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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Amendment No. 3

to

Form 10-KSB



|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



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MOLECULAR IMAGING CORPORATION

A Delaware Corporation

(Name of small business issuer in its charter)



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|Delaware                                                       |  | 11-2787966                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|2150 West Washington St., Suite 110 San Diego, CA 92110        |  | 92110                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



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



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



|Title of each class |  | Name of each exchange on which registered
|------------------- |  | -----------------------------------------
|None                |  | None                                     



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



COMMON STOCK, PAR VALUE $0.0001

(Title of class)



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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 |  |                                                                                      
|------ |  | -------------------------------------------------------------------------------------
|       |  |                                                                                      
|ITEM 6 |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|       |  |                                                                                      
|ITEM 7 |  | FINANCIAL STATEMENTS                                                                 
|       |  |                                                                                      
|ITEM 8 |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 





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



Overview



Molecular Imaging Corporation (formerly Mobile PET Systems, Inc.) is a national 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 this advanced diagnostic imaging patient service.



Under a service agreement, we provide hospitals and physicians access to our state-of-the-art
PET imaging systems, which can be integrated on mobile coaches or in stationary facilities. We can also 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 provided by the medical institution.



As of June 30, 2002, we had fifteen mobile units deployed providing our services to
approximately 75 healthcare facilities in 22 states. We believe there are and will be significant opportunities to develop and operate additional mobile and stationary PET facilities.



We owned and operated the only private sector stationary PET facility in the United Kingdom (London PET Centre). We sold this facility in
July 2002. We 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 statement 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 shareholders equity. Transaction gains and losses are reflected in the statements of cash flows as the effect of exchange rate changes on cash.



Critical Accounting Policies



Our discussion and analysis of our financial condition and results of operations is based
upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.
Estimated amounts may differ under different assumptions or conditions, and actual results could differ from the estimates. The following critical accounting policy, among others, affects the judgments and estimates used in the preparation of our
financial statements.



Revenue Recognition



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



Service revenues from third party payors are 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 and are based on final settlement history. Differences
between estimated amounts and accrued and interim and final settlements are reported in operations in the period of settlement.



Results of Operations



Twelve Months Ended June 30, 2002



Service revenues for the twelve months ended June 30, 2002 were $17,603,130, compared to service revenues for the twelve months ended June 30, 2001 of $7,163,312. Our cost of service revenues for the twelve months ended June 30, 2002 were
$10,909,175, compared to $5,183,434 for the twelve months ended June 30, 2001. The substantial difference in service revenues is largely attributable to better utilization of each existing unit. The cost of service revenues represents salaries paid
to technologists and drivers, system maintenance, transportation and insurance on our mobile PET systems.



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The gross profit percentage increased from 27.6% for the twelve months ended June 30, 2001 to 38.0% for
the twelve months ended June 30, 2002 primarily for the following reasons:



|Gross profit percentage for the twelve months ended June 30, 2001 |  | 27.6 | %
|----------------------------------------------------------------- |  | ---- | -
|                                                                  | 
|Transportation services                                           |  | (3.7 | )
|Depreciation expense                                              |  | 13.8 |  
|Equipment rental                                                  |  | (8.8 | )
|Service contracts and repairs                                     |  | (4.7 | )
|Medical supplies                                                  |  | 8.2  |  
|Technologist/Driver salaries and wages                            |  | 7.4  |  
|Other                                                             |  | (1.8 | )
|Gross profit percentage for the twelve months ended June 30, 2002 |  | 38.0 | %



Our cost of transportation services
increased because we hired less of our own drivers and used more outside transportation services in the twelve months ended June 30, 2002. While our depreciation expense increased in absolute dollars in the twelve months ended June 30, 2002, it
decreased as a percentage of service revenues because of the substantial increase in service revenues. Equipment rental increased as we rented a new unit and the two previously rented units now represented a full years rental. Our cost of service
contracts and repairs increased over the twelve months ended June 30, 2001 since more of our units are no longer covered by warranty and require maintenance contracts or the use of other repair sources. Our cost of medical supplies increased as a
percent of service revenues as less of our customers now provide their own medical supplies. Although our salaries and wages for our technologists and drivers increased in absolute dollars in the twelve months ended June 30, 2002, it decreased as a
percentage of service revenues because of the substantial increase in revenues.



Selling and marketing expenses decreased from $3,367,693 for the twelve months ended June 30, 2001 to $2,013,520 for the twelve months ended June 30, 2002 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. General and administrative expenses increased from $6,195,430 for the twelve months ended June 30, 2001 to $8,314,077 for the twelve months ended June 30, 2002 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 fees and other finance fees of $260,635 during the twelve months ended June 30, 2002.



Our net loss for the twelve months ended June 30, 2002 of $5,823,489 was a substantial
improvement over the net loss of $9,797,942 for the twelve months ended June 30, 2001.



Expanding Our Business



We continue our efforts to develop and
expand our service business by increasing utilization of our existing units, and deploying additional mobile and stationary PET systems. We may continue to incur additional losses as we pursue our development and expansion efforts. The majority of
our costs are fixed; so increased revenues as a result of increased utilization may increase our gross profit and income, while lower utilization may result in lower gross profit and income.



One measure that management uses to evaluate our progress is average revenues per weekday for
all units. We calculate average revenues per weekday for all units by dividing total weekday revenues by the number of weekdays in the relevant period, excluding holidays. We exclude Saturdays from this calculation since not all of our units are
scheduled for Saturday service. For reasons described above, for the twelve months ended June 30, 2002, our average revenues per weekday for all units increased to approximately $67,704, from average revenues per weekday for all units of
approximately $27,551 for the twelve months ended June 30, 2001. 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 a satisfactory 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 we can generate from our operations. There can be no assurance that we will be able to maintain or
increase the number of patient procedures or that our allowances for doubtful accounts receivable will be sufficient.



We are working with third parties to develop stationary imaging centers that we will operate as Independent Diagnostic Testing Facilities (IDTF). Under the
IDTF model, patient billings will be submitted directly to Medicare or insurance carriers at higher rates than billings for mobile services to hospitals or clinics. In addition, Medicare and insurance reimbursement rates are currently higher for PET
services



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performed at an IDTF than for the same services performed as a hospital based service. Under the IDTF model, lower scans
per day are



typically necessary to reach break-even because of the higher
amount of reimbursement. Because patient billings are submitted directly to Medicare and insurance carriers under the IDTF model, we may experience a longer period of time between billing and collection than we experience from our traditional mobile
services.



These stationary imaging centers are identified and selected based
on input from hospital administrators, imaging center operators or physician groups who want to offer molecular imaging on their campus. We analyze the marketplace demographics, local competition, tumor board statistics, referring physician
demographics and the availability of an on-site physician champion to increase the vitality of the PET service. As permitted under state and federal laws, we may also partner with third party investors in the development and operation of these
stationary imaging centers.



Since our inception we have incurred significant
losses. Through June 30, 2002, we have an accumulated deficit of $26,410,567, which we have financed primarily through equity sales. For the twelve months ended June 30, 2002, we recognized a loss from continuing operations of $5,823,489 compared to
a loss from continuing operations of $9,797,942 for the twelve months ended June 30, 2001. There was net loss available to common shareholders of $5,823,489 for the twelve months ended June 30, 2002, compared to a net loss available to common
shareholders of $10,552,752 for the twelve months ended June 30, 2001.



Subject
to obtaining additional financing, we are also seeking to deploy additional mobile units or stationary sites, which will reduce per unit operating costs. However, we can give no assurances that we will be able to deploy such additional units or
sites, or that the deployment of such additional units or sites would reduce our per unit operating costs. As a result, in order to maintain profitability, we will need to continue to increase revenues and effectively manage our operating overhead.



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ITEM 6.



|MANAGEMENTS |  | DISCUSSION AND ANALYSIS (continued)
|------------ |  | -----------------------------------



Liquidity and Capital Resources



At June 30, 2002, our total assets were $20,876,584, compared to $21,947,273 at June 30, 2001. The decrease was primarily the result of a reduction in net property and
equipment due to depreciation, offset by a lesser increase in accounts receivable. Our current assets at June 30, 2002 totaled $5,037,607, and our current liabilities were $12,581,697, as compared to current assets of $3,444,272 and current
liabilities of $8,149,809 at June 30, 2001. Our current liabilities exceed current assets because, under Generally Accepted Accounting Principles, we are required to record as a current liability our capital lease obligations due within the next
twelve months. As discussed in Note 9Commitments, several of our units are also financed under non-cancelable operating leases that are not recorded as liabilities until the monthly payment is due. Our current assets, on the other hand,
include only those accounts receivable that are outstanding from service revenues recognized and typically represent 30 to 60 days of service revenues. Shareholders equity increased to ($3,866,505) at June 30, 2002, from ($4,993,780) at June
30, 2001, due primarily private placements of common stock of $4,230,000, net of offering costs, common stock issued through conversion of preferred stock of $1,118,569, common stock issued for services of $1,060,251, options and warrants issued as
compensation and for services of $491,248, less $5,823,489 in operating loss. We used the net proceeds from these transactions to make payments of accounts payable and certain other obligations.



While we believe that our available cash, short-term assets, and other resources will be
sufficient to fund our operations and capital expenditures through the current fiscal year, our results of operations will have an impact on our cash needs beyond that time. We are currently pursuing several financing opportunities as well as
working to achieve sustained profitability from operations. If we are unable to generate sufficient service revenues to fund continuing operations or achieve sustained profitability, or if we are unable to successfully complete any of the proposed
financing activities, our operations will need to be significantly reduced or will otherwise suffer. In addition, we may be required to raise additional capital to add or acquire additional mobile units or stationary sites, or for other operating
purposes. We are continually exploring various financing alternatives, but there can be no assurance that any additional debt or equity financing will be available on commercially reasonable terms or at all.



Seasonality



We experience seasonality in the sale of our services. For example, first quarter client and patient vacation schedules may affect revenues.
Second quarter revenues may be affected by client and patient holiday and vacation schedules and inclement weather, the results of which may be fewer patients 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 declines in revenue, which would make our
business difficult to operate and would harm our financial results. In addition, we may be unable to adjust our expenditures if revenues in a particular period fail to meet our expectations, which would harm our operating results for that period.



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.



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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 affected.



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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



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paid, may sell limited quantities of the securities to the public without registration, provided 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, prevents us from gaining new customers, and adversely affects 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.



10



---

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
client and patient vacation schedules may affect revenues. 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.



11



---

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.



12



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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



July 3, 2003



13



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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



June 30, 2002 and 2001



|                                                                                                                                                               |  | 2002 |             |   | 2001 |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | -
|ASSETS                                                                                                                                                         |  |      |             |   |      |  
|Current assets                                                                                                                                                 |  |      |             |   |      |  
|Cash                                                                                                                                                           |  | $    | 94,143      |   |      | $
|Accounts receivable, net of allowance for doubtful accounts of $116,000 and $116,000 at June 30, 2002 and 2001,
respectively                                   |  |      | 3,419,701   |   |      |  
|Prepaid expenses                                                                                                                                               |  |      | 676,076     |   |      |  
|Deposits and other assets                                                                                                                                      |  |      | 847,687     |   |      |  
|                                                                                                                                                               |  |      |             |   |      |  
|Total current assets                                                                                                                                           |  |      | 5,037,607   |   |      |  
|                                                                                                                                                               |  |     
|Property and equipment, net                                                                                                                                    |  |      | 15,146,597  |   |      |  
|                                                                                                                                                               |  |     
|Other assets                                                                                                                                                   |  |      |             |   |      |  
|Accrued interest receivable                                                                                                                                    |  |      | 10,573      |   |      |  
|Due from London Radiosurgical Centre, Ltd                                                                                                                      |  |      | 129,317     |   |      |  
|Subordinated equity participation                                                                                                                              |  |      | 200,000     |   |      |  
|Restricted cash                                                                                                                                                |  |      | 352,490     |   |      |  
|                                                                                                                                                               |  |      |             |   |      |  
|Total assets                                                                                                                                                   |  | $    | 20,876,584  |   |      | $
|                                                                                                                                                               |  |      |             |   |      |  
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                                                                 |  |      |             |   |      |  
|Current liabilities                                                                                                                                            |  |      |             |   |      |  
|Accounts payable                                                                                                                                               |  | $    | 4,315,483   |   |      | $
|Current portion of long-term debt                                                                                                                              |  |      | 27,730      |   |      |  
|Loans payable to related parties                                                                                                                               |  |      | 504,650     |   |      |  
|Accrued and other liabilities                                                                                                                                  |  |      | 793,134     |   |      |  
|Other liabilities                                                                                                                                              |  |      | 301,448     |   |      |  
|Obligations under capital leasecurrent                                                                                                                        |  |      | 6,639,252   |   |      |  
|                                                                                                                                                               |  |      |             |   |      |  
|Total current liabilities                                                                                                                                      |  |      | 12,581,697  |   |      |  
|                                                                                                                                                               |  |     
|Noncurrent Liabilities                                                                                                                                         |  |      |             |   |      |  
|Obligations under capital lease                                                                                                                                |  |      | 8,602,488   |   |      |  
|Long-term debt                                                                                                                                                 |  |      | 72,194      |   |      |  
|                                                                                                                                                               |  |      |             |   |      |  
|Total liabilities                                                                                                                                              |  |      | 21,256,379  |   |      |  
|                                                                                                                                                               |  |     
|Mandatorily redeemable preferred stock; 10,000,000 shares authorized                                                                                           |  |      |             |   |      |  
|Preferred stock series A; 23 and 34 shares issued and outstanding at June 30, 2002 and June 30, 2001, respectively                                             |  |      | 1,441,912   |   |      |  
|Preferred stock series B; 27 and 30 shares issued and outstanding at June 30, 2002 and June 30, 2001, respectively                                             |  |      | 2,044,798   |   |      |  
|                                                                                                                                                               |  |     
|Shareholders equity (deficit)                                                                                                                                 |  |      |             |   |      |  
|Common 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       |   |      |  
|Additional paid in capital                                                                                                                                     |  |      | 22,852,226  |   |      |  
|Accumulated deficit                                                                                                                                            |  |      | (26,410,567 | ) |      |  
|Foreign currency translation adjustment                                                                                                                        |  |      | (312,661    | ) |      |  
|                                                                                                                                                               |  |      |             |   |      |  
|Total shareholders equity                                                                                                                                     |  |      | (3,866,505  | ) |      |  
|                                                                                                                                                               |  |      |             |   |      |  
|Total liabilities and shareholders equity                                                                                                                     |  | $    | 20,876,584  |   |      | $
|                                                                                                                                                               |  |      |             |   |      |  



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



14



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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS



For the Years Ended June 30, 2002 and 2001



|                                          |  | 2002 |            |   | 2001 |  
|----------------------------------------- |  | ---- | ---------- | - | ---- | -
|Service revenues                          |  | $    | 17,603,130 |   |      | $
|Cost of service revenues                  |  |      | 10,909,175 |   |      |  
|                                          |  |      |            |   |      |  
|Gross profit                              |  |      | 6,693,955  |   |      |  
|                                          |  |     
|Expenses                                  |  |      |            |   |      |  
|Selling and marketing                     |  |      | 2,013,520  |   |      |  
|General and administrative                |  |      | 8,314,077  |   |      |  
|                                          |  |      |            |   |      |  
|Total expenses                            |  |      | 10,327,597 |   |      |  
|                                          |  |      |            |   |      |  
|Loss from operations                      |  |      | (3,633,642 | ) |      |  
|                                          |  |     
|Other Income (expense)                    |  |      |            |   |      |  
|Interest income                           |  |      | 8,359      |   |      |  
|Other expense                             |  |      | (29,389    | ) |      |  
|Interest expense                          |  |      | (2,167,217 | ) |      |  
|                                          |  |      |            |   |      |  
|Total other income (expense)              |  |      | (2,188,247 | ) |      |  
|                                          |  |     
|Loss before provision for income taxes    |  |      | (5,821,889 | ) |      |  
|Provision for income taxes                |  |      | 1,600      |   |      |  
|                                          |  |      |            |   |      |  
|Net loss                                  |  |      | (5,823,489 | ) |      |  
|Preferred stock dividend                  |  |      |           |   |      |  
|                                          |  |      |            |   |      |  
|Net lossavailable to common shareholders |  | $    | (5,823,489 | ) |      | $
|                                          |  |      |            |   |      |  
|Loss per sharebasic                      |  | $    | (0.18      | ) |      | $
|                                          |  |      |            |   |      |  
|Loss per sharediluted                    |  | $    | (0.18      | ) |      | $
|                                          |  |      |            |   |      |  



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



15



---

MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY



For the Years Ended June 30, 2002 and 2001



|                                                                    |  | Common Stock  |  | AdditionalPaid in Capital |       |  | AccumulatedDeficit |            |   | Foreign ExchangeAdjustment |   |             | Total | 
|------------------------------------------------------------------- |  | ------------- |  | ------------------------- | ----- |  | ------------------ | ---------- | - | -------------------------- | - | ----------- | ----- | 
|                                                                    |  | No. of Shares |  | Amount                    |       |  |                    |           
|Balance as originally reportedJune 30, 2000                        |  | 14,944,658    |  | $                         | 1,495 |  | $                  | 8,580,888  |   |                            | $ | (8,415,771  | )     | 
|Prior period adjustmentreverse option credits                      |  |               |  |                           |       |  |                    | 412,555    |   |                            |   | (412,555    | )     | 
|Reclassify manditorily redeemable preferred stock liability         |  |               |  |                           |       |  |                    | 300,000    |   |                            |   |             |       | 
|Preferred stock dividendbeneficial conversion feature              |  |               |  |                           |       |  |                    |            |   |                            |   | (1,206,000  | )     | 
|                                                                    |  |               |  |                           |       |  |                    |            |   |                            |   |             |       | 
|Balance as restatedJune 30, 2000                                   |  | 14,944,658    |  |                           | 1,495 |  |                    | 9,293,443  |   |                            |   | (10,034,326 | )     | 
|Preferred stock dividendbeneficial conversion feature              |  |               |  |                           |       |  |                    |            |   |                            |   | (414,580    | )     | 
|Recapitalization of preferred stock                                 |  |               |  |                           |       |  |                    | (347,500   | ) |                            |   |             |       | 
|Recapitalization of preferred stockdividend                        |  |               |  |                           |       |  |                    |            |   |                            |   | (273,956    | )     | 
|Common stock issued in private placement, net of offering costs     |  | 3,710,584     |  |                           | 371   |  |                    | 1,820,779  |   |                            |   |             |       | 
|Common stock issued through the exercise of options                 |  | 25,000        |  |                           | 3     |  |                    | 47,497     |   |                            |   |             |       | 
|Common stock issued through conversion of preferred stock           |  | 1,716,157     |  |                           | 171   |  |                    | 1,721,586  |   |                            |   |             |       | 
|Common stock issued through conversion of preferred stock dividends |  | 75,356        |  |                           | 8     |  |                    | 66,266     |   |                            |   | (66,274     | )     | 
|Common stock issued through conversion of debt                      |  | 1,875,000     |  |                           | 188   |  |                    | 749,812    |   |                            |   |             |       | 
|Common stock issued through settlement agreement                    |  | 2,733,981     |  |                           | 273   |  |                    | 749,727    |   |                            |   |             |       | 
|Common stock subscribed, net of offering costs                      |  |               |  |                           |       |  |                    | 1,000,000  |   |                            |   |             |       | 
|Common stock issued for services                                    |  | 403,350       |  |                           | 40    |  |                    | 201,635    |   |                            |   |             |       | 
|Options issued as compensation                                      |  |               |  |                           |       |  |                    | 600,061    |   |                            |   |             |       | 
|Convertible debt intrinsic beneficial conversion feature            |  |               |  |                           |       |  |                    | 7,800      |   |                            |   |             |       | 
|Net loss                                                            |  |               |  |                           |       |  |                    |            |   |                            |   | (9,797,942  | )     | 
|Foreign currency translation adjustment                             |  |               |  |                           |       |  |                    |            |   |                            |   |             |       | 
|                                                                    |  |               |  |                           |       |  |                    |            |   |                            |   |             |       | 
|BalanceJune 30, 2001                                               |  | 25,484,086    |  |                           | 2,549 |  |                    | 15,911,106 |   |                            |   | (20,587,078 | )     | 
|Common stock issued in private placement, net of offering costs     |  | 13,999,998    |  |                           | 1,400 |  |                    | 4,228,600  |   |                            |   |             |       | 
|Common stock issued through conversion of preferred stock           |  | 2,158,138     |  |                           | 215   |  |                    | 1,118,354  |   |                            |   |             |       | 
|Common stock issued as finders fee                                  |  | 161,714       |  |                           | 16    |  |                    | (16        | ) |                            |   |             |       | 
|Common stock issued for services                                    |  | 3,062,331     |  |                           | 307   |  |                    | 1,059,944  |   |                            |   |             |       | 
|Common stock issued for compensation                                |  | 100,000       |  |                           | 10    |  |                    | 42,990     |   |                            |   |             |       | 
|Options and warrants issued as compensation and for services        |  |               |  |                           |       |  |                    | 491,248    |   |                            |   |             |       | 
|Net loss                                                            |  |               |  |                           |       |  |                    |            |   |                            |   | (5,823,489  | )     | 
|Foreign currency translation adjustment                             |  |               |  |                           |       |  |                    |            |   |                            |   |             |       | 
|                                                                    |  |               |  |                           |       |  |                    |            |   |                            |   |             |       | 
|BalanceJune 30, 2002                                               |  | 44,966,267    |  | $                         | 4,497 |  | $                  | 22,852,226 |   |                            | $ | (26,410,567 | )     | 
|                                                                    |  |               |  |                           |       |  |                    |            |   |                            |   |             |       | 



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



16



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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



For the Years Ended June 30, 2002 and 2001



|                                                                           |  | 2002 |            |   | 2001 |  
|-------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -
|Cash flows from operating activities                                       |  |      |            |   |      |  
|Net loss                                                                   |  | $    | (5,823,489 | ) |      | $
|Adjustments to reconcile net loss to net cash used in operating activities |  |      |            |   |      |  
|Depreciation and amortization                                              |  |      | 3,102,398  |   |      |  
|Interest                                                                   |  |      |           |   |      |  
|Noncash stock option and warrant charges                                   |  |      | 491,248    |   |      |  
|Common stock issued for compensation                                       |  |      | 43,000     |   |      |  
|Common stock issued for services                                           |  |      | 1,060,251  |   |      |  
|(Increase) decrease in operating assets                                    |  |      |            |   |      |  
|Accounts receivable                                                        |  |      | (1,362,949 | ) |      |  
|Due from London Radiosurgical Centre, Ltd                                  |  |      | 109,249    |   |      |  
|Prepaid expenses                                                           |  |      | 162,088    |   |      |  
|Deposits and other assets                                                  |  |      | (361,411   | ) |      |  
|Restricted cash                                                            |  |      | (7,620     | ) |      |  
|Accrued interest receivable                                                |  |      |           |   |      |  
|Increase (decrease) in operating liabilities                               |  |      |            |   |      |  
|Accounts payable                                                           |  |      | 1,902,313  |   |      |  
|Accrued and other liabilities                                              |  |      | 69,447     |   |      |  
|Deferred revenue                                                           |  |      |           |   |      |  
|                                                                           |  |      |            |   |      |  
|Net cash used in operating activities                                      |  |      | (615,475   | ) |      |  
|                                                                           |  |      |            |   |      |  
|Cash flows from investing activities                                       |  |      |            |   |      |  
|Capital expenditures                                                       |  |      | (540,003   | ) |      |  
|                                                                           |  |      |            |   |      |  
|Net cash used in investing activities                                      |  |      | (540,003   | ) |      |  
|                                                                           |  |      |            |   |      |  
|Cash flows from financing activities                                       |  |      |            |   |      |  
|Repayment of loans                                                         |  |      | (317,502   | ) |      |  
|Proceeds from loans                                                        |  |      | 77,600     |   |      |  
|Payments on obligations under capital lease                                |  |      | (2,811,253 | ) |      |  
|Common stock issued                                                        |  |      | 4,230,000  |   |      |  
|Preferred stock issued                                                     |  |      |           |   |      |  
|                                                                           |  |      |            |   |      |  
|Net cash provided by financing activities                                  |  |      | 1,178,845  |   |      |  
|                                                                           |  |      |            |   |      |  
|Net increase (decrease) in cash                                            |  |      | 23,367     |   |      |  
|Effect of exchange rate on changes in cash                                 |  |      | 7,696      |   |      |  
|Cashbeginning of year                                                     |  |      | 63,080     |   |      |  
|                                                                           |  |      |            |   |      |  
|Cashend of year                                                           |  | $    | 94,143     |   |      | $
|                                                                           |  |      |            |   |      |  
|SUPPLEMENTAL DISCLOSURES                                                   |  |      |            |   |      |  
|Interest Paid                                                              |  |      | 2,181,309  |   |      |  
|Income taxes paid                                                          |  |      | 1,600      |   |      |  
|NON CASH INVESTING ACTIVITIES                                              |  |      |            |   |      |  
|Equipment under capital lease                                              |  |      |           |   |      |  
|NON CASH FINANCING ACTIVITIES                                              |  |      |            |   |      |  
|Preferred stock dividend-beneficial conversion feature                     |  |      |           |   |      |  
|Conversion of debt to equity                                               |  |      |           |   |      |  
|Obligations under capital lease                                            |  |      |           |   |      |  
|Conversion of liability to note payable                                    |  |      | 20,000     |   |      |  



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



17



---

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 are 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.



18



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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



19



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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 |         | 2001
|---------------------- |  | ---- | ------- | ----
|Prepaid equipment rent |  | $    | 503,986 |     
|Other                  |  |      | 172,090 |     
|                       |  | $    | 676,076 |     



NOTE 5PROPERTY AND EQUIPMENT



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



|                              |  | 2002 |            |   | 2001 |  
|----------------------------- |  | ---- | ---------- | - | ---- | -
|Computer equipment            |  | $    | 1,421,843  |   |      | $
|Office furniture and fixtures |  |      | 211,610    |   |      |  
|Office equipment              |  |      | 12,752     |   |      |  
|Leasehold improvements        |  |      | 7,070      |   |      |  
|Equipment                     |  |      | 19,413,346 |   |      |  
|                              |  |      | 21,066,621 |   |      |  
|Less accumulated depreciation |  |      | (5,920,024 | ) |      |  
|                              |  | $    | 15,146,597 |   |      | $



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



20



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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 |         | 2001
|----------------------------------- |  | ---- | ------- | ----
|Equipment depositsMobile PET Units |  | $    | 325,580 |     
|Equipment rental depositsother     |  |      |        |     
|Preferred stock redemption deposit  |  |      | 500,000 |     
|Other                               |  |      | 22,107  |     
|                                    |  | $    | 847,687 |     



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. The sixty (60) shares of Series A Stock provided an intrinsic value of
beneficial conversion feature of approximately $1,206,000, which was recognized as a preferred stock dividend and the Series A Stock was recorded at a fair value of $3,906,000. 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. In addition, the buyer of the preferred stock agreed to purchase shares of common stock in the Company in tranches, subject to certain
limitations, for an aggregate purchase price up to $10,000,000, at a price equal to eighty-five percent (85%) of the average closing bid price five (5) consecutive days immediately prior to the Company providing a tranche notice to the buyer. The
Company has received an aggregate $1,075,000, net of offering costs, and issued 2,703,093 shares of common stock under this facility. This facility has not been utilized subsequent to June 30, 2001.



On May 30, 2001 the liquidation value was increased $50,000 to $58,937 per share when the
Company entered into a Settlement Agreement and Conditional Release of a lawsuit surrounding the Securities Purchase Agreement, increasing the fair value of the Series A Stock an additional $376,238. The holders converted cumulative preferred
dividends in the amount of $66,274 and converted 37 shares of Series A into 3,459,361 shares of common stock at various dates through June 30, 2002.



On September 21, 2000, the Company designated and subsequently issued thirty (30) shares of 8% Cumulative Convertible Redeemable Preferred Series B Stock (Series
B) for cash in the amount of $1,385,000, net of



21



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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. The thirty (30) shares of Series B Stock issued provided an intrinsic value of beneficial conversion feature of
approximately $414,580, which was recognized as a preferred stock dividend and the Series B Stock was recorded at fair value in the amount of $1,799,580. 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. On May 30, 2001 the liquidation value
was increased from $50,000 to $58,937 per share when the Company entered into a Settlement Agreement and Conditional Release of a lawsuit surrounding the Securities Purchase Agreement, increasing the fair value of the Series B Stock an additional
$376,238.



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.



22



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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 Shares |           
|-------------------------- |  | -------------- | ---------- | ---------------- | ---------- | - | ------------- | ----------
|Outstanding, June 30, 2000 |  | $              | 1.00$4.63 |                  | 5,988,000  |   |               | 2,662,000 
|Granted                    |  | $              | .45$3.25  |                  | 1,282,250  |   |               | 1,504,170 
|Exercised                  |  |                |            |                  | (25,000    | ) |               | (25,000   
|Cancelled                  |  | $              | 1.00$5.31 |                  | (2,364,500 | ) |               | (295,000  
|Outstanding, June 30, 2001 |  | $              | .45$4.63  |                  | 4,880,750  |   |               | 3,846,170 
|Granted                    |  | $              | .50$3.00  |                  | 2,096,043  |   |               | 1,662,792 
|Exercised                  |  |                |            |                  |           |   |               |          
|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 $600,661, respectively.



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



|                                          |  | June 30, |           
|----------------------------------------- |  | -------- | ----------
|                                          |  | 2002     |           
|Net loss                                  |  |          |           
|As reported                               |  | $        | (5,823,489
|Pro forma                                 |  |          | (6,738,895
|Net lossavailable to common shareholders |  |          |           
|As reported                               |  | $        | (5,823,489
|Pro forma                                 |  |          | (6,738,895
|Loss per share                            |  |          |           
|As reported                               |  | $        | (0.18     
|Pro forma                                 |  | $        | (0.21     



23



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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.



24



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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 that 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



25



---

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 carry forward for tax purposes of
approximately $15,125,000 that expires through the year 2022. The Internal Revenue Code contains provisions which may limit the loss carry forward 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    
|Current                    |  |         
|Foreign                    |  | $       
|Federal                    |  |         
|State                      |  |         
|                           |  |         
|Deferred                   |  |         
|Foreign                    |  |         
|Federal                    |  |         
|State                      |  |         
|                           |  |         
|Provision for income taxes |  | $       



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



|                                 |  | June 30, |           
|-------------------------------- |  | -------- | ----------
|                                 |  | 2002     |           
|Deferred tax assets              |  |          |           
|Non-cash compensation            |  | $        | 512,465   
|Organization and start-up costs  |  |          | 91,115    
|State tax benefit and other      |  |          | 803,310   
|Net operating loss carry forward |  |          | 6,583,850 
|                                 |  |          | 7,990,740 
|Deferred tax liabilities         |  |          |           
|Depreciation                     |  |          | 491,186   
|                                 |  |          | 7,499,554 
|Less valuation allowance         |  |          | (7,499,554
|Net deferred tax assets          |  | $        |          



26



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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 |         |   | 2001 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | -
|Promissory 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  |   |      |  
|Less current portion                                                                                                                                                                              |  |      | (27,730 | ) |      |  
|Long term debt, net of current portion                                                                                                                                                            |  | $    | 72,194  |   |      | $



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



|June 30, |  |  
|-------- |  | -
|2003     |  | $
|2004     |  |  
|2005     |  |  
|2006     |  |  
|         | 
|         |  | $



NOTE 12COMMITMENTS



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



|                              |  | June 30, |           
|----------------------------- |  | -------- | ----------
|                              |  | 2002     |           
|Equipment                     |  | $        | 19,413,346
|Less accumulated amortization |  |          | (5,386,603
|Net capital lease assets      |  | $        | 14,026,743



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 Companys
assets secure the capital leases. 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.



27



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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 |            |   | OperatingLeases
|--------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ---------------
|2003                                                                              |  | $             | 8,313,650  |   |                
|2004                                                                              |  |               | 4,341,852  |   |                
|2005                                                                              |  |               | 4,341,852  |   |                
|2006                                                                              |  |               | 1,804,362  |   |                
|2007                                                                              |  |               | 322,025    |   |                
|                                                                                  |  |              
|                                                                                  |  |               | 19,123,741 |   |                
|                                                                                  |  |              
|Less 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.



28



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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     |           
|Loss per sharebasic                      |  |          |           
|Numerator:                                |  |          |           
|Net lossavailable to common shareholders |  | $        | (5,823,489
|Denominator:                              |  |          |           
|Weightedaverage shares                   |  |          | 31,960,313
|Loss per sharebasic                      |  | $        | (0.18     
|Loss per sharediluted                    |  |          |           
|Numerator:                                |  |          |           
|Net lossavailable to common shareholders |  | $        | (5,823,489
|Denominator:                              |  |          |           
|Weightedaverage shares                   |  |          | 31,960,313
|Loss per sharediluted                    |  | $        | (0.18     



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     
|Cumulative convertible redeemable preferred stock common stock equivalent |  | 966,624  
|Employee stock options                                                    |  | 6,177,688
|Warrants                                                                  |  | 6,005,310



NOTE 16RESTATEMENT OF
PREVIOUSLY ISSUED FINANCIAL STATEMENTS



In response to technical comments
from the Securities & Exchange Commission (SEC), and in consultation with SEC staff, the Company has restated its previously issued financial statements for the years ended June 30, 2002 and 2001. Unaudited quarterly financial
information for the first three quarters of the years ended June 30, 2003 and 2002 is also being restated in this filing. Set forth below is a comparison of the previously reported and restated consolidated balance sheets and statements of operation
for the years ended June 30, 2002 and 2001, and a comparison of the previously reported and restated consolidated balance sheets and statements of operation for the first three quarters of the years ended June 30, 2003 and 2002.



29



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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 16RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (Continued)



The Company previously recorded compensation expense for issued and outstanding options
granted to employees who terminated employment in the year ended June 30, 2002, thus forfeiting their unexercised options. The SEC staff has advised the Company that vested options that are returned to the Company as a result of the termination of
employment should not result in a decrease in compensation expense. Accordingly, the Company has reversed the compensation expense for forfeited unexercised options.



|                                       |  | June 30,               |           
|-------------------------------------- |  | ---------------------- | ----------
|                                       |  | 2002                   |           
|                                       |  | As Originally Reported |           
|Assets                                 |  | $                      | 20,876,584
|Liabilities                            |  | $                      | 21,256,379
|Mandatorily redeemable preferred stock |  | $                      |          
|Shareholders Equity                   |  | $                      | (379,795  



|                                                           |  | For the Years Ended June 30 |           
|---------------------------------------------------------- |  | --------------------------- | ----------
|                                                           |  | 2002                        |           
|                                                           |  | As Originally Reported      |           
|Revenues                                                   |  | $                           | 17,603,130
|Expenses                                                   |  | $                           | 22,439,850
|Income (loss) from operations                              |  | $                           | (4,836,720
|Preferred stock dividend                                   |  | $                           | 236,625   
|Net income (loss)available to common shareholders         |  | $                           | (5,073,345
|Net income (loss)available to common shareholders-basic   |  | $                           | (0.16     
|Net income (loss)available to common shareholders-diluted |  | $                           | (0.16     



30



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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 16RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (Continued)



The financial statements for the three months ended September 30, 2001 have been restated by
reversing non-cash credits recorded against previously recognized compensation expense, for vested stock option awards, cancelled by termination of employment. Mandatorily redeemable preferred stock has been reclassified out of shareholders
equity. The effect of the restatements is as follows:



|                                       |  | September 30,          |           
|-------------------------------------- |  | ---------------------- | ----------
|                                       |  | 2001                   |           
|                                       |  | As Originally Reported |           
|Assets                                 |  | $                      | 21,453,464
|Liabilities                            |  | $                      | 21,393,620
|Mandatorily redeemable preferred stock |  | $                      |          
|Preferred Stock-Series A and B         |  | $                      | 3,801,421 
|Shareholders Equity                   |  | $                      | 59,844    



|                                                           |  | Theee Months Ended September 30, |           
|---------------------------------------------------------- |  | -------------------------------- | ----------
|                                                           |  | 2001                             |           
|                                                           |  | As Originally Reported           |           
|Revenues                                                   |  | $                                | 3,398,905 
|Expenses                                                   |  | $                                | 4,455,222 
|Income (loss) from operations of discontinued subsidiaries |  | $                                | (1,056,317
|Preferred stock dividend                                   |  | $                                | 76,654    
|Net income (loss)available to common shareholders         |  | $                                | (1,132,971
|Net income (loss)available to common shareholders-basic   |  | $                                | (0.04     
|Net income (loss)available to common shareholders-diluted |  | $                                | (0.04     



31



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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 16RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (Continued)



The financial statements for the three and six months ended December 31, 2001 have been
restated by reversing non-cash credits recorded against previously recognized compensation expense, for vested stock option awards, cancelled by termination of employment. Mandatorily redeemable preferred stock has been reclassified out of
shareholders equity. The effect of the restatements is as follows:



|                                                           |  | Three Months Ended December 31, |           
|---------------------------------------------------------- |  | ------------------------------- | ----------
|                                                           |  | 2001                            |           
|                                                           |  | As Originally Reported          |           
|Revenues                                                   |  | $                               | 3,870,809 
|Expenses                                                   |  | $                               | 5,157,362 
|Income (loss) from operations                              |  | $                               | (1,286,553
|Preferred stock dividend                                   |  | $                               | 76,033    
|Net income (loss)available to common shareholders         |  | $                               | (1,362,586
|Net income (loss)available to common shareholders-basic   |  | $                               | (0.04     
|Net income (loss)available to common shareholders-diluted |  | $                               | (0.04     



|                                                           |  | Six Months Ended December 31, |           
|---------------------------------------------------------- |  | ----------------------------- | ----------
|                                                           |  | 2001                          |           
|                                                           |  | As Originally Reported        |           
|Revenues                                                   |  | $                             | 7,269,714 
|Expenses                                                   |  | $                             | 9,612,584 
|Income (loss) from operations                              |  | $                             | (2,342,870
|Preferred stock dividend                                   |  | $                             | 152,687   
|Net income (loss)available to common shareholders         |  | $                             | (2,495,557
|Net income (loss)available to common shareholders-basic   |  | $                             | 0.08      
|Net income (loss)available to common shareholders-diluted |  | $                             | 0.08      



32



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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 16RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (Continued)



The financial statements for the three and nine months ended March 31, 2002 have been
restated by reversing non-cash credits recorded against previously recognized compensation expense, for vested stock option awards, cancelled by termination of employment. Mandatorily redeemable preferred stock has been reclassified out of
shareholders equity. The effect of the restatements is as follows:



|                                                           |  |   |      |  |   | Three Months EndedMarch 31, | 
|---------------------------------------------------------- |  | - | ---- |  | - | --------------------------- | 
|                                                           |  |   |      |  |   | 2002                        | 
|                                                           |  |   |      |  |   | As Originally Reported      | 
|Revenues                                                   |  |   |      |  |   |                             | 
|Expenses                                                   |  |   |      |  |   |                             | 
|Income (loss) from operations                              |  |   |      |  |   |                             | 
|Preferred stock dividend                                   |  |   |      |  |   |                             | 
|Net income (loss)available to common shareholders         |  |   |      |  |   |                             | 
|Net income (loss)available to common shareholders-basic   |  |   |      |  |   |                             | 
|Net income (loss)available to common shareholders-diluted |  | $ | 0.00 |  | $ | 0.00                        | 



|                                                           |  | Nine Months Ended March 2002, |           
|---------------------------------------------------------- |  | ----------------------------- | ----------
|                                                           |  | 2002                          |           
|                                                           |  | As OriginallyReported         |           
|Revenues                                                   |  | $                             | 11,519,484
|Expenses                                                   |  | $                             | 15,024,115
|Income (loss) from operations                              |  | $                             | (3,504,631
|Preferred stock dividend                                   |  | $                             | 214,305   
|Net income (loss)available to common shareholders         |  | $                             | (3,718,936
|Net income (loss)available to common shareholders-basic   |  | $                             | (0.11     
|Net income (loss)available to common shareholders-diluted |  | $                             | (0.11     



33



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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 16RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (Continued)



In July of 2002 the Company redeemed all of the outstanding shares of 8% Cumulative
Convertible Redeemable Preferred, Series A Stock and Series B Stock (the Redeemable Preferred Stock) of the Company. The Securities Purchase Agreements under which the holders of Redeemable Preferred Stock purchased the shares
provided that the Redeemable Preferred Stock was to be redeemable at the Companys option, or at the option of the purchaser, if upon the purchasers notice of conversion to the Company the number of conversion shares of common stock
exceed the number of shares of common stock authorized by the Company. In its previous public filings with the SEC, the Company classified the Redeemable Preferred Stock within stockholders equity pursuant to the requirements of Rule 5-02,
caption 28(a) of Regulation S-X. Although the condition allowing for redemption by the purchaser did not occur prior to the Companys redemption of the Redeemable Preferred Stock, SEC staff has advised the Company that because the price of the
Companys common stock could have fallen to a point such that the number of shares of common stock into which the Redeemable Preferred Stock could have been converted could have caused the Company to request its stockholders increase the number
of authorized shares, that this event was outside the control of the Company, and the Redeemable Preferred Stock should therefore be classified outside stockholders equity. Accordingly, the Company has reclassified the Redeemable Preferred
Stock outside stockholders equity as mandatory redeemable preferred stock.



The Company previously recorded compensation expense for issued and outstanding options granted to employees who terminated employment in the year ended June 30, 2002, thus forfeiting their unexercised options. The SEC staff has advised the
Company that vested options that are returned to the Company as a result of the termination of employment should not result in a decrease in compensation expense. Accordingly, the Company has reversed the compensation expense for forfeited
unexercised options.



34



---

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.



35



---

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, 2002
|------------------------------------------ |  | ------------- | ---------- | - | -------------------- | - | ---------- | --------------- |  | ----------------------------- | --------- |  | -----------------------
|Cash                                       |  | $             | 94,143     |   |                      | $ | 2,106,409  |                 |  | $                             | 6,250,000 |  | $                      
|Other current assets                       |  |               | 4,943,464  |   |                      |   | (197,210   | )               |  |                               |          |  |                        
|Property and equipment, net                |  |               | 15,146,597 |   |                      |   | (1,220,921 | )               |  |                               |          |  |                        
|Other assets                               |  |               | 692,380    |   |                      |   |           |                 |  |                               |          |  |                        
|Total assets                               |  | $             | 20,876,584 |   |                      | $ | 688,278    |                 |  | $                             | 6,250,000 |  | $                      
|Current liabilities                        |  |               | 12,581,697 |   |                      |   | (1,107,712 | )               |  |                               |          |  |                        
|Noncurrent liabilities                     |  |               | 8,674,682  |   |                      |   | (806,244   | )               |  |                               |          |  |                        
|Mandatorily redeemable Preferred stock     |  |               | 3,486,710  |   |                      |   |           |                 |  |                               |          |  |                        
|Preferred stock                            |  |               |           |   |                      |   |           |                 |  |                               |          |  |                        
|Common stock                               |  |               | 4,497      |   |                      |   |           |                 |  |                               | 282       |  |                        
|Other shareholders equity (deficit)       |  |               | (3,871,002 | ) |                      |   | 2,602,234  |                 |  |                               | 6,249,718 |  |                        
|Total liabilities and shareholders equity |  | $             | 20,876,584 |   |                      | $ | 688,278    |                 |  | $                             | 6,250,000 |  | $                      



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



36



---

MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Pro Forma Statement of Operations (Unaudited)



|                                                    |  | For the Year EndedJune 30, 2002 |            |   | Sale ofSubsidiaries |   |            | StockPurchases |  | Redemptionof PreferredStock |   | Pro Forma For theYear EndedJune 30, 2002 |  
|--------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------- | - | ---------- | -------------- |  | --------------------------- | - | ---------------------------------------- | -
|Service revenues                                    |  |                                 | 17,603,130 |   |                     | $ | (1,301,121 | )              |  | $                           |  |                                          | $
|Cost of sales                                       |  |                                 | 10,909,175 |   |                     |   | 690,188    |                |  |                             |  |                                          |  
|                                                    |  |                                 |            |   |                    
|Gross profit                                        |  |                                 | 6,693,955  |   |                     |   | 610,933    |                |  |                             |  |                                          |  
|Expenses                                            |  |                                 | 10,327,597 |   |                     |   | 849,867    |                |  |                             |  |                                          |  
|                                                    |  |                                 |            |   |                    
|Loss from operations                                |  |                                 | (3,633,642 | ) |                     |   | (238,934   | )              |  |                             |  |                                          |  
|Other income (expense)                              |  |                                 | (2,188,247 | ) |                     |   | (169,348   | )              |  |                             |  |                                          |  
|                                                    |  |                                 |            |   |                    
|Loss before provision for income taxes              |  |                                 | (5,821,889 | ) |                     |   | (408,282   | )              |  |                             |  |                                          |  
|Provision for income taxes                          |  |                                 | 1,600      |   |                     |   |            |                |  |                             |  |                                          |  
|                                                    |  |                                 |            |   |                    
|Net income (loss)                                   |  |                                 | (5,823,489 | ) |                     |   | (408,282   | )              |  |                             |  |                                          |  
|Preferred stock dividend                            |  |                                 |            |   |                     |   |            |                |  |                             |  |                                          |  
|                                                    |  |                                 |            |   |                    
|Net income (loss)available to common shareholders |  |                                 | (5,823,489 | ) |                     | $ | (408,282   | )              |  | $                           |  |                                          | $
|                                                    |  |                                 |            |   |                    
|Loss per sharebasic                                |  | $                               | (0.18      | ) |                     | $ | (0.01      | )              |  | $                           |  |                                          | $
|                                                    |  |                                 |            |   |                    
|Loss per sharediluted                              |  | $                               | (0.18      | ) |                     | $ | (0.01      | )              |  | $                           |  |                                          | $



37



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|ITEM 8. |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- |  | ------------------------------------------------------------------------------------



We have not had any disputes or disagreements with Peterson & Co., our independent outside auditors, since Peterson & Co. was first engaged on December 1, 1998.
Peterson & Co. was the auditor of Mobile PET 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.



38



---

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
corporation
|------------------------------------------------
|                                                
|By:                                             
|Name:                                           
|Title:                                          
|                                                
|Date: July 10, 2003                             



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.



|                    | 
|------------------- | 
|                    | 
|Name:               | 
|Title:              | 
|                   
|Date: July 10, 2003
|                    | 
|                    | 
|Name:               | 
|Title:              | 
|                   
|Date: July 10, 2003
|                    | 
|                    | 
|Name:               | 
|Title:              | 
|                   
|Date: July 10, 2003
|                    | 
|                    | 
|Name:               | 
|Title:              | 
|                   
|Date: July 10, 2003
|                    | 
|                    | 
|Name:               | 
|Title:              | 
|                   
|Date: July 10, 2003
|                    | 
|                    | 
|Name:               | 
|Title:              | 
|                   
|Date: July 10, 2003



39



---

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.
CROWE                 
|-------------------------------------
|Paul J. Crowe Chief Executive Officer
|



2. Senior Vice President, Finance



I, Anthony R. Turnbull, 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/    ANTHONY R.
TURNBULL                        
|--------------------------------------------------
|Anthony R. Turnbull Senior Vice President, Finance
|



40