capital lease were paid
as described in Note 12.





Pro Forma Statement of Operations (Unaudited)





For the Year Ended June 30, 2002


Sale of Subsidiaries


Stock Purchases

Redemption of Preferred Stock

Pro Forma For the Year Ended June 30, 2002Service revenues

$
17,603,130


$
1,301,121


$


$


$
16,302,009Cost of sales


10,908,826



690,188









10,218,638Gross profit


6,694,304



610,933









6,083,371Expenses


9,341,177



849,867









8,491,310Loss from operations


(2,646,873
)


(238,934
)








(2,407,939
)Other income (expense)


(2,188,247
)


(169,348
)








(2,018,899
)Loss before provision for income taxes


(4,835,120
)


(408,282
)








(4,426,838
)Provision for income taxes


1,600













1,600Net loss


(4,836,720
)


(408,282
)








(4,428,438
)Preferred stock dividend


236,625













236,625Net lossavailable to common shareholders

$
(5,073,345
)

$
(408,282
)

$


$


$
(4,665,063
)Loss per sharebasic

$
(0.16
)

$
(0.01
)

$


$


$
(0.15
)Loss per sharediluted

$
(0.16
)

$
(0.01
)

$


$


$
(0.15
)




44




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##### Table of Contents




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 for two years immediately prior to its acquisition by Colony International Incorporated, and has
continued as our auditor since the acquisition.





PART III





Incorporated by reference from the definitive proxy statement filed or to be
filed in accordance with Rule 14a-101, Schedule 14A or definitive information statement filed or to be filed pursuant to Rule 14c-101, Schedule 14C, or an amendment to this Form 10-KSB to be filed no later then 120 days after the end of our
fiscal year.





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

Reference3.1

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
)10.8

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
)10.14

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
)




45




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##### Table of Contents

Exhibit No.

Description

Reference10.19

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

(5
)10.20

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
)10.26

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
)10.35

Share Purchase Agreement dated 12 July 2002 by and between Mobile PET Systems, Inc, Integrated Healthcare Management
S.A. and Paul Crowe for the sale of The London P.E.T. Centre Limited and Mobile P.E.T. Leasing Limited

(12
)10.36

Securities Purchase Agreement, dated July 12, 2002 by and between Mobile PET Systems, Inc., Ivan Bradbury and
Integrated Healthcare Management S.A.

(12
)10.37

Warrant Agreement dated July 31, 2002, to Dragon Nominees Limited to purchase 3,000,000 shares of common stock at
$0.448 per share

(12
)10.38

Registration Rights Agreement dated July 31, 2002, by and between Mobile PET Systems, Inc. and Dragon Nominees
Limited

(12
)10.39

Stock Purchase Agreement, dated July 15, 2002, by and between Mobile PET Systems, Inc. and Bernd Steudle

(12
)10.40

Warrant Agreement to Bank J. Vontobel & Sons, AG to purchase 375,000 shares of common stock at $0.448 per
share.

(12
)10.41

Registration Rights Agreement dated July 31, 2002 by and between Mobile PET Systems, Inc. and Bernd
Steudle

(12
)10.42

Redemption Agreement dated July 31, 2002 by and between Mobile PET Systems, Inc. and York, LLC

(12
)




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##### Table of Contents

Exhibit No.

Description

Reference10.43

Common Stock Purchase Warrant, dated March 22, 2002 by and between Mobile PET Systems, Inc. and Paul Crowe, to
purchase 1,366,510 shares of common stock at $0.35 per share10.44

Employment Agreement dated July 1, 2002 by and between Mobile PET Systems, Inc. and Thomas H. Insley10.45

Form of Common Stock Purchase Warrant issued by Company prior to June 30, 2002 for compensation or
otherwise21

Subsidiaries of the Registrant23.1

Consent of Independent Accountants99

Certification Pursuant to Section 906 of the Sorbanes-Oxley Act of 2002 (furnished, not filed)


---

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

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

|(12) |  | Previously filed as an Exhibit to the Companys Form 8-K, filed with the Securities and Exchange Commission on August 6, 2002.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------




(b)  Reports On Form 8-K





Form 8-K filed with the Securities and Exchange Commission on April 10, 2002, covering a press release announcing revenues for the quarter ending March 31, 2002.





Form 8-K filed with the Securities and Exchange Commission on July 26, 2002, and Amendment No. 1 to the same,
filed with the Securities and Exchange Commission on July 31, 2002, covering the sale of the Companys London, England subsidiaries.





Form 8-K filed with the Securities and Exchange Commission on August 6, 2002, covering (i) the sale of 10,000,000 common shares and warrants to purchase 3,000,000 common shares, (ii) the sale of 1,250,000 common shares
and warrants to purchase 375,000 common shares, and (iii) the redemption of all outstanding preferred shares.




47




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##### Table of Contents

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.





MOBILE PET SYSTEMS, INC., a Delaware corporationBy:

/s/    PAUL J.
CROWEName:    Paul J. CroweTitle:    President and Chief Executive OfficerDate: Sept. 26, 2002





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.





/s/    PAUL J. CROWEName:    Paul J. CroweTitle:    President, Chief Executive Officer and DirectorDate: Sept. 26, 2002/s/    ROBERT C. BUSHName:    Robert C. BushTitle:    DirectorDate: Sept. 26, 2002/s/    AXEL STEUDLEName:    Axel SteudleTitle:    DirectorDate: Sept. 26, 2002/s/    THOMAS H. INSLEYName:    Thomas H. InsleyTitle:    Director, Chief Financial Officer and SecretaryDate: Sept. 26, 2002/s/    ALBERT F. HAUSSENERName:    Albert F. HaussenerTitle:    DirectorDate: Sept. 26, 2002/s/    PETER S. CONTIName:    Peter S. Conti, M.D., Ph.DTitle:    DirectorDate: Sept. 26, 2002







48




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##### Table of Contents

CERTIFICATIONS





1.    Chief Executive Officer





I, Paul J. Crowe, certify that:





| | 1. |  | I have reviewed this annual report on Form 10-KSB of Mobile PET Systems, Inc.;
| | -- |  | ------------------------------------------------------------------------------




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




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




/s/    PAUL J. CROWEPaul J. CroweChief Executive Officer





2.    Chief Financial Officer





I, Thomas H. Insley, certify that:





| | 1. |  | I have reviewed this annual report on Form 10-KSB of Mobile PET Systems, Inc.;
| | -- |  | ------------------------------------------------------------------------------




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




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




/s/    THOMAS H. INSLEYThomas H. InsleyChief Financial Officer




49