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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



Form 10-KSB



(Mark One)

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



For the fiscal year ended June 30, 2004



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



For the transition period fromto.



Commission file number 000-27915



MOLECULAR IMAGING CORPORATION

A Delaware Corporation

(Name of small business issuer in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 11-2787966                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|9530 Towne Centre Drive San Diego, California                  |  | 92121                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



Issuers
telephone number: (858) 642-0032

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)



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, 2004 were $21,207,425.



The aggregate market value of voting
common shares held by non-affiliates of the registrant was $4,078,736 as of September 14, 2004 (computed by reference to the average bid and ask prices of the issuers Common Stock on that date as reported by the OTC Bulletin Board ($.11),
times the number of voting common shares held by non-affiliates (37,079,422), without regard to derivative securities holdings).



There were 56,267,801 shares outstanding of the registrants Common Stock as of September 14, 2004.



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



Documents Incorporated by Reference



Portions of the Definitive Proxy Statement for the 2004 Annual Meeting of Stockholders (which will be filed within 120 days after the close of the Companys fiscal
year ended June 30, 2004) are incorporated by reference. With the exception of those portions which are specifically incorporated by referenced in this 10-KSB Annual Report, the Proxy Statement for the 2004 Annual Meeting of Stockholders is not
deemed to be filed as a part of this Report.



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TABLE OF CONTENTS



|         |  |                                                                                                |  |   
|-------- |  | ---------------------------------------------------------------------------------------------- |  | --
|PART I   |  |                                                                                               
|         |  |                                                                                               
|ITEM 1   |  | BUSINESS                                                                                       |  | 3 
|         |  |                                                                                               
|ITEM 2   |  | PROPERTIES                                                                                     |  | 15
|         |  |                                                                                               
|ITEM 3   |  | LEGAL PROCEEDINGS                                                                              |  | 16
|         |  |                                                                                               
|ITEM 4   |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            |  | 16
|         | 
|PART II  |  |                                                                                               
|         |  |                                                                                               
|ITEM 5   |  | MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                       |  | 17
|         |  |                                                                                               
|ITEM 6   |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS          |  | 18
|         |  |                                                                                               
|ITEM 7   |  | FINANCIAL STATEMENTS                                                                           |  | 34
|         |  |                                                                                               
|ITEM 8   |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE           |  | 53
|         |  |                                                                                               
|ITEM 8A  |  | CONTROLS AND PROCEDURES                                                                        |  | 53
|         | 
|PART III |  |                                                                                               
|         |  |                                                                                               
|ITEM 9   |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                             |  | 53
|         |  |                                                                                               
|ITEM 10  |  | EXECUTIVE COMPENSATION                                                                         |  | 53
|         |  |                                                                                               
|ITEM 11  |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |  | 53
|         |  |                                                                                               
|ITEM 12  |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTION                                                  |  | 54
|         |  |                                                                                               
|ITEM 13  |  | EXHIBITS                                                                                       |  | 54
|         |  |                                                                                               
|ITEM 14  |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                         |  | 57



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PART I



ITEM 1.        BUSINESS



Corporate History



The Company commenced
its current operations under the name Mobile PET Systems, Inc. in January 1999 to reflect a technology called Positron Emission Tomography (PET). The Company then changed its name to Molecular Imaging Corporation on May 1,
2003 as the industry is now referring to this technology as molecular imaging (MI).



General Business



Molecular Imaging
Corporation is a leading national provider of molecular imaging (MI) services to the healthcare industry. MI is a powerful diagnostic imaging procedure used to diagnose, monitor and assess disease severity for many cancers,
cardiovascular disease and neurological disorders. MI procedures display metabolic and functional characteristics of disease, which typically are the first indications of disease. Unlike Computed Tomography (CT) or Magnetic Resonance
Imaging (MRI), which provide physicians with changes in anatomy, MI detects the altered metabolism typically before anatomical changes occur. MI can help physicians effectively detect disease at the very earliest stages. We also provide
a newer combined MI/CT system. This combined imaging system offers physicians un-paralleled diagnostic information, which includes both metabolic, and anatomical information in one co-registered image. The new combined MI/CT technology improves the
time to diagnosis, staging of many cancers, cardiovascular disease and neurological disorders and is also used to observe patient response to treatment.



We provide our services to hospitals, physician groups, diagnostic imaging centers and other healthcare providers in selected marketplaces in the United States. Our
shared service model provides mobile MI units or mobile MI/CT units, which we provide on a daily basis or per procedure basis to our clients. We are also working to develop and operate long-term permanent facilities with clients interested in full
time MI or MI/CT services.



Mobile Services.With our mobile imaging
business, we integrate MI or MI/CT systems on mobile coaches and enter into multi-year contracts with our clients to provide mobile services for a specified number of days per week. We also provide our customers with technical personnel to operate
the equipment and implement the MI procedure under the direction of hospital physicians. In some cases, we also train hospital technical personnel to conduct the MI procedures. Our mobile services allow hospitals, physician groups, imaging center
operators and other healthcare providers to access this state-of-the art diagnostic imaging technology seamlessly and efficiently.



Stationary Facilities.We have a stationary MI imaging facility in San Diego, California that is owned by our subsidiary, Molecular Imaging Sorrento Valley, LLC
(Sorrento Valley LLC), and is managed by the Company. The center is operated with the University of California, San Diego (UCSD) as the University of California, San Diego Center For Molecular Imaging. The UCSD
School of Medicine radiology faculty provides all clinical patient support services at the center and the Company manages the business operations of the center. The facility is intended to serve the UCSD Healthcare patient population and the greater
San Diego metropolitan area.



In most situations we operate in conjunction with
a hospital facility. We bill our clients for the technical component of the patient procedure and the client bills the insurer for the balance of patient services rendered. Under this model we invoice the client for our services at a discounted rate
and they invoice the insurer directly.



We also operate our stationary facility
and three of our mobile MI imaging centers as Independent Diagnostic Testing Facilities (IDTF). Under the IDTF model, the Company submits patient billings directly to public and private insurance carriers. We invoice our MI
services that are inclusive of all patient services, at retail rates, rather than wholesale rates. In addition, insurance reimbursement rates are currently higher for MI services performed at an IDTF facility than for the same services performed at
a hospital.



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Radiopharmaceuticals.We also operate a cyclotron facility located in San Diego,
California. A cyclotron is used to produce radiopharmaceuticals such as Fluorine-18, Nitrogen-13, Oxygen-15 and Flurodeoxyglucose (FDG), which are some of the radiopharmaceuticals used for MI procedures. FDG is the primary
radiopharmaceutical that is injected into a patient before a MI procedure. Abnormal concentrations of FDG can indicate areas of malignancies. In conjunction with UCSD, the Company plans to use the cyclotron in future research programs for the
development of other radioisotopes that may be useful in the fields of neuroscience and cardiology. We believe that the vertical integration of the cyclotron will offer significant commercial benefits for our existing physician and hospital customer
base in Southern California and provide us with a competitive advantage. In August 2004 we entered into a Radiopharmaceutical Distribution Agreement with Anazao Health Corporation, dba Custom Care Pharmacy (Custom Care),
pursuant to which we have appointed Custom Care to distribute radiopharmaceuticals to customers in the Southern California marketplace. Under the terms of this distribution agreement, we are also permitted to distribute Custom Cares other
cardiac products to new and existing customers for which we will be paid a commission by Custom Care.



We are subject to the informational requirements of the Securities Exchange Act of 1934 (the Exchange Act), which requires us to file reports, proxy statements and other information with the Securities and
Exchange Commission. Such reports, proxy statements and other information may be inspected at public reference facilities of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549; 233 Broadway, New York, New York 10279; Northwest
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 5670 Wilshire Boulevard, Los Angeles, California 90036. Copies of such material can be obtained from the Public Reference Section of the SEC at Judiciary Plaza, 450
Fifth Street N.W., Washington, D.C. 20549 at prescribed rates. Because we file documents electronically with the SEC, you may also obtain this information by visiting the SECs Internet web site at http://www.sec.gov.



Significant Fiscal 2004 And Subsequent Corporate Events



In July 2003, the Company purchased a cyclotron facility and a stationary MI center in San
Diego. The cyclotron is used to produce the radio-pharmaceuticals used for MI procedures. The acquisition of the cyclotron was made to secure a source of supply for the Company for its Southern California operations, reducing its dependence on third
party suppliers, and to establish an additional product line for the Company. The MI center is operated in conjunction with UCSD and is known as the University of California, San Diego Center For Molecular Imaging.



The Company operates in an extremely capital intensive industry. In order to provide its
services, it must secure the use of MI systems, which are expensive and generally secured under long term leases. During fiscal 2004 the Company suffered declining liquidity, resulting in its failure to make current payments on some of those leases.
It took several steps to address its financial position, including renegotiating certain of its capital leases, raising additional cash through the sale of Series C Preferred Stock, as described below. Despite these steps, the Company expects that
it will need to raise additional capital in order to continue to fund its operations.



In January of 2004 the Company was notified by Siemens Financial Services, Inc. (Siemens) that it was in default under its Siemens leasing contracts (the Siemens Leases), and GE Healthcare Financial Services,
Inc. (GE) provided a final demand for payment to the Company for overdue payments under the GE leasing contracts (the GE Leases). The Siemens Leases cover nine MI scanners and related equipment operated by the Company and the
GE Leases cover six MI scanners and related equipment operated by the Company. Upon receipt of these notifications from Siemens and GE, the Company then commenced negotiations with Siemens and GE to restructure payments under the Siemens Leases and
GE Leases.



In June 2004, the Company entered into an Addendum Master Equipment
Lease Agreement and an Addendum Master Equipment Service Agreement, and related revised lease schedules, with Siemens to restructure the Siemens Leases (the Siemens Restructuring Agreements). Under the terms of the Siemens Restructuring
Agreements, the Company and Siemens agreed that the Companys monthly payment obligations under the



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Siemens Leases is reduced by 66 and 2/3 percent for the period commencing November 2003 and ending December 2004. The terms of the Siemens Restructuring
Agreement results in the reduction of the Companys aggregate monthly payments under the Siemens Leases from $389,000 to $124,000 for that period.The reduction of the payment obligation during this period is deferred to the end
of the terms of the Siemens Leases. Under the terms of the Siemens Restructuring Agreement, Siemens agreed, in exchange for the Companys timely reduced payments through December 31, 2004, to waive any current default under the terms of the
Siemens Leases. Commencing January 2005, the Company will be required to resume the full monthly payment obligations under the Siemens Leases. The Siemens Restructuring Agreements also contain certain financial and operational covenants applicable
to the Company. As part of the Siemens Restructuring Agreements, the Company issued a Warrant To Purchase Common Stock to Siemens. This warrant grants Siemens to right to purchase up to 500,000 shares of common stock of the Company at an exercise
price of $.45 per share. The expiration date of the warrant is December 31, 2008.



In June 2004, the Company entered into a Subscription Agreement (the June 2004 Subscription Agreement) with Dragon Nominees Limited (Dragon) and consummated the sale to Dragon of $1,100,000 of Series C Convertible
Preferred Stock. Ivan Bradbury is deemed to beneficially own the shares held by Dragon. Based upon a review of the most recent Schedule 13D filed by Mr. Bradbury with the SEC, the acquisition of the Series C Convertible Preferred Stock
increased Mr. Bradburys beneficial ownership stake in the Company to approximately 38 percent.



On September 30, 2004, the Company entered into a Restructuring Agreement (the GE Restructuring Agreement) with GE to restructure the GE Leases. Under the terms of the GE Restructuring Agreements, the
Company and GE agreed that the Companys monthly payment obligations under the GE Leases is reduced by 50 percent for the period commencing November 2003 and ending December 2004. The terms of the GE Restructuring Agreement results in the
reduction of the Companys aggregate monthly payments under the GE Leases from approximately $226,000 to $113,000. The reduction of the payment obligation during this period is deferred to the end of the terms of the GE Leases. Under the terms
of the GE Restructuring Agreement, GE agreed, in exchange for the Companys timely reduced payments through December 31, 2004, to waive any current default under the terms of the GE Leases. Commencing January 2005, the Company will be required
to resume the full monthly payment obligations under the GE Leases through the completion of their terms, which expire at various times from February 2005 to June 2006. The GE Restructuring Agreement also contains certain financial and operational
covenants applicable to the Company.



During the fiscal year, the principal
manufacturers of MI systems began to establish market awareness of new combined systems that include MI and CT scanners in a single machine. Based on initial reaction from its customers and prospective customers, the Company anticipates that demand
for combined MI/CT scanners will increase, and that demand for stand-alone MI scanners will decline. As a result, the Company has taken an impairment charge of $3,261,066 in fiscal 2004 to reflect its estimate of the reduced value of its existing MI
systems.



In September 2004, Paul Crowe, our Chairman, Chief Executive Officer
and founder, resigned as an officer and director of the Company.



On October
12, 2004, the Board of Directors appointed Kenneth Frederick as Chief Executive Officer of the Company and entered into an employment agreement with Mr. Frederick. At the time of his appointment, Mr. Frederick was a director of the Company, having
been nominated by Dragon pursuant to the terms of the July 2002 Securities Purchase Agreement between the Company and Dragon. The terms of the employment agreement provide for (i) a base salary of $260,000 per annum; (ii) a term from October 12,
2004 until November 15, 2005, subject to certain Company termination rights and severance obligations; (iii) a housing allowance of $4,000.00 per month; and (iv) fringe benefits as received by other members of senior management of the Company. In
connection with the employment agreement, the Company has issued Mr. Frederick 250,000 options under the Companys 1999 Stock Option Plan. The options vest monthly over a period of 12 months and



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have an exercise price of $.08 per share. The Company also issued Mr. Frederick 900,000 warrants to purchase Company common stock. These warrants also vest
monthly over a period of 12 months and have an exercise price of (i) $.08 per share for the purchase of shares 1 to 300,000 vested and purchased; (ii) $.16 per share for the purchase of shares 300,001 to 599,999 vested and purchased; and
(iii) $.24 per share for the purchase of shares 600,00 to 900,000 vested and purchased.



In October 2004, Dragon agreed to waive certain rights it has under the July 2002 Securities Purchase Agreement with the Company with respect to the nomination of a designee to the Companys Board of Directors until the first to occur
of (i) the date which is six (6) months after the effective date that Mr. Frederick became Chief Executive Officer or (ii) the date which Mr. Frederick is no longer a member of the Companys Board of Directors.



In October 2004, Dragon and the Company entered into an amendment to the June 2004
Subscription Agreement to allow the Company to delay the requirement to file a registration statement with respect to Company securities held by Dragon until February 15, 2005.



In October 2004, Robert Bush, a director of the Company, notified the Company that he did not intend to stand for re-election as a director
at our upcoming fiscal year 2004 annual stockholders meeting.



About Our
Industry



The Company believes that the growth rates for the sale of MI and
MI/CT equipment are an indication of the potential growth rates for MI and MI/CT services. A leading industry study projects annual revenue from sales of diagnostic imaging equipment to grow from $347.1 million in 1998 to approximately $1.2 billion
by the end of calendar year 2008. Although the study predicts that stand alone MRI and CT growth rates will begin to decline as these modalities approach maturity and market saturation, MI and MI/CT equipment sales are expected to triple in size
from 2002 to 2008. The increase in growth rate is a direct result of MIs recent entry into the diagnostic imaging marketplace and a rise in the price for combined MI/CT systems. Physician and patient demand is growing for MI procedures
influenced by expanded reimbursement for clinical applications approved over the past several years.



We believe that the diagnostic imaging services industry will continue to grow as a result of a number of factors, including the following:



Increasing Demand for Healthcare Services from an Aging Population.    The Unites States
population continues to age with persons over the age of 65 comprising one of the fastest growing segments of the population. According to the United States Census Bureau, this group is expected to increase as much as 14% from 2000 to 2010. Because
diagnostic imaging use tends to increase as a person ages, we believe the aging population will generate more demand for diagnostic imaging procedures.



Wider Physician and Payor Acceptance of the Use of Imaging.  Because advanced imaging systems are increasingly seen as a tool for
reducing long-term healthcare costs, they are gaining wider acceptance among payors. The recent expansion of Centers for Medicare & Medicaid Services (CMS) coverage has driven the growth of MI scanning. Since 1998, the diagnosis,
staging, and restaging of lung, esophageal, colorectal, breast, head and neck cancers, lymphoma, and melanoma have been approved by CMS for reimbursement.



Greater Consumer Awareness of and Demand for Preventive Diagnostic Screening. Diagnostic imaging is increasingly being used as a screening tool for
preventive care such as elective full-body scans. Consumer awareness of and demand for diagnostic imaging as a less invasive and preventive screening method has added to the growth in diagnostic imaging procedures. We believe that further
technological advancements will create demand for diagnostic imaging procedures as less invasive procedures for early diagnosis of diseases and disorders.



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The MI and MI/CT Technology and Procedure



A dedicated MI scanner is a state-of-the-art diagnostic imaging system (similar in appearance to a CT scanner) comprised of a high-speed
computer, integrated workstation, patient exam table and a full ring detector gantry. Performing an MI procedure begins with injecting a small amount of a radioisotope such as FDG into the patient. After absorption of the radioisotope, which takes
approximately 45 minutes, the patient is positioned on the exam table. The exam table automatically travels through the full ring detector gantry and detects signals emitted from the patient. The actual scanning procedure takes about 30-40 minutes.
Upon completion, a 3D full body MI procedure is ready for physician interpretation. An MI scan produces metabolic information of the body, unlike CT or MRI that produce anatomical information. Metabolic changes are typically the first indication of
disease. MI scans are primarily utilized for the diagnosis and staging of cancer, heart disease and neurological disorders.



A dedicated MI/CT scanner is becoming popular with physicians and radiologists because it takes two modalities, MI and CT, and co-registers the information, providing the
physician with a full body study depicting anatomical form and normal or abnormal molecular activity. MI/CT provides both anatomical and molecular information in one procedure. This combined image assists in treatment planning by providing the
physician more specificity. The procedural workup is the same as above but the clinical output includes the additional CT information.



The Advantages of MI and MI/CT



MI offers significant advantages over other diagnostic imaging techniques as it provides a direct measure of biochemistry and functional/metabolic activity. In most
cases, the precursors to disease are biochemical in nature and initially affect function, as opposed to structure. MI has the ability to create a 3D diagnostic image of early metabolic changes, can significantly reduce the time to diagnosis, reduce
costs and improve patient outcomes for numerous indications for oncology, cardiology and neurology.



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



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

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

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

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

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

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

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



As a result of the clinical effectiveness of MI and MI/CT, the Company believes that health care providers are experiencing increased demand to provide MI services.
Increasingly, many health care providers are utilizing out sourced third parties, like our company, to provide these technology-driven patient services.



The American Cancer Society reported that approximately 8.9 million Americans with a history of cancer were alive in 1999 and an estimated 1,334,100 million new
incidences were diagnosed in 2003. MI is currently recognized as one of the only metabolic diagnostic imaging procedures powerful enough to accurately diagnose and stage the metabolic function of cancer with a single pass. It can also provide
information to determine whether a primary cancer has metastasized to other parts of the body. MI has demonstrated its usefulness in cost-effective, whole-body metastatic surveys; avoiding biopsies for low-grade tumors; non-invasive differentiation
of tumors from radiation necrosis; early change in course of ineffective chemotherapy; and avoiding unnecessary diagnostic and therapeutic surgeries.



According to two studies, Contribution of PET in the Diagnosis of Recurrent Colorectal Cancer Comparison with Conventional Imaging, EUROPEAN JOURNAL OF SURGICAL ONCOLOGY
1995, 21: 517-522; and



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Diagnostic Value of Positron Emission Tomography for Detecting Breast Cancer, WORLD JOURNAL OF SURGERY 1998, 22: 223-228; CT scanning is also less effective
than MI Scans as a tool for early detection and diagnosis. These studies indicate that MI has displayed the following detection rates compared to CT scanning and mammography:



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

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

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



In cardiology, an MI scan is one of the most accurate diagnostic tests available to detect cardiovascular disease. By measuring both blood
flow and metabolic rate within the heart, the images display inadequate blood flow to the heart caused by blockages and differentiate between damaged muscle and living muscle that is undetected by other non-invasive cardiac tests. MI enables
physicians to screen for coronary artery disease, to assess flow rates and flow reserve, and to distinguish viable from nonviable myocardium for bypass and transplant candidates. It is also fast becoming an important tool for cardiologists
attempting to achieve reversal of coronary artery disease through aggressive risk factor modification, enabling both doctor and patient to directly and non-invasively measure the progress of improvement in coronary blood flow.



In neurology, MI can assist in the early diagnosis and staging of disorders like
Parkinsons disease. MI is the most accurate method of diagnosing mild to moderate Alzheimers disease. (Overview of Molecular Imaging Technology and Medicare Coverage, Academy of Molecular Imaging 03 Symposium, September 2003,www.ami-imaging.org.) MI can detect a consistent diagnostic pattern for Alzheimers disease where certain regions of the brain may show decreased metabolism early in the disease. This pattern often can be recognized several years before a
physician is able to make the diagnosis from visible symptoms. In addition, MI scans can differentiate Alzheimers from other types of dementia or depression. Before MI, the only way to definitively diagnose Alzheimers was through an
autopsy. MI can also detect Parkinsons disease. A labeled acid is used in MI to determine if the brain is deficient in dopamine synthesis. If it is determined there is no deficiency and the patient is not suffering from Parkinsons
disease, then the course of tremor evaluation and treatment would be modified.



While MI has certain advantages in early detection of diseases, CT scans have certain advantages in that they provide physicians with anatomical information with respect to the patient. In addition, because CT scanning has been available
longer, there are more physicians and technicians available to prescribe, administer and interpret a CT scan. The latest trend in the industry is to combine MI and CT in a single scanner. The leading providers of MI scanners each now offer a MI/CT
scanner. Increasingly, hospitals are requesting the combined MI/CT scan because it provides the benefits of both MIs early detection, and CTs broader diagnostics and accessibility, and the combination of the two technologies improves the
MI scan time and quality.



Our Molecular Imaging Services



Our mobile service business model provides efficient, cost effective access to this
technology for many hospitals and other health care providers that are unable to financially justify or secure the acquisition of a dedicated full-time MI service. A mobile MI system consists of the MI scanner, integrated workstation, 3D Advanced
Computational Image Acquisition and Display System, and patient couch. Mobile coaches are specifically designed for medical staff convenience, patient comfort and safety, and include a powered patient lift, stairway, stabilizing system for leveling,
and transportation alarm to warn of equipment not properly stowed for transport. The interior space of the coach is divided into three sections: a patient staging room, a technology control room, and the MI room. The cost for a new, fully
commissioned MI system can range from $1.6 to $1.9 million, and a MI/CT system between $2,300,000 and $2,600,000 million, inclusive of mobile coach or lease hold improvements. As of September 1, 2004, we have seventeen mobile MI units; one mobile
MI/CT unit; and one fixed site MI unit in operation. These scanners were manufactured either by CTI Molecular Imaging (CTI), Siemens Medical Systems, Inc. (Siemens Medical) or General Electric Medical Systems (General
Electric).



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We offer a comprehensive value added service for our customers which includes:



| |  | A Medical Advisory Board to present seminars that educate physicians on the benefits of MI;
| | - | -------------------------------------------------------------------------------------------

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

| |  | Clinical websitewww.petadvances.com for patient and physician information;
| | - | --------------------------------------------------------------------------

| |  | Facilities planning, economic modeling, and support to accommodate fixed site development for some of our clients;
| | - | ------------------------------------------------------------------------------------------------------------------

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

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



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



Our Operations



Customer Base.    We believe that many hospitals and other health care providers will continue to develop MI
services to remain competitive in the health care marketplace. The Company is licensed to provide MI services in 24 states representing key marketplaces in the United States. Regulatory, Certificate of Need (CON), and licensing
requirements in many states limit general access to MI services. In addition, many health care providers lack sufficient patient volumes or financial resources to justify the purchase of a dedicated in-house MI system. As a result, providers will
consider contracting for mobile services or joint ventures to gain access to MI technology, build patient flows and provide comprehensive MI services to their communities. Many health care providers, regardless of whether their patient flows or
financial resources justify the purchase of a MI system, may prefer to contract with us to (i) obtain the use of a MI or MI/CT system without significant capital investment or financial risk; (ii) retain the ability to switch system types and avoid
the risk of technological obsolescence; (iii) eliminate the need to recruit, train and manage qualified technologists; (iv) provide expanded imaging services when patient demand exceeds their in-house capability; or (v) benefit from our experience
in operating this service.



Mobile Services
Agreements.    We provide our services to hospitals and health care providers under mobile services agreements. These agreements generally have standardized provisions, which are subject to modifications based on the needs of
a particular customer. Under these agreements, we provide use of our mobile MI systems or mobile MI/CT systems, along with a minimum of one trained licensed nuclear medicine technologist, for a specified number of days per week. Fees are based on a
per-patient basis or a flat daily rate. A minimum number of MI exams per day are usually required. We require our customers to pay us for our services within thirty days after we bill them. The agreements require our customers to perform various
functions and supply various items, such as space, power, medical supplies, physicians and patient support services. The agreements generally have a three or five-year term, which is typically subject to automatic renewal for a similar term. The
agreements may be terminated for certain causes, or in some cases without cause, generally on 180 days notice, as described in each of the agreements. Our mobile service agreements contain grounds for termination which include a customers
lack of economic justification for our services, or a customers transition to a stationary site (however, in certain agreements we have a right of first refusal to participate in any joint venture created to install such a stationary system).
The agreements also generally require that we exclusively perform all MI services on our customers sites.



Stationary Facilities.    We are also working to develop stationary MI facilities with hospitals or medical groups who have sufficient patient
volumes to support a full time service. These projects are intended to be structured as either wholly owned subsidiaries or joint ventures. As of September 1, 2004, we operate one stationary MI facility in San Diego, California. The center is
operated with the University of California, San Diego (UCSD)



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as the University of California, San Diego Center For Molecular Imaging. We provide the facility design and build-out, staffing, billing and
collections, and day-to-day management for this facility.



Independent
Diagnostic Testing Facility.    An Independent Diagnostic Testing Facility (IDTF) is a stationary site or mobile MI unit that operates independently of a hospital. Operating as an IDTF allows the Company to enter into a
long-term space rental agreement with a hospital or stand-alone imaging center, with the Company acting as the sole managing entity, or managing partner in the case of a joint venture. This allows the Company to retain full decision making
authority, bill insurance and Medicare directly at higher reimbursements rates, and use our experience in marketing and referral building to increase scan volumes. As of the date of this report, we operate five IDTFs, which includes the stationary
facility in San Diego, California, and four mobile IDTFs in Southern California.



We have also entered into a Limited Liability Company Agreement with Radnet Managed Imaging Services, Inc. (Radnet) for the formation and operation of Radmol PET Center, LLC which will utilize one of the Companys PET
scanners to provide services at several of Radnets imaging facilities in California.



Reimbursement.    Under our direct billing model, we contract directly with and are paid by the hospital, which then bills the health care payors. All of our revenues under this model are
paid directly by the hospital. To date, the vast majority of our customers have paid us on time. However, there can be no assurance that we will always be paid in a timely manner.



Billing and reimbursement for diagnostic imaging services is divided into a technical component and a professional component. Our business
revenue is based on providing part of the technical component, which includes the cost of the equipment, labor and materials needed to perform the imaging procedure by our technologists and the hospital. The professional component is the cost of
interpreting the diagnostic image by the physician. We typically contract with a hospital to receive a negotiated rate for the technical component of the MI procedure that we provide. The hospital then seeks reimbursement from health care payers for
the technical and professional components. At the current time, the average insurance reimbursement to a hospital for a MI procedure is $1,700 to $3,100.



Under our IDTF model, we bill to, and are reimbursed directly by, health care payors such as Medicare, Medicaid, private insurance companies or managed care companies.
Under this model we can bill at retail rates. However, we retain the responsibility of collecting from health care payors. Reimbursement is subject to some risk. Payers may deny coverage and reimbursement for the MI 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. Accordingly, the Company has established an allowance for doubtful accounts which it will continue to
review.



In January 1998 CMS approved Medicare reimbursement for the diagnostic
evaluation of solitary pulmonary nodules and for staging non-small cell lung cancer. As indicated in the table below, the number of procedures that have been approved for Medicare reimbursement has grown. The expansion of Medicare reimbursement for
MI clinical indications is outlined in the chart below:



|                       |  |                                                                                             |  |                
|---------------------- |  | ------------------------------------------------------------------------------------------- |  | ---------------
|Clinical indications   |  | Permitted Reimbursements                                                                    |  | Effective Date 
|                       |  |                                                                                            
|Rb82 Cardiac Perfusion |  | In place of or following inconclusive SPECT                                                 |  | March 4, 1995  
|                       |  |                                                                                            
|Lung Cancer            |  | Characterization of solitary pulmonary nodule                                               |  | January 1, 1998
|                       |  |                                                                                            
|                       |  | Initial staging of lung cancer                                                              |  | January 1, 1998
|                       |  |                                                                                            
|Colorectal Cancer      |  | Detection of the location of recurrent colorectal cancer in patients with rising CEA levels |  | July 1, 1999   
|                       |  |                                                                                            
|Lymphoma               |  | Staging of lymphoma (Hodgkins and non-Hodgkins)                                             |  | July 1, 1999   



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|                             |  |                                                                                       |  |                   
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | ------------------
|Clinical indications         |  | Permitted Reimbursements                                                              |  | Effective Date    
|                             |  |                                                                                      
|Melanoma                     |  | Detection of recurrent melanoma                                                       |  | July 1, 1999      
|                             |  |                                                                                      
|Lung Cancer (non-small cell) |  | Diagnosis, initial staging and restaging                                              |  | July 1, 2001      
|                             |  |                                                                                      
|Colorectal Cancer            |  | Diagnosis, initial staging and restaging                                              |  | July 1, 2001      
|                             |  |                                                                                      
|Melanoma                     |  | Diagnosis, staging and restaging. Not covered to evaluate regional lymph nodes        |  | July 1, 2001      
|                             |  |                                                                                      
|Lymphoma                     |  | Diagnosis, initial staging and restaging                                              |  | July 1, 2001      
|                             |  |                                                                                      
|Head & Neck Cancers          |  | Diagnosis, initial staging and restaging                                              |  | July 1, 2001      
|                             |  |                                                                                      
|Esophageal Cancer            |  | Diagnosis, initial staging and restaging                                              |  | July 1, 2001      
|                             |  |                                                                                      
|Epilepsy Refractory Seizures |  | Pre-surgical evaluation                                                               |  | July 1, 2001      
|                             |  |                                                                                      
|FDG Myocardial Viability     |  | Metabolic assessment after inconclusive SPECT                                         |  | July 1, 2001      
|                             |  |                                                                                      
|Lung Cancer SPN              |  | Characterization definition change                                                    |  | July 1, 2001      
|                             |  |                                                                                      
|Breast Cancer                |  | Staging and restaging of advanced diagnosis and response to therapy/treatment         |  | October 1, 2002   
|                             |  |                                                                                      
|FDG Myocardial Viability     |  | Primary or initial study for determining cardiac viability prior to revascularization |  | October 1, 2002   
|                             |  |                                                                                      
|Thyroid Cancer               |  | MI for restaging of previously treated thyroid cancer                                 |  | October 1, 2003   
|                             |  |                                                                                      
|Alzheimers                  |  | Evaluation of suspected Alzheimers disease                                           |  | September 15, 2004



A majority of private insurers and
HMOs currently approve reimbursement for MI according to their own policies. Many industry observers believe with expanded reimbursement and approval by CMS, a significant growth in clinical utilization of MI will be realized over the next
several years. We believe MI represents a medical technology that provides clinical diagnosis, prepared patient outcomes and a savings to purchasers of services.



Government Regulation



We are required to adhere to a wide variety of regulations governing the operation of our business, including the following:



Physician Referral and Anti-Kickback laws.A federal regulation commonly
known as the Stark Law imposes civil penalties and exclusion from participation in the Medicare program of reimbursement for referrals by physicians for designated health services to certain entities with which the referring
physician has a financial relationship if those referrals do not fall within an exception created by law or regulation. While designated health services do not include MI scans, many legal commentators believe that the Stark Law may be
expanded in the future to include MI scans within the definition of designated health services. Implementing regulations have been issued regarding referrals for clinical laboratory services, but no final implementing regulations have
been issued regarding MI services. It is likely these proposed rules will be found to apply to MI, thereby restricting physician referrals for MI services by an investor-physician or a physician who has a compensation arrangement.



In addition, several states (including the State of California) in which we operate or plan
to operate have enacted or are considering legislation that restricts physician referral arrangements in a manner similar to the Stark Laws and requires physicians to disclose any financial interest they may have with a health care provider to their
patients to whom they recommend that provider. Possible sanctions for violating these provisions include loss of



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medical licensure and civil and criminal sanctions. Such state laws vary from state to state and seldom have been interpreted by the courts or regulatory
agencies. Nonetheless, strict enforcement of these requirements is likely.



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



Federal False Claims Act.    Increasingly, healthcare service providers are facing claims under the federal False Claims Act and, in particular, actions under the False Claims Acts
whistleblower provisions. Those provisions allow a private individual to bring actions on behalf of the government alleging that the defendant has defrauded the federal government. After the individual has initiated the lawsuit, the
government must decide whether to intervene in the lawsuit and to become the primary prosecutor. If the government declines to join the lawsuit, then the individual may choose to pursue the case alone, in which case the individuals counsel
will have primary control over the prosecution, although the government must be kept apprised of the progress of the lawsuit. If the litigation is successful, the individual is entitled to no less than 15%, but no more than 30%, of whatever amount
the government recovers. When an entity is determined to have violated the federal False Claims Act, it must pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 to $11,000 for each
separate false claim. Liability arises, primarily, when an entity knowingly submits a false claim for reimbursement to the federal government. Simple negligence should not give rise to liability, but submitting a claim with reckless disregard of its
truth or falsity could result in substantial civil liability. Future actions under the False Claims Act may result in significant fines and legal fees, which would adversely affect our financial performance and our ability to operate our business.



Health Insurance Portability and Accountability Act of
1996.    The Health Insurance Portability and Accountability Act of 1996 (HIPAA) created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute
prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs
such as the Medicare and Medicaid Programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with
the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment.



HIPAA also establishes uniform standards governing the conduct of certain electronic health care transactions and protecting the security and privacy of individually
identifiable health information maintained or transmitted by health care providers, health plans and health care clearinghouses. Two standards have been promulgated under HIPAA with which we currently are required to comply. We must comply with the
Standards for Privacy of Individually Identifiable Health Information, which restrict our use and disclosure of certain individually identifiable health information. We must also comply with the Standards for Electronic Transactions, which establish
standards for common health care transactions, such as claims information, plan eligibility, payment information and the use of electronic signatures. If we fail to comply with these standards, we could be subject to criminal penalties and civil
sanctions.



In addition to federal regulations issued under HIPAA, some states
have enacted privacy and security statutes or regulations that, in some cases, are more stringent than those issued under HIPAA. In those cases it may be necessary to modify our operations and procedures to comply with the more stringent state laws,
which may entail significant and costly changes for us. We believe that we are in compliance with such state laws and regulations. However, if we fail to comply with applicable state laws and regulations, we could be subject to sanctions.



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Certificate of Need Laws.    Our operations are also subject to Certificate of Need (CON) laws
or regulations in certain states. CON laws were enacted to contain rising healthcare costs by preventing the unnecessary duplication of health resources in a state. The laws require we obtain approval from state authorities before commencing
operations in those states. Depending on the specific requirements of these various laws, this may make it difficult for us to expand our operations in certain states. These laws may also make it more difficult for competitors to expand into areas
where we hold a CON.



Environmental Protection
Laws.    Our MI imaging services require the use of radioactive materials. While this material has a short half-life, meaning it quickly breaks down into inert, or non-radioactive substances, using such materials presents the
risk of accidental environmental contamination and physical injury. Our operations are subject to applicable Federal and State laws governing the use, possession and transportation of radioactive materials. We are subject to quarterly audits by
qualified medical physicists and periodic inspections.. Although we believe that our safety procedures for storing, 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 laws and regulations.
We have not had material expenses related to environmental, health and safety laws or regulations to date.



Competition



We believe that the key
competitive factors affecting our business include providing quality patient care, reliable service, attracting and retaining quality technicians, price, and availability of MI and MI/CT services. At the present time, we believe that there are two
other national companies providing mobile MI services, as well as several regional competitors. Based on industry reports and our review of public filings of we believe that we currently have one of the largest fleets of mobile MI systems of U.S.
operators dedicated to providing only MI and MI/CT services.



We are, and
will continue to be, subject to intense competition in our markets, principally from businesses providing other traditional diagnostic imaging techniques, including existing and developing technologies, and competitive products. There are many
companies engaged in this market, some with significantly greater resources than ours, Significant competitive factors, which will affect future sales in the marketplace, include access to capital, the presence or absence of exclusive service
contracts, the ability to supply MI/CT services, regulatory approvals, performance, pricing and general market acceptance. In addition to direct competition from other providers of mobile MI services, we compete with free-standing CT, MRI and MI
centers, hospitals, health care providers that have their own diagnostic imaging systems, and equipment manufacturers that sell or lease imaging systems to health care providers for mobile or full-time use.



We will also face competition in the marketing and sale of FDG from our cyclotron facility in
San Diego, California. Established competition in the Southern California market includes companies such as P.E.T. Net Pharmaceuticals and Syncor/Cardinal Health.



The risks that may occur if we fail to compete successfully are discussed in the Risk Factors section of this Form 10-KSB.



Our Competitive Strategy



Management has developed and implemented a business strategy designed to grow our company,
increase revenues, and maximize returned earnings. Our goal is to maintain a leadership position in our industry as well as



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pursue significant growth opportunities based on the following competitive strategies. However, there can be no assurance that we will maintain a leadership
position or experience significant growth as a result of these strategies.



State-of-the-Art Technology.    We will seek to continue to provide our customers with the new generation MI devices like MI/CT and image fusion software.



Quality Customer Service and Strong Customer Relationships.    We
have positioned ourselves as a high quality patient service provider rather than solely as an operator of shared services on the basis of value-added services. We differentiate ourselves from potential competitors by professionally developing our
services with those hospitals and physicians who determine quality services are the primary goal for their patients. We offer patient scheduling and insurance pre-certification approval services to facilitate patient throughput and prompt payment.



Secure Exclusive, Long-term Contracts with Key Hospitals in Attractive
Markets.    We generate a majority of our revenues from exclusive, long-term contracts with hospitals and other health care providers on a flat rate or fee for service basis. Our marketing focus is currently directed on key
market segments throughout the U.S. In each of our geographic regions, we approach hospitals, imaging centers and medical groups that we believe require access to MI and MI/CT services. These prospective customers may desire to use mobile MI
services to remain competitive in their respective health care markets or may lack sufficient patient volumes to justify the purchase of a stationary MI or MI/CT system. We also plan to continue to pursue securing long-term contracts with high
profile university hospitals such as our relationship with the University of California, San Diego, which offer the potential of establishing market presence and name recognition. We have also developed a Value Added strategy that is
intended to utilize our senior executives and Medical Advisory Board members to help our customers during the start-up phases at their facilities. Our approach includes physician education and a focused marketing effort to increase utilization. Our
value added services include billing and collections, patient scheduling and third party contracting.



Favorable Payment Terms.    A majority of our billings are direct to hospitals. The hospitals, in turn, generally pay us prior to collecting from patients and third party payers.
Accordingly, we believe our exposure to un-collectable patient receivables is reduced.



Increase Scan Volumes to Maximize Operating Leverage and Return on Capital.    We believe that the demand for MI procedures will continue to grow as new applications are developed, reimbursement approvals expand
and MI continues to gain increased acceptance by physicians resulting in replacing and/or supplementing other diagnostic imaging technologies. We have an opportunity to increase patient procedures by adding new customers, offering new services (i.e.
cardiac and breast imaging), which can increase the number of patient procedures performed. We hope to maximize our return on capital through operating leverage which may be realized by billing our customers on a per-patient basis, so
that as patient flows increase our revenues also increase, but without a significant corresponding increase in our operating costs. We estimate that, on average, a system can be utilized for approximately eight years in a high demand market when
properly maintained and upgraded, after which time the system can either be utilized in a market with less demand or traded in towards the price of a new system.



Identify Attractive Strategic Acquisitions.    We intend to continue to identify attractive strategic acquisition
opportunities that may arise to improve our ability to (i) access lower cost financial resources; (ii) realize significant synergies from operating expense reduction and overhead cost savings; (iii) expand into new geographic markets; and (iv)
increase top line growth.



Vertical
Integration.    We currently produce FDG at our San Diego cyclotron facility for sale to our fixed site MI center and other third parties. We believe we can produce and sell FDG at lower rates than we are currently paying
thereby reducing our operating costs. We also believe we can sell more FDG to third parties as the low cost provider in Southern California, generating additional revenue for the company.



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Customer Support



As part of our professional services, we provide several levels of support to a hospital or health care provider, including (i) developing commercial and clinical
marketing materials; (ii) sponsoring clinical lectures; and (iii) offering educational over-read services. In addition, value added services for billing, collections, and third- party contracting are available on request. We believe that these
services play a key role in our ability to attract new business, retain accounts and build patient procedures. We can provide patient scheduling services, billing and collection services for customers, which provide the company with additional
service revenue.



Sales and Marketing



As of the date of this report, our sales force consists of five regional business development
representatives. The business development personnel identify, qualify and contact candidates for our services. Each regional business development representative has overall sales and marketing responsibility for a specific region of the country.



We believe that our direct education to referring physicians plays a primary
role in our ability to increase patient procedures. As of the date of this report, we have three education specialists. Our educational specialists focus on developing increased scan volumes by introducing referring physicians and their staff to our
MI services and MIs capabilities. In addition, certain key executive officers spend a portion of their time marketing our services. We have also assembled a Medical Advisory Board comprised of leading physicians who assist in educational
programs directed to the medical community, enhancing our ability to attract and increase patient procedures.



Our target market includes hospitals that have an on-site radiology and oncology department or have affiliated oncology service relationships. We believe there are approximately 2,000 hospitals with 250 beds or more
in the U.S. that meet these criteria.



Employees



At September 1, 2004, the Company employed 65 people on a full-time basis and 23 people on a
part-time basis for a total of 88 employees. None of these employees is subject to a collective bargaining agreement and there is no union representation within the Company. The Company maintains various employee benefits plans and believes its
employee relations are good.



ITEM 2.         PROPERTIES



Our corporate offices are located at 9530 Towne Centre Drive, Suite #120, San Diego, California, 92121, where we sublease approximately 6,000 square feet. This sublease is for a term of 48 months through May 31, 2006.
The monthly rental payment for the first month was $0; for months 2 to 12 is $6,000 per month; and for months 13 to 24 is $7,000 per month.



In January of 2004, the Company assumed a facility lease located at 11388 Sorrento Valley Road, Suite 100, San Diego, California, 92121. The term of the lease
expires on August 31, 2008. The monthly rent is $21,995 plus an approximately 25% share of the operating expenses for the entire premises. In January of 2004, the Company entered into a sublease with its wholly owned subsidiary, Molecular Imaging
Sorrento Valley LLC, for the operation of an imaging center at the facility. The term of the sublease expires on August 31, 2008. The monthly rent is $10,997.50 plus an approximately 12.5% share of the operating expenses for the entire premises. In
January of 2004, the Company also entered into a sublease with its majority-owned subsidiary, Molecular Imaging Cyclotron LLC, for the operation of the cyclotron at the facility. The term of the sublease commenced expires on August 31, 2008. The
monthly rent is $10,997.50 plus an approximately 12.5% share of operating expenses.



The Company believes these leased properties are in good condition and adequate to meet its requirements. The Company and its subsidiaries also from time to time enter into space rental agreements for the operation of our mobile IDTF
business.



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ITEM 3.         LEGAL PROCEEDINGS



The Company is often involved in various claims and disputes arising in the course of business, seeking monetary damages and other relief, or in which the Company may seek to collect money for services rendered or
enforce the provisions of its service agreements. The amount of the liability, if any, from such claims cannot be determined with certainty. However, the Company believes the ultimate liability for such claims will not have a material adverse effect
on the Companys consolidated financial position, results of operations or cash flows.



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



The Company held its fiscal year 2003 annual stockholders meeting on July 15, 2004 in San Diego, California. At our annual stockholders meeting, the stockholders of the
company (i) elected managements five nominees to the Companys Board of Directors for another term and (ii) approved of an amendment to the Companys Amended and Restated Certificate of Incorporation to increase the number of
authorized shares of common stock from 90,000,000 to 140,000,000.



The
following members were elected to and as the Board of Directors to serve for the ensuing year and until their successors are elected:



|                         |  |                   |  |                           
|------------------------ |  | ----------------- |  | --------------------------
|                         |  |                  
|Nominee:                 |  | Shares Voted For: |  | Shares Withheld/Abstained:
|Paul J. Crowe            |  | 45,452,068        |  | 521,793                   
|Dr. Axel Steudle         |  | 45,503,568        |  | 469,876                   
|Peter Conti, M.D., Ph.D. |  | 45,499,258        |  | 474,176                   
|Robert C. Bush           |  | 45,499,258        |  | 474,176                   
|Kenneth C. Frederick     |  | 45,563,768        |  | 409,676                   



The number of affirmative votes for
the increase in the number of authorized shares of common stock was 44,805,485; the number of votes against the amendment was 1,121,616; and the number of votes abstaining was 47,160.



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PART II



ITEM 5.         MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



Our Common Stock currently trades on the OTC Bulletin Board, under the symbol MLRI. Our symbol was changed from MBPT to MLRI in May of
2003 in connection with our name change.



The following table sets forth, for
the two most recent fiscal years indicated, the high and low closing bid prices for our Common Stock as reported on the OTC Bulletin Board. The quotation for the Common Stock traded on the OTC Bulletin Board may reflect inter-dealer prices, without
retail mark-up, markdown or commission and may not necessarily represent actual transactions.



|                                  |  |          |  |        
|--------------------------------- |  | -------- |  | -------
|Molecular Imaging Corporation     |  | High Bid |  | Low Bid
|FISCAL YEAR 2002-2003             |  |          |  |        
|FIRST QUARTER (7/1/02-9/30/02)    |  | 0.65     |  | 0.32   
|SECOND QUARTER (10/1/02-12/31/02) |  | 0.34     |  | 0.21   
|THIRD QUARTER (1/1/03-3/31/03)    |  | 0.25     |  | 0.14   
|FOURTH QUARTER (4/1/03-6/30/03)   |  | 0.37     |  | 0.16   
|                                  |  |         
|FISCAL YEAR 2003-2004             |  |          |  |        
|FIRST QUARTER (7/1/03-9/30/03)    |  | 0.62     |  | 0.25   
|SECOND QUARTER (10/1/03-12/31/03) |  | 0.58     |  | 0.34   
|THIRD QUARTER (1/1/04-3/31/04)    |  | 0.50     |  | 0.17   
|FOURTH QUARTER (4/1/04-6/30/04)   |  | 0.31     |  | 0.17   



As of June 30, 2004, 299 stockholders
of record, not including the holders that have their shares held in a depository trust in street name, held our common shares. The transfer agent of our common stock is OTC Corporate Transfer Service Co., P.O. Box 591, Hicksville, NY
11802.



Dividend Policy



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



Equity Compensation Plans



As of June 30, 2004, we have issued the following equity compensation under plans or
individual arrangements:



|                                                               |  |                                                                                             |  |                                                                             |  |                                                                                                                                           
|-------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|                                                               |  | (a)                                                                                         |  | (b)                                                                         |  | (c)                                                                                                                                       
|Plan Category                                                  |  | Number of securities to be issued upon exercise of outstanding options, warrants
and rights |  | Weighted-average exercise price of outstanding options, warrants and rights |  | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected
in column(a))
|Equity compensation plans approved by security holders (1)     |  | 3,123,070                                                                                   |  | $.64                                                                        |  | 4,876,930                                                                                                                                 
|                                                               |  |                                                                                             | 
|Equity compensation plans not approved by security holders (2) |  | 2,055,905                                                                                   |  | $.37                                                                        |  | Not Applicable                                                                                                                            
|                                                               |  |                                                                                            
|Total                                                          |  | 5,178,974                                                                                   |  | $.53                                                                        |  | 4,876,930                                                                                                                                 



|(1) | The Companys only equity compensation plan approved by its stockholders is its 1999 Stock Option Plan, as amended.
|--- | -------------------------------------------------------------------------------------------------------------------



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|(2) | The Company has entered into certain compensation arrangements from time to time. The Company has issued individual warrants to purchase common stock to consultants and service
providers, including the Companys Medical Advisory Board, and to officers and directors who have provided services or advanced credit to the Company. The number shown for this category includes (i) only warrants issued for compensation to
consultants and service providers and (ii) all warrants issued to officers and directors, whether as compensation for services, advancing credit, or otherwise. Not included are warrants issued to vendors or to purchasers of the Companys stock
in connection with the sale of such stock or warrants, or stock or warrants issued after June 30, 2004. As of June 30, 2004, the Company has issued warrants to purchase a total of 7,600,116 common shares (including those shown above), at a
weighted-average exercise price of $.51.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Recent Sales of
Unregistered Securities



On June 16, 2004, 2004 the Company entered into a
Master Equipment Lease Agreement Addendum (the Agreement) with Siemens Financial Services, Inc. (Siemens) pursuant to which the Company issued a Warrant To Purchase Common Stock. This warrant grants Siemens to right to
purchase up to 500,000 shares of common stock of the Company at an exercise price of $.45 per share. The expiration date of the warrants is December 31, 2008. The warrant was issued in reliance upon Section 4(2) of the Securities Exchange Act (the
Act).



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



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.



Overview



The Company is a leading national service provider of
Positron Emission Tomography molecular imaging (PET or MI) services to the healthcare industry. MI is a powerful imaging procedure used to diagnose, monitor and assess disease severity for many cancers, cardiovascular disease
and neurological disorders. MI procedures display metabolic and functional characteristics of disease. Other conventional imaging procedures, such as Computed Tomography (CT) and Magnetic Resonance Imaging (MRI) systems, provide physicians with
anatomical information. Because diseases like cancer, cardiac, vascular disease, and neurological disorders often exhibit altered metabolism before the anatomy is changed, MI helps physicians effectively detect and stage these problems at their
earliest stages. That information helps define and guide appropriate treatment options, which can eliminate redundant testing, hospitalization, or non-beneficial therapies. We provide MI services to hospitals and other healthcare providers in
selected marketplaces in the United States on both a mobile and stationary site basis. We were also one of the first providers of a combined MI/CT system on a mobile coach. These combined scanners represent the latest in MI technology and offer an
added dimension in the diagnosis and monitoring of disease. The MI/CT combined technology improves the diagnosis of cardiovascular disease and central nervous system disorders such as Alzheimers disease.



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With our mobile imaging business, we integrate MI systems on mobile coaches and enter into multi-year contracts with
customers to provide mobile services for a specified number of days per week. We also provide our customers with technical personnel to conduct the MI procedure under the direction of hospital physicians. In some cases, we also train hospital
technical personnel to conduct the MI procedures. Our services allow hospitals and other healthcare providers to access this state-of-the art diagnostic imaging technology and offer these services to their patients. Our customers pay us based on a
flat daily rate or per procedure basis. As discussed above, we have also developed a stationary imaging center that we will operate as an Independent Diagnostic Testing Facility (IDTF). The center is operated with the University of
California, San Diego (UCSD) as the University of California, San Diego Center For Molecular Imaging.



The Companys results of operations declined slightly during 2004. While the Company added new systems, service revenues remained relatively flat. The Company also
experienced a decline in working capital. It addressed this financial position through renegotiating certain of its capital leases and raising additional cash through the sale of Series C Preferred Stock. Despite these steps, the Company expects
that it will need to raise additional capital in order to continue to fund its operations. The Companys auditors have included a Going Concern opinion with their report.



Also as discussed above, we operate a cyclotron facility located in San Diego, California to produce radiopharmaceuticals used in MI
procedures. In August 2004 we entered into a Radiopharmaceutical Distribution Agreement with Custom Care pursuant to which we have appointed Custom Care to distribute radiopharmaceuticals to customers in the Southern California marketplace. The
Distribution Agreement with Custom Care also grants the Company national distribution rights for Custom Cares nuclear medicine products.



The wide spread acceptance of the MI/CT combined technology has caused the demand for non combined MI systems to soften and as a result we have evaluated the
recoverability of the carrying amount of our long-lived MI system assets, in accordance with SFAS 144. SFAS 144 provides that an impairment is assessed when the undiscounted expected future cash flow derived from the asset is less than its carrying
amount. We used our best judgment based upon the most current facts and circumstances when applying these impairment rules. Based upon the analysis performed on the MI systems, an impairment loss of $3,261,066 was recorded to reduce certain of these
impaired assets to their fair market value as of June 30, 2004. We also changed our estimate of useful lives from 7 years to 5.5 years to correspond with the lease termination of these assets, as it is our intention to replace these MI assets with
MI/CT assets when the leases terminate.



The Company depends in part on
long-term exclusive contracts with hospitals to provide MI services. Approximately 31% of the Companys long-term contracts will come up for renewal in fiscal 2005. Some of these facilities may wish to upgrade to a newer MI/CT system. The
Company would have to secure new systems, or risk losing the contract to a competitor that can provide a combined system. The Company is working with its vendors, but does not have purchase or finance arrangements in place at this time to secure
additional MI/CT systems.



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. There are many critical accounting policies discussed in the notes to our financial statements including the following
critical accounting policy that affects the judgments and estimates used in the preparation of our financial statements.



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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.



Recent Accounting Pronouncements



There were no recent accounting pronouncements that affect the Company in the current year.



Results of Operations



Twelve Months Ended June 30, 2004



Service revenues for the twelve months ended June 30, 2004 were $21,207,000 compared to service revenues for the twelve months ended June 30, 2003 of $20,888,000. During
fiscal year 2004, we placed in service our new mobile MI/CT unit and Sorrento Valley MI site and facility. Accordingly, service revenues for systems that were in service for the entire fiscal year declined. This decline is largely attributable to
the underutilization of our mobile MI units and downward pressure on the price of MI scans. Our cost of service revenues for the twelve months ended June 30, 2004 were $13,623,000, compared to $12,455,000 for the twelve months ended June 30, 2003.
The cost of service revenues represents salaries paid to technologists and drivers, system maintenance, transportation and insurance on our mobile MI systems.



The gross profit percentage decreased from 40.4% for the twelve months ended June 30, 2003 to 35.8% for the twelve months ended June 30, 2004 primarily for the
following reasons:



|                                                                  |  |      |  
|----------------------------------------------------------------- |  | ---- | -
|Gross profit percentage for the twelve months ended June 30, 2003 |  | 40.4 | %
|Personnel costs                                                   |  | 0.2  |  
|Depreciation expense                                              |  | (5.8 | )
|Capital equipment rental                                          |  | 1.8  |  
|Capital equipment service contracts and repairs                   |  | (0.6 | )
|FDG                                                               |  | (0.1 | )
|Other                                                             |  | (0.1 | )
|Gross profit percentage for the twelve months ended June 30, 2004 |  | 35.8 | %



Our personnel costs decreased slightly
despite adding Sorrento Valley and the Mobile PET/CT unit during the year as we were able to better manage this resource and moved some positions from full time to part time during the year. Depreciation expense increased during the year mainly due
to the addition of our Sorrento Valley MI site and our one mobile MI/CT unit. Equipment rental costs decreased mainly due to the transfer of one rental unit to a capital leased vehicle in January 2003. Our cost of capital equipment service contracts
and repairs decreased during the year ended June 30, 2004 over the year ended June 30, 2003, due to the termination of certain maintenance contracts that were replaced with time and materials service. This savings was partially offset by an increase
in service costs relating to equipment that is no longer under the one-year factory warranty period. Overall, our FDG (glucose injections) cost increased in fiscal year ending June 30, 2004 over last year as the result of the increased number of
systems in place in 2004, despite the decease in the second half of the year as our suppliers of FDG began selling FDG directly to our customers.



Selling and marketing expenses increased from $1,644,847 for the twelve months ended June 30, 2003 to $1,988,568 for the twelve months ended June 30, 2004. This increase
was primarily from a $107,435 increase in personnel costs related to marketing and sales for the new Sorrento Valley MI and cyclotron facility, as well as a



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$59,074 increase in tradeshow costs; a $53,308 increase in travel costs; and a $195,905 increase in commission expenses, most of which were from prior
periods; all of which are partially offset by savings in personnel costs. General and administrative expenses increased from $6,198,076 for the twelve months ended June 30, 2003 to $8,137,549 for the twelve months ended June 30, 2004. This increase
primarily relates to the Sorrento Valley MI and cyclotron facility general and administrative and start up costs of $1,196,832; increases in bad debt expense of $593,000; increased insurance costs of $245,275; and increased property tax expense of
$200,000 relating to the new systems acquired last year and earlier this year. These increases were partially offset by savings in personnel costs.



Our net income from operations decreased from $589,705 for the year ended June 30, 2003 to a loss of $5,802,527 for the year ended June 30, 2004. The 1.5% increase in
revenue was not sufficient to overcome the 13% increase in cost of sales and operating expenses as described above. Approximately 59% of the increased spending in fiscal year 2004 is attributed to adding the Sorrento Valley MI and cyclotron
facility.



As discussed above, we recorded non-cash impairment charges of
$3,261,066 in fiscal year 2004 relating to the write down of certain of our mobile MI assets in accordance with the provisions of SFAS 144. These assets carried book values that exceeded their fair value, based on managements estimates of the
future expected cash flows.



We recorded a $200,000 non-cash reserve against
our subordinated equity position the London Radiosurgical Centre Ltd. based on the uncertainty of repayment in this investment.



Interest expense increased from $1,915,513 for the year ended June 30, 2003 to $3,019,292 for the year ended June 30,2004 as a result of increased equipment under capital
lease and the additional borrowing on our line of credit with Meridian Healthcare Finance.



Net cash provided by operating activities for the twelve months ended June 30, 2004 increased to $1,739,849, from a negative $1,215,315 for the twelve months ended June 30, 2003. This change was mainly attributable to
an increase in accounts payable and accrued liabilities, as well as a decrease in the amount of outstanding accounts receivable.



Focusing On Our Core Business



We intend to focus our efforts to increase utilization of our existing units to achieve operational profitability. As discussed above, we are also working with existing
customers to convent them to Independent Diagnostic Testing Facilities (IDTF). One measure that management uses to evaluate our progress is average revenues per weekday for all operating 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, 2004, our average revenues per weekday for all units increased to approximately $83,166, from average revenues per weekday for all units of approximately $82,889 for the twelve months ended June
30, 2003. 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 un-collectable 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.



Since our
inception we have incurred significant losses. Through June 30, 2004, we have an accumulated deficit of $34,568,174, which we have financed primarily through equity sales. For the twelve months ended June 30,



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2004, we recognized a loss from continuing operations of $9,051,200, compared to a loss from continuing operations of $1,260,513 for the twelve months ended
June 30, 2003. There was a net loss of $8,801,200 for the twelve months ended June 30, 2004, compared to net income of $964,131 for the twelve months ended June 30, 2003. The net income for the twelve months ended June 30, 2003 was attributable
primarily to the $2.2 million gain on the sale of our London PET Centre in June 2002. There was a net loss available to common stockholders of $9,323,420 for the twelve months ended June 30, 2004, compared to net income available to common
stockholders of $643,593 for the twelve months ended June 30, 2003.



We will
finance and deploy additional mobile or stationary MI/CT systems only for projects that are financially viable. The deployment of additional mobile units or stationary sites should reduce our 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 obtain profitability, we will need to continue to
increase revenues and effectively manage our operating overhead.



Liquidity
and Capital Resources



At June 30, 2004, our total assets were $19,022,152,
compared to $21,788,908 at June 30, 2003. The decrease was primarily the result of a decrease in net property and equipment due to the asset impairment loss recorded on our MI assets. Our current assets at June 30, 2004 totaled $3,645,397, and our
current liabilities were $11,288,280 before the reclassification of long-term lease obligations to current liabilities, compared to current assets of $3,805,598 and current liabilities of $8,434,193 at June 30, 2003. 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 13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.



At June 30, 2004 we had a stockholders deficit of ($3,528,240) which is a decrease of $7,277,984 from stockholders equity of $3,749,744 at June 30, 2003. This decrease in stockholders equity was the result of the net loss of
$8,801,200, partially offset by an increase in stockholders equity of $1,025,000 from the sale of our Series C Convertible Preferred Stock to Dragon.



We have a need to raise additional capital to sustain our operations. In addition, we will be required to raise additional capital to add or acquire additional mobile
units or stationary sites. We are actively exploring various financing alternatives. However, there can be no assurance as to whether, when, or upon what terms the Company will be able to consummate any financing.



The Company is overdue on payments to some of its suppliers. In January of 2004 Siemens
Financial Services, Inc. (Siemens) notified the Company that is was in default under its leasing contracts (the Siemens Leases) with Siemens as a result of overdue payments in the amount of $1,193,452. The Siemens Leases
cover nine molecular imaging scanners and related equipment operated by the Company. Also in January of 2004 GE Healthcare Financial Services, Inc. (GE) provided a final demand for payment to the Company for overdue payments in the
amount of $839,691 under the leasing contracts (the GE Leases) with GE. The GE Leases cover six molecular imaging scanners and related equipment operated by the Company.



On June 16, 2004, the Company entered into an Addendum Master Equipment Lease Agreement and an Addendum Master Equipment Service Agreement,
and related revised lease schedules, with Siemens to restructure the Siemens Leases (the Siemens Restructuring Agreements). Under the terms of the Siemens Restructuring Agreements, the Company and Siemens agreed that the Companys
monthly payment obligations under the Siemens Leases is reduced by 66 and 2/3 percent for the period commencing November 2003 and ending December 2004. The terms of the Siemens Restructuring Agreement results in the reduction of the



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Companys aggregate monthly payments under the Siemens Leases from $389,000 to $124,000 for that period. The reduction of the payment obligation
during this period is deferred to the end of the terms of the Siemens Leases. Under the terms of the Siemens Restructuring Agreement, Siemens agreed, in exchange for the Companys timely reduced payments through December 31, 2004, to waive any
current default under the terms of the Siemens Leases. Commencing January 2005, the Company will be required to resume the full monthly payment obligations under the Siemens Leases. The Siemens Restructuring Agreements also contain certain financial
and operational covenants applicable to the Company. As part of the Siemens Restructuring Agreements, the Company issued a Warrant To Purchase Common Stock to Siemens. This warrant grants Siemens to right to purchase up to 500,000 shares of common
stock of the Company at an exercise price of $.45 per share. The expiration date of the warrant is December 31, 2008.



On September 30, 2004, the Company entered into a Restructuring Agreement (the GE Restructuring Agreement) with GE to restructure the GE Leases. Under the
terms of the GE Restructuring Agreements, the Company and GE agreed that the Companys monthly payment obligations under the GE Leases is reduced by 50 percent for the period commencing November 2003 and ending December 2004. The terms of the
GE Restructuring Agreement results in the reduction of the Companys aggregate monthly payments under the GE Leases from approximately $226,000 to $113,000. The reduction of the payment obligation during this period is deferred to the end of
the terms of the GE Leases. Under the terms of the GE Restructuring Agreement, GE agreed, in exchange for the Companys timely reduced payments through December 31, 2004, to waive any current default under the terms of the GE Leases. Commencing
January 2005, the Company will be required to resume the full monthly payment obligations under the GE Leases through the completion of their terms, which expire at various times from February 2006 to June 2007. The GE Restructuring Agreement also
contains certain financial and operational covenants applicable to the Company.



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RISK FACTORS



You should carefully consider the risks described below before investing in our publicly-traded securities. The risks described below are
not the only ones facing us. Our business is also subject to the risks that affect many other companies, such as competition, technological obsolescence, labor relations, general economic conditions and geopolitical changes. Additional risks not
currently known to us or that we currently believe are immaterial also may impair our business operations and our liquidity.



Risks Related to Our Financial Condition



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 sustained
profitability.



We May Not Be Able to Continue as a Going Concern as Our
Funds Are Insufficient to Fund Our Current Operations



Peterson & Co.,
our independent auditors, have included a going concern modification in their audit opinion on our consolidated financial statements for the fiscal year ended June 30, 2004, which states that:



The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 18 to the financial statements [See Item 7], the Company has suffered recurring losses from operations and a net capital deficiency that raise substantial doubt about is ability to
continue as a going concern. Managements plans in regard to these matters are also described in Note 18 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this
uncertainty



We do not expect our cash position as of the date of this
report to fund our operations under our current operating plan. We are assessing our ability to raise additional capital through equity offerings, debt financing and other financing vehicles, but we cannot assure you that sufficient funds will be
available to us on terms that we deem acceptable, if they are available at all. The inclusion of a going concern modification in Peterson & Co.s audit opinion may materially and adversely affect our stock price and our ability to raise new
equity or debt capital.



Our financial statements have been prepared on the
basis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have not made any adjustments to our financial statements as a result of the going concern opinion. If we
cannot continue as a going concern, we may have to liquidate our assets and we may receive significantly less than the values at which they are carried on our financial statements. Any shortfall in the proceeds from the liquidation of our assets
would directly reduce the amounts that holders of our common stock could receive in liquidation.



Our substantial indebtedness has restricted our operations and made us more vulnerable to adverse economic conditions.



We are a highly leveraged company and our substantial indebtedness has had important consequences. For example, our indebtedness:



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

| |  | requires 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;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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

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



Equipment and other assets of the Company secure certain of our indebtedness. If the Companys creditors foreclose as a result of the
Companys default under its debt obligations, the Company and its operations would be materially and adversely affected.



If we are unable to generate or borrow sufficient cash to make payments on our indebtedness or to refinance our indebtedness on acceptable terms, our financial
condition would be materially harmed, our business may fail and you may lose all of your investment.



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.



Additionally, as discussed above, the Company
recently entered into the Siemens Restructuring Agreements and the GE Restructuring Agreement. Should the Company default under the Siemens Restructuring Agreement or the GE Restructuring Agreement, Siemens and GE would have the right to terminate
the Siemens Leases and GE Leases, respectively; repossess the molecular imaging equipment operated by the Company under the leases; and demand payment for all costs and expenses related to repossessing and reselling the equipment. A default under
the Siemens Restructuring Agreements or GE Restructuring Agreement could also result in a default under the three molecular imaging equipment leases assigned to Ascendant PET Partners-I, LLC (PET Partners) in May of 2003. In the event of
such a default, PET Partners would also be entitled to repossess the equipment and demand payment for costs and expenses. The Company generates substantially all of its revenue from the operation of the molecular imaging equipment under the Siemens
Leases, GE Leases and PET Partners leases. The repossession of all or a portion of the molecular imaging equipment under these leases would result in the Companys inability to generate further revenues and, therefore, would have a material
adverse affect on the Companys operations and its ability to continue as a going concern.



We will need to obtain additional financing and if we are unable to obtain it our business may fail.



Our capital requirements associated with our operations have been and will continue to be substantial. Our available short-term assets and investment income are
insufficient to meet our operating expenses and capital expenditures through the current fiscal year. Even if additional investment is obtained, 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 MI services. We cannot assure you 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 are either not available or not available on acceptable terms, our business, revenues, financial condition and results of operations will
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. Also, our ability to raise additional funds through the issuance of equity or convertible securities is restricted by our number of authorized shares and may be restricted by certain covenants contained in the July
2002 private placement agreements.



We have a single stockholder with a
large concentration of shares that will be able to exert significant influence over matters requiring stockholder approval, including change of control transactions.



Ivan Bradbury beneficially owns a significant amount of our Common Stock, as well as warrants to purchase our Common Stock, and all of our
outstanding Series C Convertible Preferred Stock. Based upon a review of filings



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made by Mr. Bradbury with the SEC, on a fully diluted basis, Mr. Bradbury beneficially owns approximately 38% of our common equity. This concentration of
shares allows Dragon to exert influence over matters requiring stockholder approval. This concentration of ownership may also delay or prevent a change of control of our company or reduce the price investors might be willing to pay for our common
stock. Additionally, Dragon has certain rights under the July 2002 Securities Purchase Agreement, including the right to appoint a nominee to the Companys Board of Directors, and a right of first refusal to purchase additional securities
offered by the Company. The interests of Mr. Bradbury may conflict with the interests of other holders of our common stock.



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



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



Risks Related to Our Business



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



Our future revenues and
profitability depend in part on our ability to demonstrate to hospitals and other potential new clients the cost and performance advantages of the MI and MI/CT system over traditional diagnostic imaging systems. Our ability to achieve sustained
profitability in the future will depend in part on our ability to successfully market and sell MI services on a wide scale. High cost, concerns by patients and physicians relating to safety and efficacy, and the substantial acceptance of other
diagnostic tools such as MRI or CT scans may interfere with the growing acceptance of MI technology. We believe MI 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. If we are unable to secure this acceptance, we will be unable to achieve sustained profitability from operations.



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We may not be able to renew or maintain our client contracts which would result in a loss of revenue.



Upon expiration of our clients contracts, we are subject to the risk that clients
will cease using our MI systems and purchase or lease their own MI systems or MI/CT systems, use our competitors MI systems or MI/CT systems, or rely on alternate imaging technologies. Approximately thirty-one percent of our multi-year client
contracts expire in 2004; approximately forty-six percent expire in 2005; and approximately twenty-three percent in 2006/2007. Moreover, approximately one-third of our client contracts permit the client, upon typically 180 days notice, to
terminate the 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 MI system. In addition, many
of our contracts do not have minimum usage requirements. If we lose a client, we may not be able to immediately secure a replacement client, or secure a client with the same number of patient scans.



Because we have high fixed costs, lower scan volumes per system could significantly impact
our profitability.



Our expenses are comprised primarily of compensation
paid to technologists, equipment rental and purchase expenses, transportation expenses and equipment maintenance costs. Because a majority of these expenses are fixed, a relatively small change in our revenue could have a disproportionate effect on
our operating and financial results. Thus decreased revenue from lower scan volumes per system could significantly impact our profitability and adversely affect our business.



We will continue to face substantial competition, and 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. We believe some of our competitors are offering MI services to our existing and potential customers at lower rates than we are charging or proposing to charge such customers. These lower
rates could cause us to lose our existing customers or fail to gain new customers that could have a material adverse impact on our business and results of operations. Furthermore, we expect that other companies will enter the mobile and stationary
MI and MI/CT market, particularly as MI and MI/CT 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 MI
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.



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



The markets in which our MI services compete are subject to rapid technological change as well as the potential development of alternative
diagnostic imaging techniques or products, or the combination of modalities such as MI/CT. While MI currently provides advantages over alternative imaging solutions, the industry is subject to rapid technical changes, and new technologies may be
developed which provide superior diagnostic or economic advantages. The development of combination MI/CT systems has resulted in the reduction in the value of, and reduced need for, our MI systems. These changes could also render the MI system
technologically or economically obsolete. There can be no assurance that we will be able to acquire the new or improved systems MI/CT systems that may be demanded by new and existing customers.



We have experienced turnover in our executive management, and the replacement of that
management may impact the direction and operations of the Company.



During
the period covered by this report, the Company hired a new Chief Financial Officer. Following the end of the current fiscal year, Paul Crowe, founder of the Company, resigned his position as Chairman of the Board,



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Chief Executive Officer, and as a Director. As of the date of this report, the Company has appointed Kenneth Frederick as its new Chief Executive Officer.
The appointment of a new Chief Executive Officer and Chief Financial Officer within a relatively short period of time could be expected to have a significant impact upon the operations, earnings and prospects of the Company.



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



We obtain our MI and MI/CT 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. To date, we have leased substantially all of our systems from Siemens and GE. From time to time, we have been in default
under those leases and we have recently negotiated reduced terms with Siemens and GE. There is no assurance that Siemens or GE will continue to lease to us on the future on favorable terms, or on any terms at all. While there are alternative
suppliers for the MI and MI/CT systems, there can be no assurance that any supplier could be replaced in a timely manner, or that the alternative systems and service contracts would be sufficient to allow us to effectively and economically service
our clients. Any interruption in the supply and/or delivery of the MI or MI/CT systems could materially harm our ability to expand our revenues and thereby adversely affect our financial condition and results from operations. In addition, the small
number of potential suppliers may adversely impacts the Companys ability to negotiate the most favorable terms.



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 of operations.



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



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



The success of the IDTF
business model depends on our ability to accurately predict patient demand for our services; the maintenance of higher reimbursement rates for IDTF procedures; and our selection of quality business partners.



As of the date of this report, we have five IDTFs, one of which is stationary and four of
which are mobile. We are actively working with third parties to develop additional stationary and mobile imaging centers that we will operate as IDTFs. These imaging centers are identified and selected based on input from hospital administrators,
imaging center operators or physician groups who want to offer MI on their campus. We analyze the marketplace demographics, local competition, tumor board statistics, referring physician demographics and the availability of an on-site MI champion to
increase the vitality of the MI 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, as we have done with The Regents of the
University of California for our stationary imaging center in San Diego, California. We anticipate that these partnerships would be in the form of a limited liability company or similar legal entity in which we would have a majority ownership,
control and management rights.



While we will use our experience and knowledge
of the MI marketplace to select IDTF imaging centers that we believe will be successful, there can be no assurances that our selection process will result in an IDTF that is profitable. Also, the factors upon which we select the IDTF imaging center
may change after commencement of operations of the site that could result in reduced patient use and revenues and have an adverse impact on our business. There are no assurances that the current reimbursement rates for IDTF imaging centers will
remain



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higher than those for hospital based services. A reduction in such reimbursement rates could have an adverse impact on the operation of the IDTF model. The
IDTF model may also result in a longer period of time between when we perform the MI procedure and receive payment then under our typical mobile services model. This could have an adverse impact on our cash flow.



The success of our IDTF model will also depend on our ability to select quality partners who
can assist in the development and operation of those imaging centers and our ability to execute and implement agreements with such third parties that will protect our rights with respect to the management and operation of these imaging centers.
While we will use our experience to select quality business partners, there can be no assurance that such partners will act in our best interest, or that our agreements with such partners will adequately protect our rights in the event of a dispute
with such partners. The federal and state laws and regulations described above also impact our ability to partner with third parties for the development and operation of IDTF imaging centers, and any changes in such laws, or changes in the
interpretations of such laws, could restrict our ability to enter into such partnerships. Also, the failure by such partners to comply with the applicable state and federal laws and regulations described above could result in penalties, damages,
fines or a curtailment in our operations which could adversely affect our ability to operate our business.



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 terminate or fail to 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.



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



We depend to a considerable degree on a limited number of key personnel. The loss of the services of key personnel could harm our business. Our success will also depend,
among other factors, on the successful recruitment and retention of qualified business development, education, marketing, and technological personnel. It is impossible to predict the availability of qualified sales persons and technologists or the
compensation levels that will be required to hire them. In particular, there is a very high demand for qualified MI technologists who are necessary to operate our systems. We may not be able to hire or retain a sufficient number of MI technologists,
and we may be required to pay higher salaries to our MI 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.



We have a very limited operating history with respect to the cyclotron.



We completed the purchase of the cyclotron in August of 2003 and have a very limited operating history with respect to the cyclotron. To date, we have produced only a
limited amount of FDG for sale to third parties, and



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have produced only a limited amount of FDG for use by our subsidiary. Although our officers and employees have substantial business experience in the MI
industry and the healthcare industry generally, and we have retained skilled and qualified employees, consultants and a third party pharmaceutical distribution company to assist us with the day-to-day operation of the cyclotron and delivery of FDG,
there can be no assurances that our cyclotron operations will be successful. The operation of the cyclotron and delivery of FDG is also subject to local, state and federal licensing and permitting requirements. Although we have retained a consultant
to assist us with this licensing and permitting, and have contracted with a third party for the distribution of the FDG, any failure to maintain these licenses and permits, or retain the third party pharmaceutical distribution company under the
terms of the agreement, could have a material adverse impact on our operations.



A successful liability claim asserted against us due to a defect in the MI system, MI/CT system, or FDG, in excess of our insurance coverage, would harm our business.



Providing mobile MI and MI/CT shared services, and producing, selling and distributing FDG, involves the inherent risk of professional and
product liability claims against us. We currently maintain insurance coverage in the types and amounts which we deem adequate for our operations, 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 MI and MI/CT systems, or the production, delivery and sale of FDG, 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.



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 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.



Risks relating to Government Regulation of Our Business



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



Our MI service involves the
controlled storage, use and disposal of material containing radioactive isotopes. Our cyclotron business involves the production and delivery of 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 production, delivery, 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 or a defect in the FDG, we could be held liable for any damages that result, and any liability could



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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.



Managed care and healthcare reform legislation may impact third party reimbursement, which is critical to market acceptance of our
services.



Under the non-IDTF model, MI 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 MI 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 MI system have generally been reimbursed, payers
may deny coverage and reimbursement for the MI 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 MI 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. Any change in the rates of or
conditions for reimbursement could also substantially reduce the number of procedures that we perform under our IDTF model. 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.



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;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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

| |  | the federal Health Insurance Portability and Accountability Act (HIPAA) of 1996, which requires covered entities to comply with national standards for security and privacy of
protected health information and with standards for transactions and code sets.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 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 MI 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 a
few of the states in which we operate require a certificate of need, more states are adopting similar licensing requirements. In many cases, a limited number of these certificates are available in a given state. If we are unable to obtain the
applicable certificate or approval or additional certificates or approvals necessary to expand our operations, these regulations may limit or preclude our operations in the relevant jurisdictions. Conversely, states in which we have obtained or will
obtain a certificate of need may repeal existing certificate of need regulations or liberalize exemptions from the regulations. The repeal of certificate of need regulations in states in which we have obtained a certificate of need or a certificate
of need exemption would lower barriers to entry for competition in those states and could adversely affect our business.



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



All of the states in which we
operate require that the imaging technologists that operate our systems be licensed or certified. In the healthcare industry, various types of organizations are accredited to meet certain Medicare certification requirements, expedite third-party
payment, and fulfill state licensure requirements. Some managed



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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.



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.



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ITEM 7.    FINANCIAL STATEMENTS



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNT FIRM



To The Board of Directors

Molecular Imaging Corporation



We have audited the consolidated balance sheets of Molecular Imaging Corporation and subsidiaries as of June 30, 2004 and 2003, and the
related consolidated statements of operations, changes in stockholders 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 of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, based on our audits, the financial statements referred to above present fairly, in all material respects, the financial
position of Molecular Imaging Corporation and its subsidiaries as of June 30, 2004 and 2003, 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.



The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note 19 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Managements plans in regard to these matters are also described in Note 19. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.





PETERSON & CO., LLP

San Diego, California

October 13, 2004



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MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

June 30,
2004 and 2003



|                                                                                                                                                               |  |      |             |   |      |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                                                                                               |  | 2004 |             |   | 2003 |  
|ASSETS                                                                                                                                                         |  |      |             |   |      |   |             |  
|                                                                                                                                                               |  |     
|Current assets                                                                                                                                                 |  |      |             |   |      |   |             |  
|Cash                                                                                                                                                           |  | $    | 213,571     |   |      | $ | 113,130     |  
|Accounts receivable, net                                                                                                                                       |  |      | 3,086,335   |   |      |   | 3,282,147   |  
|Prepaid expenses                                                                                                                                               |  |      | 198,784     |   |      |   | 406,980     |  
|Deposits and other assets                                                                                                                                      |  |      | 146,707     |   |      |   | 3,341       |  
|                                                                                                                                                               |  |      |             |   |      |   |             |  
|Total current assets                                                                                                                                           |  |      | 3,645,397   |   |      |   | 3,805,598   |  
|                                                                                                                                                               |  |     
|Property and equipment, net                                                                                                                                    |  |      | 14,141,267  |   |      |   | 15,944,388  |  
|                                                                                                                                                               |  |     
|Other assets                                                                                                                                                   |  |      |             |   |      |   |             |  
|Accrued interest receivable                                                                                                                                    |  |      | 10,573      |   |      |   | 10,573      |  
|Due from London Radiosurgical Centre, Ltd                                                                                                                      |  |      | 93,112      |   |      |   | 127,123     |  
|Subordinated equity participation                                                                                                                              |  |      |            |   |      |   | 200,000     |  
|Loan receivable                                                                                                                                                |  |      |            |   |      |   | 500,000     |  
|Prepaid rent and financing costs                                                                                                                               |  |      | 1,131,803   |   |      |   | 1,201,226   |  
|                                                                                                                                                               |  |      |             |   |      |   |             |  
|Total assets                                                                                                                                                   |  | $    | 19,022,152  |   |      | $ | 21,788,908  |  
|                                                                                                                                                               |  |      |             |   |      |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                 |  |      |             |   |      |   |             |  
|                                                                                                                                                               |  |     
|Current liabilities                                                                                                                                            |  |      |             |   |      |   |             |  
|Accounts payable                                                                                                                                               |  | $    | 1,673,697   |   |      | $ | 1,494,450   |  
|Asset-backed financing facility                                                                                                                                |  |      | 1,480,405   |   |      |   | 1,554,628   |  
|Current portion of long-term debt                                                                                                                              |  |      | 20,149      |   |      |   | 28,481      |  
|Loans payable to related parties                                                                                                                               |  |      | 60,000      |   |      |   | 122,692     |  
|Accrued and other liabilities                                                                                                                                  |  |      | 2,192,438   |   |      |   | 420,471     |  
|Obligations under capital lease - current                                                                                                                      |  |      | 17,013,360  |   |      |   | 4,813,471   |  
|                                                                                                                                                               |  |      |             |   |      |   |             |  
|Total current liabilities                                                                                                                                      |  |      | 22,440,049  |   |      |   | 8,434,193   |  
|                                                                                                                                                               |  |     
|Noncurrent liabilities                                                                                                                                         |  |      |             |   |      |   |             |  
|Obligations under capital lease, net                                                                                                                           |  |      |            |   |      |   | 9,561,258   |  
|Long-term debt                                                                                                                                                 |  |      | 21,280      |   |      |   | 43,713      |  
|Deferred gain                                                                                                                                                  |  |      | 89,063      |   |      |   |            |  
|                                                                                                                                                               |  |      |             |   |      |   |             |  
|Total liabilities                                                                                                                                              |  |      | 22,550,392  |   |      |   | 18,039,164  |  
|                                                                                                                                                               |  |      |             |   |      |   |             |  
|Minority interest                                                                                                                                              |  |      |            |   |      |   |            |  
|                                                                                                                                                               |  |     
|Stockholders equity (deficit)                                                                                                                                 |  |      |             |   |      |   |             |  
|Common stock; $0.0001 par value; 90,000,000 shares authorized; 56,267,801 and 55,531,272 shares issued and outstanding at June 30, 2004 and
2003, respectively |  |      | 5,628       |   |      |   | 5,554       |  
|Preferred stock; $0.0001 par value; 10,000,000 shares authorized; 1,100,000 shares issued and outstanding at June 30, 2004                                     |  |      | 1,025,000   |   |      |   |            |  
|Additional paid in capital                                                                                                                                     |  |      | 30,009,306  |   |      |   | 29,511,164  |  
|Accumulated deficit                                                                                                                                            |  |      | (34,568,174 | ) |      |   | (25,766,974 | )
|                                                                                                                                                               |  |      |             |   |      |   |             |  
|Total stockholders equity (deficit)                                                                                                                           |  |      | (3,528,240  | ) |      |   | 3,749,744   |  
|                                                                                                                                                               |  |      |             |   |      |   |             |  
|Total liabilities and stockholders equity (deficit)                                                                                                           |  | $    | 19,022,152  |   |      | $ | 21,788,908  |  
|                                                                                                                                                               |  |      |             |   |      |   |             |  



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



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MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

For the Years Ended June 30, 2004 and 2003



|                                                                                                                                  |  |      |            |   |      |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                  |  | 2004 |            |   | 2003 |  
|Service revenues, net                                                                                                             |  | $    | 21,207,425 |   |      | $ | 20,887,924 |  
|Cost of service revenues                                                                                                          |  |      | 13,622,769 |   |      |   | 12,455,296 |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Gross profit                                                                                                                      |  |      | 7,584,656  |   |      |   | 8,432,628  |  
|                                                                                                                                  |  |     
|Expenses                                                                                                                          |  |      |            |   |      |   |            |  
|Selling and marketing                                                                                                             |  |      | 1,988,568  |   |      |   | 1,644,847  |  
|General and administrative                                                                                                        |  |      | 8,137,549  |   |      |   | 6,198,076  |  
|Asset impairment loss                                                                                                             |  |      | 3,261,066  |   |      |   |           |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Total expenses                                                                                                                    |  |      | 13,387,183 |   |      |   | 7,842,923  |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Income (loss) from operations                                                                                                     |  |      | (5,802,527 | ) |      |   | 589,705    |  
|                                                                                                                                  |  |     
|Other income (expense)                                                                                                            |  |      |            |   |      |   |            |  
|Interest income                                                                                                                   |  |      |           |   |      |   | 4,742      |  
|Other income                                                                                                                      |  |      | 8,378      |   |      |   | 107,371    |  
|Interest expense                                                                                                                  |  |      | (3,019,292 | ) |      |   | (1,915,513 | )
|Impairment loss on LRC Investment                                                                                                 |  |      | (200,000   | ) |      |   |           |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Total other income (expense)                                                                                                      |  |      | (3,210,914 | ) |      |   | (1,803,400 | )
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Loss from continuing operations before provision for income taxes                                                                 |  |      | (9,013,441 | ) |      |   | (1,213,695 | )
|Provision for income taxes                                                                                                        |  |      | 37,759     |   |      |   | 46,818     |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Net loss from continuing operations                                                                                               |  |      | (9,051,200 | ) |      |   | (1,260,513 | )
|Minority share of net loss                                                                                                        |  |      | (250,000   | ) |      |   |           |  
|Income (loss) from operations of discontinued subsidiaries (including a $2,219,300 gain on sale for the year ended June 30,
2003) |  |      |           |   |      |   | 2,224,644  |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Net income (loss)                                                                                                                 |  |      | (8,801,200 | ) |      |   | 964,131    |  
|Preferred stock dividend                                                                                                          |  |      | 522,220    |   |      |   | 320,538    |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Net income (loss) - available to common shareholders                                                                              |  | $    | (9,323,420 | ) |      | $ | 643,593    |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|                                                                                                                                  |  |     
|Earnings per share                                                                                                                |  |      |            |   |      |   |            |  
|Loss per share from continuing operations - basic                                                                                 |  | $    | (0.16      | ) |      | $ | (0.02      | )
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Income (loss) per share from discontinued operations - basic                                                                      |  | $    |           |   |      | $ | 0.04       |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Net income (loss) per share available to common shareholders - basic                                                              |  | $    | (0.17      | ) |      | $ | 0.01       |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Loss per share from continuing operations - diluted                                                                               |  | $    | (0.17      | ) |      | $ | (0.02      | )
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Income (loss) per share from discontinued operations - diluted                                                                    |  | $    |           |   |      | $ | 0.04       |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Net income (loss) per share - available to common shareholders - diluted                                                          |  | $    | (0.17      | ) |      | $ | 0.01       |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Weighted average number of shares - basic                                                                                         |  |      | 55,847,081 |   |      |   | 54,292,673 |  
|                                                                                                                                  |  |      |            |   |      |   |            |  
|Weighted average number of shares - diluted                                                                                       |  |      | 55,981,918 |   |      |   | 54,627,390 |  
|                                                                                                                                  |  |      |            |   |      |   |            |  



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



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MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders Equity (Deficit)

For the Years ended June 30, 2004 and 2003



|                                                                |  |              |   |  |                 |       |                            |        |           |                     |   |           |                                         |   |            |                                     |  |   |             |   |  |   |          |   |  |   |            |  
|--------------------------------------------------------------- |  | ------------ | - |  | --------------- | ----- | -------------------------- | ------ | --------- | ------------------- | - | --------- | --------------------------------------- | - | ---------- | ----------------------------------- |  | - | ----------- | - |  | - | -------- | - |  | - | ---------- | -
|                                                                |  | Common Stock |   |  | Preferred Stock |       | Additional Paid In Capital |        |           | Accumulated Deficit |   |           | Foreign Currency Translation Adjustment |   |            | Total Stockholders Equity(Deficit) | 
|                                                                |  | Shares       |   |  | Amount          |       |                            | Shares |           | Amount              |   |           |                                         |  
|Balance June 30, 2002                                           |  | 44,966,267   |   |  | $               | 4,497 |                            |        |           |                     |   |           |                                         | $ | 22,852,226 |                                     |  | $ | (26,410,567 | ) |  | $ | (312,661 | ) |  | $ | (3,866,505 | )
|                                                                |  |              |   |  |                 |       |                            |       
|Common stock issued in private placement, net of offering costs |  | 9,821,429    |   |  |                 | 982   |                            |        |           |                     |   |           |                                         |   | 6,184,424  |                                     |  |   |             |   |  |   |          |   |  |   | 6,185,406  |  
|Preferred stock redemption - common stock surrendered           |  | (374,000     | ) |  |                 | (37   | )                          |        |           |                     |   |           |                                         |   | 37         |                                     |  |   |             |   |  |   |          |   |  |   |           |  
|Preferred stock redemption - dividend                           |  |              |   |  |                 |       |                            |        |           |                     |   |           |                                         |   |            |                                     |  |   | (297,362    | ) |  |   |          |   |  |   | (297,362   | )
|Repriced warrants                                               |  |              |   |  |                 |       |                            |        |           |                     |   |           |                                         |   | 23,176     |                                     |  |   | (23,176     | ) |  |   |          |   |  |   |           |  
|Common stock issued for services                                |  | 930,076      |   |  |                 | 93    |                            |        |           |                     |   |           |                                         |   | 344,907    |                                     |  |   |             |   |  |   |          |   |  |   | 345,000    |  
|Common stock issued through the exercise of options             |  | 187,500      |   |  |                 | 19    |                            |        |           |                     |   |           |                                         |   | (19        | )                                   |  |   |             |   |  |   |          |   |  |   |           |  
|Options and warrants issued as compensation and for services    |  |              |   |  |                 |       |                            |        |           |                     |   |           |                                         |   | 106,413    |                                     |  |   |             |   |  |   |          |   |  |   | 106,413    |  
|Net income                                                      |  |              |   |  |                 |       |                            |        |           |                     |   |           |                                         |   |            |                                     |  |   | 964,131     |   |  |   |          |   |  |   | 964,131    |  
|Foreign currency translation adjustment                         |  |              |   |  |                 |       |                            |        |           |                     |   |           |                                         |   |            |                                     |  |   |             |   |  |   | 312,661  |   |  |   | 312,661    |  
|                                                                |  |              |   |  |                 |       |                            |        |           |                     |   |           |                                         |   |            |                                     |  |   |             |   |  |   |          |   |  |   |            |  
|Balance June 30, 2003                                           |  | 55,531,272   |   |  |                 | 5,554 |                            |        |           |                     |   |           |                                         |   | 29,511,164 |                                     |  |   | (25,766,974 | ) |  |   |         |   |  |   | 3,749,744  |  
|                                                                |  |              |   |  |                 |       |                            |       
|Common stock issued through the exercise of warrants            |  | 224,999      |   |  |                 | 22    |                            |        |           |                     |   |           |                                         |   | 78,727     |                                     |  |   |             |   |  |   |          |   |  |   | 78,749     |  
|Common stock issued through the exercise of options             |  | 2,000        |   |  |                 | 1     |                            |        |           |                     |   |           |                                         |   | 339        |                                     |  |   |             |   |  |   |          |   |  |   | 340        |  
|Common stock issued for services                                |  | 509,530      |   |  |                 | 51    |                            |        |           |                     |   |           |                                         |   | 130,313    |                                     |  |   |             |   |  |   |          |   |  |   | 130,364    |  
|Preferred stock issued in private placement                     |  |              |   |  |                 |       |                            |        | 1,100,000 |                     |   | 1,025,000 |                                         |   |            |                                     |  |   |             |   |  |   |          |   |  |   | 1,025,000  |  
|Section 16(b) shareholder short swing profits                   |  |              |   |  |                 |       |                            |        |           |                     |   |           |                                         |   | 288,763    |                                     |  |   |             |   |  |   |          |   |  |   | 288,763    |  
|                                                                |  |              |   |  |                 |       |                            |        |           |                     |   |           |                                         |   |            |                                     |  |   |             |   |  |   |          |   |  |   |           |  
|Net loss                                                        |  |              |   |  |                 |       |                            |        |           |                     |   |           |                                         |   |            |                                     |  |   | (8,801,200  | ) |  |   |          |   |  |   | (8,801,200 | )
|                                                                |  |              |   |  |                 |       |                            |        |           |                     |   |           |                                         |   |            |                                     |  |   |             |   |  |   |          |   |  |   |           |  
|                                                                |  |              |   |  |                 |       |                            |        |           |                     |   |           |                                         |   |            |                                     |  |   |             |   |  |   |          |   |  |   |            |  
|Balance June 30, 2004                                           |  | 56,267,801   |   |  | $               | 5,628 |                            |        | 1,100,000 |                     | $ | 1,025,000 |                                         | $ | 30,009,306 |                                     |  | $ | (34,568,174 | ) |  |   |         |   |  | $ | (3,528,240 | )
|                                                                |  |              |   |  |                 |       |                            |        |           |                     |   |           |                                         |   |            |                                     |  |   |             |   |  |   |          |   |  |   |            |  





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



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MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Years Ended June 30, 2004 and 2003



|                                                                                    |  |      |            |   |      |   |            |  
|----------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                    |  | 2004 |            |   | 2003 |  
|Cash flows from operating activities                                                |  |      |            |   |      |   |            |  
|Net income (loss)                                                                   |  | $    | (8,801,200 | ) |      | $ | 964,131    |  
|Adjustments to reconcile net income (loss) to net cash used in operating activities |  |      |            |   |      |   |            |  
|Depreciation                                                                        |  |      | 4,795,266  |   |      |   | 3,135,082  |  
|Non cash impairment loss                                                            |  |      | 3,261,066  |   |      |   |           |  
|Impairment loss on LRC investment                                                   |  |      | 200,000    |   |      |   |           |  
|Non cash stock option and warrant charge                                            |  |      |           |   |      |   | 106,413    |  
|Common stock issued for services                                                    |  |      | 130,364    |   |      |   | 345,000    |  
|Gain on Sale and lease back                                                         |  |      | 100,000    |   |      |   |           |  
|Minority interest in net loss of subsidiary                                         |  |      | (250,000   | ) |      |   |           |  
|Gain on sale of discontinued operations                                             |  |      |           |   |      |   | (2,219,300 | )
|(Increase) decrease in operating assets                                             |  |      |           |   |      |   |            |  
|Accounts receivable                                                                 |  |      | 195,812    |   |      |   | 137,554    |  
|Due from London Radiosurgical Centre, Ltd.                                          |  |      | 34,011     |   |      |   | 2,194      |  
|Prepaid expenses                                                                    |  |      | 208,196    |   |      |   | (234,890   | )
|Deposits and other assets                                                           |  |      | (143,366   | ) |      |   | 844,346    |  
|Restricted cash                                                                     |  |      |           |   |      |   | 352,490    |  
|Cash of discontinued operations                                                     |  |      |           |   |      |   | (37,574    | )
|Prepaid rent and financing costs                                                    |  |      | 69,423     |   |      |   | (697,240   | )
|Increase (decrease) in operating liabilities                                        |  |      |            |   |      |   |            |  
|Accounts payable                                                                    |  |      | 179,247    |   |      |   | (3,239,410 | )
|Accrued and other liabilities                                                       |  |      | 1,771,967  |   |      |   | (674,111   | )
|Deferred Gain                                                                       |  |      | (10,937    | ) |      |   |           |  
|                                                                                    |  |      |            |   |      |   |            |  
|Net cash used in operating activities                                               |  |      | 1,739,849  |   |      |   | (1,215,315 | )
|                                                                                    |  |     
|Cash flows from investing activities                                                |  |      |            |   |      |   |            |  
|Capital expenditures                                                                |  |      | (900,000   | ) |      |   | (144,843   | )
|Proceeds from sale of capital assets                                                |  |      | 1,250,000  |   |      |   | (500,000   | )
|Proceeds from sale of discontinued operations                                       |  |      |           |   |      |   | 1,884,917  |  
|                                                                                    |  |      |            |   |      |   |            |  
|Net cash provided by (used in) investing activities                                 |  |      | 350,000    |   |      |   | 1,240,074  |  
|                                                                                    |  |     
|Cash flows from financing activities                                                |  |      |            |   |      |   |            |  
|Asset-backed financing facility, net                                                |  |      | (74,223    | ) |      |   | 1,554,628  |  
|Payments on loans                                                                   |  |      | (93,457    | ) |      |   | (409,688   | )
|Payments on obligations under capital lease                                         |  |      | (3,464,580 | ) |      |   | (4,141,940 | )
|Investment in Subsidiary                                                            |  |      | 250,000    |   |      |   |            |  
|Preferred stock redeemed                                                            |  |      |           |   |      |   | (3,284,072 | )
|Common stock issued                                                                 |  |      | 79,089     |   |      |   | 6,185,406  |  
|Preferred stock issued                                                              |  |      | 1,025,000  |   |      |   |           |  
|Short swing profits from shareholder                                                |  |      | 288,763    |   |      |   |           |  
|                                                                                    |  |      |            |   |      |   |            |  
|Net cash provided by (used in) financing activities                                 |  |      | (1,989,408 | ) |      |   | (95,666    | )
|                                                                                    |  |      |            |   |      |   |            |  
|Net (decrease) increase in cash                                                     |  |      | 100,441    |   |      |   | (70,907    | )
|Effect of exchange rate changes on cash                                             |  |      |           |   |      |   | 89,894     |  
|Cash - beginning of year                                                            |  |      | 113,130    |   |      |   | 94,143     |  
|                                                                                    |  |      |            |   |      |   |            |  
|Cash - end of year                                                                  |  | $    | 213,571    |   |      | $ | 113,130    |  
|                                                                                    |  |      |            |   |      |   |            |  
|                                                                                    |  |     
|SUPPLEMENTAL DISCLOSURES                                                            |  |      |            |   |      |   |            |  
|Interest paid                                                                       |  | $    | 3,019,292  |   |      | $ | 1,915,513  |  
|Income taxes paid                                                                   |  | $    | 37,759     |   |      | $ | 46,818     |  
|                                                                                    |  |     
|NON CASH INVESTING AND FINANCING ACTIVITIES                                         |  |      |            |   |      |   |            |  
|Equipment under capital lease                                                       |  | $    | 6,195,179  |   |      | $ | 5,008,951  |  
|Preferred stock dividend-warrants re-priced in redemption                           |  | $    |           |   |      | $ | 23,176     |  
|Obligations under capital lease                                                     |  | $    | 6,195,179  |   |      | $ | 5,008,951  |  
|Conversion of liability to note payable                                             |  | $    | 500,000    |   |      | $ |           |  



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



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MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



NOTE 1THE COMPANY



Molecular Imaging Corporation and subsidiaries, (the Company) were organized to provide Positron Emission Tomography (PET or MI) 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. The Company sold its operation in the United Kingdom in July 2002.



NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Basis of Presentation



The consolidated financial statements include the accounts of the Company and its 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.



Impairment of Long-Lived Assets



The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment
or Disposal of Long Lived Assets (SFAS 144). SFAS 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows that are expected to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.



Revenue Recognition



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



Service revenues from third party payors are reported net of contractual
allowances. Contractual allowances are a normal industry practice and are a result of third party reimbursements for services performed based on allowable cost. 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



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MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)



NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



amounts and accrued and interim and final settlements are reported in operations in the year of settlement. Contractual allowances are $271,126 and $300,000
at June 30, 2004 and 2003, respectively.



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 stockholders equity and accordingly have no effect on net income (loss). All foreign subsidiaries were sold in July 2002.



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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.



Reclassifications



Certain prior year amounts have been reclassified to conform to fiscal
2004 presentation. These changes had no impact on previously reported results of operations or stockholders equity.



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,
2004 and 2003 was $65,825 and $142,434, 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.



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MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)



NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



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, 2004 and 2003.



NOTE 3ACQUISITIONS



Cyclotron LLC



On July 23, 2003, the Company entered into an Operating Agreement (the Cyclotron Operating Agreement) with two of our former directors, Jeffrey Rush and Paul
Crowe, and an unaffiliated third party, for the formation and operation of Molecular Imaging Cyclotron LLC, a Delaware limited liability company (Cyclotron LLC). Cyclotron LLC was established to purchase and operate a cyclotron facility
in San Diego, California for the production, marketing and sale of FDG and other radio-pharmaceuticals to third party providers and users of molecular imaging (MI) services, including the Company and its subsidiaries. Under the terms of
the Operating Agreement, the Company owns 662/3% of the equity of Cyclotron LLC, and Mr. Crowe, Mr. Rush, and a third unaffiliated investor, together own 331/2% of the equity of
Cyclotron LLC. To date, the Company has contributed $500,000 to Cyclotron LLC and Mr. Crowe and Mr. Rush, together with the unaffiliated third party investor, have contributed $250,000 to Cyclotron LLC. On August 15, 2003, Cyclotron LLC acquired
assets, including the cyclotron located in San Diego, California from Vital Imaging, Inc. (Vital Imaging) for $1,000,000 and the assumption of an equipment lease in the amount of approximately $2,100,000 from MarCap Corporation
(MarCap). Additionally, as part of the purchase price to Vital Imaging, the Company agreed to pay to Vital Imaging an amount equal to ten percent (10%) of any and all distributable cash (as defined in the Cyclotron Operating Agreement)
distributed by Cyclotron LLC to the Company.



On August 15, 2003,
Cyclotron LLC entered into an Asset Purchase and LeaseBack Agreement (the UCSD Agreement) with The Regents of the University of California (the Regents). Under the terms of the UCSD Agreement, Cyclotron LLC agreed to sell and
leaseback the cyclotron to the Regents for a purchase price of $750,000 and the Regents assumption of the equipment lease in the amount of approximately $2,100,000. The UCSD Agreement also provides that the Regents may elect to contribute the
cyclotron assets to Cyclotron LLC in exchange for a membership interest in Cyclotron LLC. Until such time, if ever, the Regents elect to make such a contribution, Cyclotron LLC is required to the pay Regents a monthly equipment lease payment in the
amount of approximately $35,500 and pay certain additional rent at such time, if ever, that Cyclotron LLC has distributable cash.



Sorrento Valley LLC



On August 15, 2003, the Company entered into an Operating Agreement (the Sorrento Valley Operating Agreement) for the formation and operation of Molecular
Imaging Sorrento Valley LLC, a Delaware limited liability company (Sorrento Valley LLC). Sorrento Valley LLC was established to purchase and operate a scanner in San Diego, California. The Company owns 100% of the equity of Sorrento
Valley LLC. To date, the Company has not contributed any money to Sorrento Valley LLC. On August 15, 2003, Sorrento Valley LLC completed the purchase of the scanner located in San Diego, California from Vital Imaging for $400,000 and the assumption
of an equipment lease in the amount of approximately $2,000,000. Additionally, as part of the purchase price to Vital Imaging, the Company agreed to pay to Vital Imaging an amount equal to sixteen and



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MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)



NOTE 3ACQUISITIONS (CONTINUED)



65/100ths (16.65%) of any and all distributable cash (as defined in the Sorrento Valley Operating Agreement) distributed by Sorrento Valley LLC to the
Company.



On August 15, 2003, Sorrento Valley LLC entered into the UCSD
Agreement with the Regents pursuant to which Sorrento Valley LLC agreed to sell and leaseback the scanner and certain related assets to the Regents for a purchase price of $500,000 and the Regents assumption of the equipment lease in the amount of
approximately $2,000,000 from MarCap. The UCSD Agreement also provides that the Regents may elect to contribute the to scanner assets in exchange for a membership interest in Sorrento Valley LLC. Until such time, if ever, the Regents elect to make
such a contribution, Sorrento Valley LLC is required to the pay the Regents a monthly equipment lease payment in the amount of approximately $33,000 and pay certain additional rent at such time, if ever, that Sorrento Valley LLC has
distributable cash.



Amendments to UCSD Agreement



On September 24, 2004, the Company, Cyclotron LLC, Sorrento Valley LLC, and the Regents
entered into a binding term sheet in which the parties agreed to amend the UCSD Agreement to extend the deadline by which UCSD may elect to become a member of Cyclotron LLC and Sorrento Valley LLC, extend the date by which Cyclotron LLC and Sorrento
Valley LLC must accrue for additional rent to the Regents, from fiscal years 2004 and 2005, to fiscal years 2006 and 2007, and require the Company to use commercially reasonable efforts to cause MarCap to consent to the assignment of the MI scanner
equipment lease from the Regents to a third party in order to allow for the financing of a new MI/CT unit at the Sorrento Valley center.



NOTE 4ACCOUNTS RECEIVABLE



Accounts receivable consist of the following at June 30, 2004 and 2003:



|                                       |  |      |           |   |      |   |           |  
|-------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                       |  | 2004 |           |   | 2003 |  
|Accounts receivable                    |  | $    | 4,211,561 |   |      | $ | 3,682,147 |  
|                                       |  |     
|Less allowance for doubtful accounts   |  |      | (854,100  | ) |      |   | (100,000  | )
|Less allowance for contractual amounts |  |      | (271,126  | ) |      |   | (300,000  | )
|                                       |  |      |           |   |      |   |           |  
|                                       |  | $    | 3,086,335 |   |      | $ | 3,282,147 |  
|                                       |  |      |           |   |      |   |           |  



NOTE 5PREPAID RENT AND
FINANCING COSTS



Prepaid rent and financing costs consist of the following
at June 30, 2004 and 2003:



|                        |  |      |           |      |   |          
|----------------------- |  | ---- | --------- | ---- | - | ---------
|                        |  | 2004 |           | 2003
|Prepaid equipment rent  |  | $    | 1,073,986 |      | $ | 1,073,986
|Prepaid financing costs |  |      | 57,817    |      |   | 127,240  
|                        |  |      |           |      |   |          
|                        |  | $    | 1,131,803 |      | $ | 1,201,226
|                        |  |      |           |      |   |          



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MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)



NOTE 6PROPERTY AND EQUIPMENT



Property and equipment at June 30, 2004 and 2003 consist of the following:



|                              |  |      |             |   |      |   |            |  
|----------------------------- |  | ---- | ----------- | - | ---- | - | ---------- | -
|                              |  | 2004 |             |   | 2003 |  
|Computer equipment            |  | $    | 1,160,758   |   |      | $ | 1,014,253  |  
|Office furniture and fixtures |  |      | 164,562     |   |      |   | 164,562    |  
|Office equipment              |  |      | 13,291      |   |      |   | 12,752     |  
|Leasehold improvements        |  |      | 250,000     |   |      |   | 7,071      |  
|Equipment                     |  |      | 25,618,324  |   |      |   | 23,023,223 |  
|                              |  |      |             |   |      |   |            |  
|                              |  |      | 27,206,935  |   |      |   | 24,221,861 |  
|Less accumulated depreciation |  |      | (13,065,668 | ) |      |   | (8,277,473 | )
|                              |  |      |             |   |      |   |            |  
|                              |  | $    | 14,141,267  |   |      | $ | 15,944,388 |  
|                              |  |      |             |   |      |   |            |  



Capitalized interest costs in the
amount of $80,411 is included in property and equipment. Depreciation expense for the years June 30, 2004 and 2003 was $4,795,266 and $3,135,082, respectively.



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). On September 21, 2000, the Company designated and subsequently issued thirty (30) shares 8% Cumulative Convertible Redeemable Preferred,
Series B Stock (Series B). On July 31, 2002 the Company entered into a Redemption Agreement to redeem all of the outstanding Series A and Series B stock. The Company redeemed 23 shares of Series A and 27 shares of Series B stock
outstanding for $3,784,072. The excess of the carrying amount of the Series A and Series B Stock over the redemption amount was recorded as a preferred dividend in the amount of $297,362. In addition, the Company agreed to re-price certain existing
warrants. Accordingly, warrants to purchase 199,581 shares of common stock at a price between $5.00 and $2.5125 per share and expiring between September and November 2005 were re-priced and may now be exercised at a price of $1.00 per share,
resulting in a preferred stock dividend in the amount of $23,176.



On June 8,
2004, the Company designated and subsequently issued 1,100,000 of Series C Convertible Preferred Stock (Series C) for sale to Dragon Nominees Limited (Dragon) for cash in the amount of $1,100,000, less $75,000 in fees related
to the financing. The Series C have no mandatory dividend or voting rights, and have a liquidation preference of $1.00 per share. The shares of Series C Preferred Stock are convertible at any time by the holder into shares of common stock of the
Company. The number of shares into which one share of Series C Preferred Stock is convertible is determined by dividing $1.00 by the Conversion Price. The Conversion Price per share for the Series C Preferred Stock is equal to 80% of the market
price of the Companys common stock; provided, however, that upon the occurrence and during the continuance of certain uncured events of default, the Conversion Price per share for the Series C Preferred Stock is be equal to 70%
of the Market Price. However, in no event shall the Conversion Price be less than $.05 per share or exceed $.25 per share. The Market Price of the Companys common stock is be equal to the average of the lowest three inter-day bid prices of the
Companys Common Stock during the ten (10) trading days immediately preceding the date of conversion; provided, that such ten (10) trading day period shall not include any trading days during the occurrence of certain events described in the
Certificate of Designations for the Series C. In addition, in connection with this financing, the



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MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)



NOTE 7CAPITALIZATION (CONTINUED)



Preferred Stock (Continued)



Company also agreed to issue warrants to Dragon to purchase up to 1,000,000 shares of common stock at an exercise price of $0.25 per share, expiring in three years from
June 2004. The Series C has a beneficial conversion feature in the amount of $522,220 which has been included the net loss available to common shareholders.



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, 2004 and 2003 the Company had 56,267,801 and
55,531,272 shares of common stock issued and outstanding, respectively.



Stock Options



The Companys Board of Directors and
stockholders 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
through April 10, 2013 and vesting over service periods that range from zero to ten years.



As of June 30, 2004, the Company has granted options to purchase 3,123,070 shares of common stock as follows:



|                           |  |                |             |                 |            |   |              |            |  
|-------------------------- |  | -------------- | ----------- | --------------- | ---------- | - | ------------ | ---------- | -
|                           |  | Exercise Price |             | Number ofShares |            |   | VestedShares |           
|Outstanding, June 30, 2002 |  | $              | .45 - $4.63 |                 | 4,082,709  |   |              | 3,268,045  |  
|Granted                    |  | $              | .17 - $ .74 |                 | 2,343,490  |   |              | 1,145,305  |  
|Exercised                  |  |                |             |                 | (187,500   | ) |              | (187,500   | )
|Cancelled                  |  | $              | .43 - $3.42 |                 | (1,919,542 | ) |              | (1,669,521 | )
|                           |  |                |             |                 |            |   |              |            |  
|Outstanding June 30, 2003  |  | $              | .17 - $4.63 |                 | 4,319,157  |   |              | 2,556,329  |  
|Granted                    |  | $              | .22 - $.34  |                 | 450,000    |   |              | 180,548    |  
|Exercised                  |  | $              | .17         |                 | (2,000     | ) |              | (2,000     | )
|Cancelled                  |  | $              | .17 - $4.63 |                 | (1,644,087 | ) |              | (440,765   | )
|                           |  |                |             |                 |            |   |              |            |  
|Outstanding, June 30, 2004 |  | $              | .17 - $3.00 |                 | 3,123,070  |   |              | 2,294,112  |  
|                           |  |                |             |                 |            |   |              |            |  



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, 2004 and 2003 the Company recognized compensation expense of $0 and $82,603, respectively.



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MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)



NOTE 7CAPITALIZATION (CONTINUED)



Stock Options (Continued)



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 income (loss) and income (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, |           
|                                                         |  | 2004     |            |   | 2003 |  
|Net loss from continuing operations                      |  |          |            |   |      |   |            |  
|As reported                                              |  | $        | (9,051,200 | ) |      | $ | (1,260,513 | )
|Pro forma                                                |  |          | (9,260,653 | ) |      |   | (1,564,186 | )
|Loss per share from continuing operations                |  |          |            |   |      |   |            |  
|As reported                                              |  | $        | (0.16      | ) |      | $ | (0.02      | )
|Pro forma                                                |  |          | (0.17      | ) |      |   | (0.03      | )
|Net income (loss) available to common stockholders       |  |          |            |   |      |   |            |  
|As reported                                              |  | $        | (9,323,420 | ) |      | $ | 643,593    |  
|Pro forma                                                |  |          | (9,532,873 | ) |      |   | 339,920    |  
|Income (loss) per share available to common stockholders |  |          |            |   |      |   |            |  
|As reported                                              |  | $        | (0.17      | ) |      | $ | 0.01       |  
|Pro forma                                                |  |          | (0.17      | ) |      |   | 0.01       |  



Warrants



At June 30, 2004 warrants were outstanding to purchase 7,640,756 shares of common stock at
exercise prices between $0.29 to $7.00 per share, and at the average of the last reported sale price of the common stock for the five trading days preceding the issue date. These warrants expire between July 12, 2003 and December 1, 2008. The
Company recognized compensation expense to employees or directors of $0 and $23,810 during the years ended June 30, 2004 and 2003, respectively.



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 stockholder, officer and director. 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, 2004 and 2003 accrued interest on the investment was $10,573.



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##### Table of Contents

MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)



NOTE 8RELATED PARTY TRANSACTIONS (CONTINUED)



Subordinated Equity Participation (Continued)



On June 30, 2004, the Company recorded an impairment loss on investment in the amount of $200,000 based on LRCs prior performance history.



Due from London Radiosurgical Centre, Ltd



LRC provided office space and administrative expenses under normal commercial terms to The
London PET Centre Limited during the period in which the Company owned The London PET Centre Limited. The Company advanced amounts to LRC in prior years for working capital, with a balance due from London Radiosurgical Centre, Ltd in the amount of
$93,112 and $127,123 at June 30, 2004 and 2003, respectively. The advances are covered by a continuing corporate guarantee. The Company has received an additional $50,924 subsequent to year end.



Loans



On August 23, 2000, the Company received an eight percent (8%) bridge loan from a director and stockholder 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 January 8, 2002, until paid in full. At June 30, 2004 and 2003, the
loan has a principal balance of $60,000 and $122,692, respectively.



NOTE
9IMPAIRMENT OF LONG-LIVED ASSETS



The wide spread acceptance of the
MI/CT combined technology has caused the demand for non combined MI systems to soften and as a result we have evaluated the recoverability of the carrying amount of our long-lived MI system assets, in accordance with SFAS 144. An impairment is
assessed when the undiscounted expected future cash flow derived from the asset is less than its carrying amount. Management used judgment based upon the most current facts and circumstances when applying these impairment rules. Based upon the
analysis performed on the MI systems, an impairment loss of $3,261,066 was recorded to reduce certain of these impaired assets to their fair market value as of June 30, 2004.



NOTE 10CHANGE IN ESTIMATE



The Company changed the remaining useful lives of certain MI systems from 7 years to 5.5 years and additional depreciation expense in the amount of $191,970 resulting
from this change in estimate is included in the statement of operations for the year ended June 30, 2004.



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MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)



NOTE 11INCOME TAXES



At June 30, 2004 the Company has a net operating loss carryforward for tax purposes of approximately $24,244,247 which expires through the
year 2024. The Internal Revenue Code contains provisions, which may limit the loss carryforward available if significant changes in stockholder ownership of the Company occur.



The components of the provision for income taxes for the years ended June 30, 2004 and 2003 are as follows:



|                           |  |          |        |      |   |       
|-------------------------- |  | -------- | ------ | ---- | - | ------
|                           |  | June 30,
|                           |  | 2004     |        | 2003
|Current                    |  |          |        |      |   |       
|Foreign                    |  | $        |       |      | $ |      
|Federal                    |  |          |       |      |   |      
|State                      |  |          | 37,759 |      |   | 46,818
|                           |  |          |        |      |   |       
|                           |  |          | 37,759 |      |   | 46,818
|Deferred                   |  |          |        |      |   |       
|Foreign                    |  |          |       |      |   |      
|Federal                    |  |          |       |      |   |      
|                           |  |          |        |      |   |       
|State                      |  |          |       |      |   |      
|                           |  |          |        |      |   |       
|Provision for income taxes |  | $        | 37,759 |      | $ | 46,818
|                           |  |          |        |      |   |       



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



|                                |  |          |             |   |      |   |            |  
|------------------------------- |  | -------- | ----------- | - | ---- | - | ---------- | -
|                                |  | June 30, |            
|                                |  | 2004     |             |   | 2003 |  
|Deferred tax assets             |  |          |             |   |      |   |            |  
|Non-cash compensation           |  | $        | 1,406,446   |   |      | $ | 897,426    |  
|Allowance for Bad Debts         |  |          | 484,271     |   |      |   | 171,560    |  
|Organization and start-up costs |  |          | 0           |   |      |   | 26,033     |  
|Asset Impairment                |  |          | 1,542,344   |   |      |   | 0          |  
|State tax benefit and other     |  |          | 207,617     |   |      |   | 63,233     |  
|Net operating loss carryforward |  |          | 9,064,162   |   |      |   | 8,581,300  |  
|                                |  |          |             |   |      |   |            |  
|                                |  |          | 12,704,840  |   |      |   | 9,739,552  |  
|Deferred tax liabilities        |  |          |             |   |      |   |            |  
|Depreciation                    |  |          | 2,238,386   |   |      |   | 2,075,756  |  
|State tax expense               |  |          | 403,450     |   |      |   | 540,093    |  
|                                |  |          |             |   |      |   |            |  
|                                |  |          | 2,641,836   |   |      |   | 2,615,849  |  
|                                |  |          |             |   |      |   |            |  
|                                |  |          | 10,063,004  |   |      |   | 7,123,703  |  
|                                |  |          |             |   |      |   |            |  
|Less valuation allowance        |  |          | (10,063,004 | ) |      |   | (7,123,703 | )
|                                |  |          |             |   |      |   |            |  
|Net deferred tax assets         |  | $        |            |   |      | $ |           |  
|                                |  |          |             |   |      |   |            |  



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MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)



NOTE 12LONG TERM DEBT



Long term debt at June 30, 2004 and 2003 consists of the following:



|                                                                                                                                                                                                   |  |      |        |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------- | -
|                                                                                                                                                                                                   |  | 2004 |        | 2003 |  
|Promissory Note with no interest, due in monthly Installments of $500, with first payment beginning On February 1, 2002.                                                                           |  | $    | 5,000  |      | $ | 11,000  |  
|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. |  |      | 36,429 |      |   | 61,194  |  
|                                                                                                                                                                                                   |  |      |        |      |   |         |  
|                                                                                                                                                                                                   |  |      | 41,429 |      |   | 72,194  |  
|Less current portion                                                                                                                                                                               |  |      | 20,149 |      |   | (28,481 | )
|                                                                                                                                                                                                   |  |      |        |      |   |         |  
|Long term debt, net of current portion                                                                                                                                                             |  | $    | 21,280 |      | $ | 43,713  |  
|                                                                                                                                                                                                   |  |      |        |      |   |         |  



The maturities of long term debt for
each of the three years subsequent to June 30, 2004, are as follows:



|                     |  |   |       
|-------------------- |  | - | ------
|Year Ending June 30, |  |  
|2005                 |  |   | 20,149
|2006                 |  |   | 21,280
|                     |  |   |       
|                     |  | $ | 41,429
|                     |  |   |       





NOTE 13COMMITMENTS



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



|                              |  |          |             |   |      |   |            |  
|----------------------------- |  | -------- | ----------- | - | ---- | - | ---------- | -
|                              |  | June 30, |            
|                              |  | 2004     |             |   | 2003 |  
|Equipment                     |  | $        | 27,208,939  |   |      | $ | 23,023,223 |  
|Less accumulated amortization |  |          | (12,247,488 | ) |      |   | (8,648,494 | )
|                              |  |          |             |   |      |   |            |  
|Net capital lease assets      |  | $        | 14,961,451  |   |      | $ | 14,374,729 |  
|                              |  |          |             |   |      |   |            |  



The Company leases office space and
certain MI equipment under non-cancelable operating leases. The office lease expires in August 2008 and the equipment leases expire through January 2008.



Rent expense for the years ended June 30, 2004 and 2003 was $2,310,441 and $2,414,452, respectively.



The Company leases certain other MI equipment under capital leases. The equipment leases expire through January 2008. The capital leases are
secured by the Companys assets. In connection with the settlement of prior litigation with a third party, the Company has agreed to purchase two MI/CT scanners and service agreements, subject to obtaining financing acceptable to the Company.



The Company obtained a waiver of its noncompliance with its financial ratio
covenant with one of its equipment lessors through December 31, 2004.



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MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)



NOTE 13COMMITMENTS (CONTINUED)



The following is a schedule by year of the future minimum lease payments at June 30, 2004 based on contracted
payments. Obligations under capital lease have been classified as short term.



|                                            |  |               |            |   |                 |   |          
|------------------------------------------- |  | ------------- | ---------- | - | --------------- | - | ---------
|Years Ending June 30,                       |  | Capital Lease |            |   | OperatingLeases
|Past Due Payments                           |  | $             | 864,835    |   |                 | $ |         
|2005                                        |  |               | 7,003,318  |   |                 |   | 1,543,985
|2006                                        |  |               | 8,192,058  |   |                 |   | 2,209,982
|2007                                        |  |               | 2,814,488  |   |                 |   | 1,082,156
|2008                                        |  |               | 2,600,881  |   |                 |   | 291,502  
|2009                                        |  |               | 1,444,866  |   |                 |   | 48,878   
|2010                                        |  |               | 468,531    |   |                 |   |         
|                                            |  |               |            |   |                 |   |          
|                                            |  |               | 23,088,937 |   |                 | $ | 5,176,503
|                                            |  |               |            |   |                 |   |          
|Less amount representing interest at 11.95% |  |               | (6,075,577 | ) |                 |   |          
|                                            |  |               |            |   |                 |   |          
|Present value of minimum lease payments     |  | $             | 17,013,360 |   |                 |   |          
|                                            |  |               |            |   |                 |   |          



NOTE 14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 years ended June 30, 2004 and 2003.



NOTE 15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.



NOTE 16SEGMENT INFORMATION



The Companys principal business is providing molecular imaging services to hospitals
and other health care providers on a fixed or mobile-shared user basis within the United States.



In August of 2003, a subsidiary of the Company acquired a cyclotron facility located in San Diego, California. A cyclotron is used to produce radiopharmaceuticals such as Fluorine-18, Nitrogen-13, Oxygen-15 and
Flurodeoxyglucose (FDG), which are some of the radiopharmaceuticals used for MI procedures. FDG is the primary radiopharmaceutical that is injected into a patient before a MI procedure. There were no sales of radiopharmaceuticals during
the year ended June 30, 2004.



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MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)



NOTE 17EARNINGS (LOSS) PER SHARE (CONTINUED)



The computations of basic and diluted earnings per share from continuing operations for the years ended June 30, 2004
and 2003 were as follows:



|                                                   |  |          |            |   |      |   |           
|-------------------------------------------------- |  | -------- | ---------- | - | ---- | - | ----------
|                                                   |  | June 30,
|                                                   |  | 2004     |            |   | 2003
|Income (loss) per sharebasic                      |  |          |            |   |      |   |           
|Numerator:                                         |  |          |            |   |      |   |           
|Net income (loss)available to Common stockholders |  | $        | (9,323,420 | ) |      | $ | 643,593   
|Denominator:                                       |  |          |            |   |      |   |           
|Weighted-average shares                            |  |          | 55,847,081 |   |      |   | 54,292,673
|                                                   |  |          |            |   |      |   |           
|Income (loss) per sharebasic                      |  | $        | (0.17      | ) |      | $ | 0.01      
|                                                   |  |          |            |   |      |   |           
|Income (loss) per sharediluted                    |  |          |            |   |      |   |           
|Numerator:                                         |  |          |            |   |      |   |           
|Net income (loss)available to Common stockholders |  | $        | (9,323,420 | ) |      | $ | 643,593   
|Denominator:                                       |  |          |            |   |      |   |           
|Weighted-average shares                            |  |          | 55,981,918 |   |      |   | 54,627,390
|                                                   |  |          |            |   |      |   |           
|Income (loss) per sharediluted                    |  | $        | (0.17      | ) |      | $ | 0.01      
|                                                   |  |          |            |   |      |   |           



The weighted average shares listed
below were not included in the computation of diluted income (loss) per share because to do so would have been antidilutive for the years ended June 30, 2004 and 2003:



|                                                                          |  |           |  |           
|------------------------------------------------------------------------- |  | --------- |  | ----------
|                                                                          |  | June 30, 
|                                                                          |  | 2004      |  | 2003      
|Cumulative convertible redeemable preferred stock common stock equivalent |  | 444,082   |  |          
|Employee stock options                                                    |  | 2,737,210 |  | 3,880,528 
|Warrants                                                                  |  | 8,295,308 |  | 13,849,247



NOTE 18ASSET BASED FINANCING



In May 2003 the Company entered into a $3,200,000 asset-based financing
arrangement with a financial institution, which expires on May 12, 2006. The amounts borrowed by the Company under this financing arrangement are used to pay its general operating expenses. Amounts available under the arrangement are limited to
approximately 85% of qualified accounts receivable following an amendment dated May 1, 2004. The balance at June 30, 2004 and June 30, 2003 was $1,480,405 and $1,554,628, respectively and is secured by certain of the Companys assets, including
the accounts receivable. The purchase fee percent is calculated at 0.032% per day. The Company was late with its annual reporting requirement.



In May 2003 the Company issued warrants to purchase 10,000 shares of common stock to the financial institution at an exercise price of $0.20 per share, expiring in three
years.



NOTE 19GOING CONCERN



The accompanying financial statements have been prepared assuming the Company will continue
as a going concern. However, the Company experienced a net loss for the fiscal year ended June 30, 2004 of ($9,051,200), compared to a net loss from continuing operations for the fiscal year ended June 30, 2003 of ($1,260,513), and has an
accumulated deficit of ($34,568,174) as of June 30, 2004. The Company also became overdue to several



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MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)



NOTE 19GOING CONCERN (CONTINUED)



of its critical vendors during the fiscal year ended June 30, 2004. The Company was required to restructure its equipment leases with Siemens Financial
Services, Inc. (Siemens) and GE Healthcare Financial Services, Inc. (GE) in order to lower the monthly lease payments until December 31, 2004. However, the Companys monthly lease obligations to Siemens and GE will
resume to full payment commencing January 2005. There is substantial uncertainty with respect to the Companys ability to resume such full payments in January 2005. The Company has therefore been required to classify the entire amount of the
Companys outstanding debt obligation to Siemens and GE under current liabilities on its consolidated balance sheet.



This net loss, accumulated deficit, and resumption of full payment of its monthly lease obligations to Siemens and GE in January 2005, raise substantial doubt about the
Companys ability to continue as a going concern. The Companys continued existence is dependent upon its ability to resolve its liquidity problems, principally by increasing revenues to cover operating expenses, reducing operating
expenses, and obtaining additional equity or debt financing. While pursuing additional equity or debt financing, the Company must continue to operate on limited cash flows generated internally. In the event the Company cannot raise additional debt
or equity financing, or increase its revenues and/or decrease its operating expenses, by January 2005 in order to resume full payments to Siemens and GE under the monthly equipment leases, the Company will likely become in default under the lease
restructuring agreements with Siemens and GE. In the event of such a default, Siemens and GE would have the right to terminate the Siemens leases and GE leases, respectively; repossess the molecular imaging equipment operated by the Company under
the leases; and demand payment for all costs and expenses related to repossessing and reselling the equipment. A default under the Siemens leases and GE leases could also result in a default under the three molecular imaging equipment leases
assigned to Ascendant PET Partners-I, LLC (PET Partners) in May of 2003. In the event of such a default, PET Partners would also be entitled to repossess the equipment and demand payment for costs and expenses. The Company generates
substantially all of its revenue from the operation of the molecular imaging equipment under these leases. The repossession of all or a portion of this molecular imaging equipment would result in the Companys inability to generate further
revenues.



In addition, we will be required to raise additional debt or equity
capital to add or acquire additional mobile or stationary molecular imaging sites. However, there can be no assurance as to whether, when, or upon what terms the Company will be able to consummate any financing to raise any additional debt or equity
capital.



NOTE 20SUBSEQUENT EVENTS



On September 30, 2004, the Company entered into a Restructuring Agreement (the GE
Restructuring Agreement) with GE to restructure the GE Leases. Under the terms of the GE Restructuring Agreements, the Company and GE agreed that the Companys monthly payment obligations under the GE Leases is reduced by 50 percent
for the period commencing November 2003 and ending December 2004. The terms of the GE Restructuring Agreement results in the reduction of the Companys aggregate monthly payments under the GE Leases from approximately $226,000 to $113,000. The
reduction of the payment obligation during this period is deferred to the end of the terms of the GE Leases. Under the terms of the GE Restructuring Agreement, GE agreed, in exchange for the Companys timely reduced payments through December
31, 2004, to waive any current default under the terms of the GE Leases. Commencing January 2005, the Company will be required to resume the full monthly payment obligations under the GE Leases through the completion of their terms, which expire at
various times from February 2005 to June 2006. The GE Restructuring Agreement also contains certain financial and operational covenants applicable to the Company.



In September 2004, Paul Crowe, our Chairman, Chief Executive Officer and founder, resigned as an officer and director of the Company.



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MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Continued)



NOTE 20SUBSEQUENT EVENTS (CONTINUED)



On October 12, 2004, the Board of Directors appointed Kenneth Frederick as Chief Executive Officer of the Company and
entered into an employment agreement with Mr. Frederick. At the time of his appointment, Mr. Frederick was a director of the Company, having been nominated by Dragon pursuant to the terms of the July 2002 Securities Purchase Agreement between the
Company and Dragon. The terms of the employment agreement provide for (i) a base salary of $260,000 per annum; (ii) a term from October 12, 2004 until November 15, 2005, subject to certain Company termination rights and severance obligations; (iii)
a housing allowance of $4,000.00 per month; and (iv) fringe benefits as received by other members of senior management of the Company. In connection with the employment agreement, the Company has issued Mr. Frederick 250,000 options under the
Companys 1999 Stock Option Plan. The options vest monthly over a period of 12 months and have an exercise price of $.08 per share. The Company also issued Mr. Frederick 900,000 warrants to purchase Company common stock. These warrants also
vest monthly over a period of 12 months and have an exercise price of (i) $.08 per share for the purchase of shares 1 to 300,000 vested and purchased; (ii) $.16 per share for the purchase of shares 300,001 to 599,999 vested and purchased; and (iii)
$.24 per share for the purchase of shares 600,00 to 900,000 vested and purchased.



In October 2004, Dragon agreed to waive certain rights it has under the July 2002 Securities Purchase Agreement with the Company with respect to the nomination of a designee to the Companys Board of Directors until the first to occur
of (i) the date which is six (6) months after the effective date that Mr. Frederick became Chief Executive Officer or (ii) the date which Mr. Frederick is no longer a member of the Companys Board of Directors.



In October 2004, Dragon and the Company entered into an amendment to the June 2004
Subscription Agreement to allow the Company to delay the requirement to file a registration statement with respect to Company securities held by Dragon until February 15, 2005.



In October 2004, Robert Bush, a director of the Company, notified the Company that he did not intend to stand for re-election as a director
at our upcoming fiscal year 2004 annual stockholders meeting.



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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 the Company prior to its acquisition by Colony International Incorporated, and has continued as our auditor since the acquisition.



ITEM 8A.    CONTROLS AND PROCEDURES



As of the end of the period covered by this annual report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer, concluded that as of the date of that evaluation our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. It should be noted that the
design of any systems of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions,
regardless of how remote. Also, we have investments in certain unconsolidated entities. Since we do not control or manage these entities, our disclosure controls and procedures with respect to those entities are substantially more limited than those
we maintain with respect to our consolidated subsidiaries. These unconsolidated entities are not considered material to our consolidated financial position or results of operations.



Our management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over
financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded that there has been no such change during the period covered by the report that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.



There have been no significant changes in our
internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out this evaluation.



ITEM 9  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT



The information required as to this Item is incorporated herein by reference from the data under the caption Information Concerning Nominees and Continuing Directors and Executive Officers in
the Proxy Statement to be used in connection with the solicitation of proxies to be voted at our Annual Meeting of Stockholders.



ITEM 10  EXECUTIVE COMPENSATION



The
information required as to this Item is incorporated herein by reference from the data under the captions Executive Compensation and Other Information, Report on Executive Compensation and Employment Agreements in the Proxy
Statement to be used in connection with the solicitation of proxies to be voted at our Annual Meeting of Stockholders.



ITEM 11  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS



The information required as to this Item is incorporated herein by reference from the data under the caption Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters in the Proxy Statement to be used in connection with the solicitation of proxies to be voted at our Annual Meeting of Stockholders.



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ITEM 12  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information required as to this Item is incorporated herein by reference from the data under the caption Certain Relationships and Related Transactions in the Proxy Statement to be used in connection
with the solicitation of proxies to be voted at our Annual Meeting of Stockholders.



ITEM 13.    EXHIBITS



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



|            |  |                                                                                                                                                                                                                 |  |          
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------
|Exhibit No. |  | Description                                                                                                                                                                                                     |  | Reference
|            |  |                                                                                                                                                                                                                
|3.1         |  | Amended and Restated Certificate of Incorporation                                                                                                                                                               |  | (13)     
|            |  |                                                                                                                                                                                                                
|3.2         |  | Amended and Restated Bylaws                                                                                                                                                                                     |  | (1)      
|            |  |                                                                                                                                                                                                                
|3.3         |  | Certificate of Designation of Series A Convertible Preferred Stock                                                                                                                                              |  | (3)      
|            |  |                                                                                                                                                                                                                
|3.4         |  | Certificate of Designation of Series B Convertible Preferred Stock                                                                                                                                              |  | (4)      
|            |  |                                                                                                                                                                                                                
|3.5         |  | Certificate of Designations of Series C Convertible Preferred Stock                                                                                                                                             |  | (12)     
|            |  |                                                                                                                                                                                                                
|10.8        |  | Form of Positron Emission Tomography Mobile Services Agreement                                                                                                                                                  |  | (1)      
|            |  |                                                                                                                                                                                                                
|10.9        |  | Promissory Note with The London Radiosurgical Centre, Ltd.                                                                                                                                                      |  | (1)      
|            |  |                                                                                                                                                                                                                
|10.10       |  | Letter Agreement with The London Radiosurgical Centre, Ltd.                                                                                                                                                     |  | (1)      
|            |  |                                                                                                                                                                                                                
|10.11       |  | Employment Agreement with Mr. Crowe                                                                                                                                                                             |  | (1)      
|            |  |                                                                                                                                                                                                                
|10.12       |  | Employment Agreement with Mr. Corlett, as amended                                                                                                                                                               |  | (1)      
|            |  |                                                                                                                                                                                                                
|10.17       |  | 1999 Stock Option Plan                                                                                                                                                                                          |  | (5)      
|            |  |                                                                                                                                                                                                                
|10.32       |  | Form of Corporate and Personal Guaranty of NeuroTechnologies International, Inc. and Paul Crowe, respectively, for the debt of London Radiosurgical Centres, Ltd. to the Company dated July 1,
2000             |  | (4)      
|            |  |                                                                                                                                                                                                                
|10.35       |  | Share Purchase Agreement dated 12 July 2002 by and between the Company, Integrated Healthcare Management S.A. and Paul Crowe for the sale of The London P.E.T. Centre Limited and Mobile P.E.T.
Leasing Limited |  | (6)      
|            |  |                                                                                                                                                                                                                
|10.36       |  | Securities Purchase Agreement, dated July 12, 2002 by and between the Company, Ivan Bradbury and Integrated Healthcare Management S.A.                                                                          |  | (6)      
|            |  |                                                                                                                                                                                                                
|10.37       |  | Warrant Agreement dated July 31, 2002, to Dragon Nominees Limited to purchase 3,000,000 shares of common stock at $0.448 per share                                                                              |  | (6)      
|            |  |                                                                                                                                                                                                                
|10.38       |  | Registration Rights Agreement dated July 31, 2002, by and between the Company and Dragon Nominees Limited                                                                                                       |  | (6)      
|            |  |                                                                                                                                                                                                                
|10.39       |  | Stock Purchase Agreement, dated July 15, 2002, by and between the Company and Bernd Steudle                                                                                                                     |  | (6)      
|            |  |                                                                                                                                                                                                                
|10.40       |  | Warrant Agreement to Bank J. Vontobel & Sons, AG to purchase 375,000 shares of common stock at $0.448 per share.                                                                                                |  | (6)      
|            |  |                                                                                                                                                                                                                
|10.41       |  | Registration Rights Agreement dated July 31, 2002 between the Company and Bernd Steudle.                                                                                                                        |  | (7)      



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##### Table of Contents

|            |  |                                                                                                                                                                                              |  |          
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------
|Exhibit No. |  | Description                                                                                                                                                                                  |  | Reference
|            |  |                                                                                                                                                                                             
|10.42       |  | Redemption Agreement dated July 31, 2002 between the Company and York, LLC.                                                                                                                  |  | (7)      
|            |  |                                                                                                                                                                                             
|10.43       |  | Common Stock Purchase Warrant dated March 22, 2002 between the Company and Paul Crowe to purchase 1,366,510 shares of common stock at $0.35 per share.                                       |  | (7)      
|            |  |                                                                                                                                                                                             
|10.45       |  | Form of Common Stock Purchase Warrant issued by Company prior to June 30, 2002 for compensation or otherwise.                                                                                |  | (7)      
|            |  |                                                                                                                                                                                             
|10.47       |  | Employment Agreement dated December 1, 2002 between the Company and Steven J. Davis.                                                                                                         |  | (8)      
|            |  |                                                                                                                                                                                             
|10.49       |  | Notice and Acknowledgement of Assignment dated May 5, 2003 by and between FINOVA Capital Corporation, the Company, Ascendiant PET Partners I, LLC and Paul J. Crowe.                         |  | (9)      
|            |  |                                                                                                                                                                                             
|10.50       |  | Equipment Lease Modification Agreement dated May 2, 2003 between Ascendiant and the Company.                                                                                                 |  | (9)      
|            |  |                                                                                                                                                                                             
|10.51       |  | Modification Agreement (Security Agreement) dated May 2, 2003 between Ascendiant and the Company.                                                                                            |  | (9)      
|            |  |                                                                                                                                                                                             
|10.52       |  | Purchase and Security Agreement dated as of May 12, 2003 between Meridian Commercial Healthcare Finance, LLC (Meridian) and the Company.                                                   |  | (9)      
|            |  |                                                                                                                                                                                             
|10.53       |  | Form of Ascendiant Warrant Agreement dated May 12, 2003.                                                                                                                                     |  | (9)      
|            |  |                                                                                                                                                                                             
|10.51       |  | Form of Meridian Warrant Agreement dated May 12, 2003.                                                                                                                                       |  | (9)      
|            |  |                                                                                                                                                                                             
|10.55       |  | Operating Agreement of Cyclotron LLC dated July 23, 2003.                                                                                                                                    |  | (10)     
|            |  |                                                                                                                                                                                             
|10.56       |  | Asset Purchase and LeaseBack Agreement dated August 15, 2003 between The Regents of the University of California, Molecular Imaging Cyclotron LLC and Molecular Imaging Sorrento Valley
LLC. |  | (10)     
|            |  |                                                                                                                                                                                             
|10.58       |  | Compliant Alliance Sole Source Agreement dated September 30, 2003 between Siemens Medical Solutions USA, Inc. and the Company.                                                               |  | (11)     
|            |  |                                                                                                                                                                                             
|10.60       |  | Subscription Agreement dated as of June 8, 2004 between Dragon Nominees Limited and the Company.                                                                                             |  | (12)     
|            |  |                                                                                                                                                                                             
|10.61       |  | Warrant To Purchase Common Stock dated as of June 8, 2004 issued by the Company to Dragon Nominees Limited.                                                                                  |  | (12)     
|            |  |                                                                                                                                                                                             
|10.62       |  | Sublease dated April 12, 2004 between Verio, Inc. and the Company.                                                                                                                           |  | (13)     
|            |  |                                                                                                                                                                                             
|10.63       |  | Addendum Master Equipment Lease Agreement dated June 16, 2004 between Siemens Financial Services, Inc. (Siemens Financial) and the Company                                                 |  | (13)     
|            |  |                                                                                                                                                                                             
|10.64       |  | Addendum Master Equipment/Service Agreement dated June 16, 2004 between Siemens Financial and the Company.                                                                                   |  | (13)     
|            |  |                                                                                                                                                                                             
|10.65       |  | Warrant To Purchase Common Stock dated as of June 16, 2004 issued by the Company to Siemens Financial.                                                                                       |  | (13)     
|            |  |                                                                                                                                                                                             
|10.66       |  | Restructuring Agreement dated as of September 24, 2004 between the Company and General Electric Capital Corporation.                                                                         |  | (13)     
|            |  |                                                                                                                                                                                             
|10.67       |  | Dragon Waiver Under July 2002 Securities Purchase Agreement dated October 7, 2004                                                                                                            |  | (13)     
|            |  |                                                                                                                                                                                             
|10.68       |  | First Amendment to Dragon Subscription Agreement dated October 12, 2004                                                                                                                      |  | (13)     



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##### Table of Contents

|            |  |                                                                                                                                  |  |          
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | ---------
|Exhibit No. |  | Description                                                                                                                      |  | Reference
|            |  |                                                                                                                                 
|10.69       |  | Employment Agreement with Kenneth C. Frederick                                                                                   |  | (13)     
|            |  |                                                                                                                                 
|10.70       |  | Warrant to Kenneth C. Frederick                                                                                                  |  | (13)     
|            |  |                                                                                                                                 
|14          |  | Code of Ethics                                                                                                                   |  | (13)     
|            |  |                                                                                                                                 
|21          |  | Subsidiaries of the Registrant.                                                                                                  |  |          
|            |  |                                                                                                                                 
|23.1        |  | Consent of Independent Accountants.                                                                                              |  |          
|            |  |                                                                                                                                 
|31.1        |  | Certification of Kenneth C. Frederick, Chief Executive Officer.                                                                  |  |          
|            |  |                                                                                                                                 
|31.2        |  | Certification of Dennis M. Mulroy, Chief Financial Officer.                                                                      |  |          
|            |  |                                                                                                                                 
|32          |  | Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |  |          



---

|     |  |                                                                                                                                                                                                                                                                                               
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|(1)  |  | Previously filed as an Exhibit to the Companys Form 10SB filed with the Securities and Exchange Commission (the SEC) on October 19, 1999.                                                                                                                                                  
|     | 
|(2)  |  | Previously filed as an Exhibit to the Companys Form 10SB, Amendment No. 1, filed with the SEC on February 9, 2000.                                                                                                                                                                           
|     | 
|(3)  |  | Previously filed as an Exhibit to the Companys Form 10SB, Amendment No. 2, filed with the SEC on March 16, 2000.                                                                                                                                                                             
|     | 
|(4)  |  | Previously filed as an Exhibit to the Companys Form 10-KSB for the fiscal year ended June 30, 2000, filed with the SEC on October 11, 2000.                                                                                                                                                  
|     | 
|(5)  |  | Previously filed as an Exhibit to the Companys Form 10SB, filed with the SEC on October 19, 1999, and subsequently amended by vote of the stockholders, held April 6, 2001, as reported
on the Companys Form 10-QSB for the period ended March 31, 2001, filed with the SEC on May 23, 2001.
|     | 
|(6)  |  | Previously filed as an Exhibit to the Companys Form 8-K, filed with the SEC on August 6, 2002.                                                                                                                                                                                               
|     | 
|(7)  |  | Previously filed as an Exhibit to the Companys Form 10-KSB, filed with the SEC on September 27, 2002.                                                                                                                                                                                        
|     | 
|(8)  |  | Previously filed as an Exhibit to the Companys Form 10-QSB, filed with the SEC on February 13, 2003.                                                                                                                                                                                         
|     | 
|(9)  |  | Previously filed as an Exhibit to the Companys Form 8-K, filed with the SEC on May 15, 2003.                                                                                                                                                                                                 
|     | 
|(10) |  | Previously filed as an Exhibit to the Companys Form 10-KSB/A filed with the SEC on September 30, 2004.                                                                                                                                                                                       
|     | 
|(11) |  | Previously filed as an Exhibit to the Companys Form 10-QSB filed with the SEC on November 13, 2003.                                                                                                                                                                                          
|     | 
|(12) |  | Previously filed as an Exhibit to the Companys Form 8-K filed with the SEC on June 9, 2004.                                                                                                                                                                                                  
|     | 
|(13) |  | Filed as an Exhibit herewith                                                                                                                                                                                                                                                                  



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ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES



Audit Fees



The aggregate fees billed by
Peterson & Co., LLP for professional services rendered for the audit of our annual financial statements for fiscal years ended June 30, 2003 and June 30, 2004, and the reviews of the financial statements included in our Forms 10-QSB and other
Securities and Exchange Commission filings, were approximately $138,000 and $129,000 (as of June 30, 2004) respectively.



Audit-Related Fees



The aggregate fees billed by Peterson & Co., LLP for professional services rendered for audit related fees for the fiscal year ended June 30, 2003 and June 30, 2004 were $0 and $0, respectively.



Tax Fees



The aggregate fees billed by Peterson & Co., LLP for professional services rendered for tax fees for the fiscal year ended June 30, 2003
and June 30, 2004 were $0 and $0, respectively.



All Other Fees



There were no other fees billed by Peterson & Co., LLP for the fiscal
year ended June 30, 2003 or June 30, 2004 other than the fees described above.



The Audit Committee has complied with the requirement to engage and approve in advance the audit of the Companys financial statement and has approved of Peterson & Co., LLP as our independent auditors for the year ending June 30,
2004.



The Audit Committee has adopted a policy requiring that any and all
non-audit services to be performed for the Company by the Companys independent auditors must be pre-approved by the Audit Committee.



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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.



MOLECULAR IMAGING CORPORATION, a Delaware corporationBy:

/s/ Kenneth C. FrederickName:

Kenneth C. FrederickTitle:

Chief Executive OfficerDate:

October 15, 2004




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



/s/ AXEL STEUDLEName:

Axel SteudleTitle:

DirectorDate: October 15, 2004/s/ Kenneth C. FrederickName:

Kenneth C. FrederickTitle:

DirectorDate: October 15, 2004/s/ Peter S. ContiName:

Peter S. Conti, M.D., Ph.DTitle:

DirectorDate: October 15, 2004/s/ ROBERT C. BUSHName:

Robert C. BushTitle:

DirectorDate: October 15, 2004/s/ Dennis M. MulroyName:

Dennis M. MulroyTitle:

Chief Financial OfficerDate: October 15, 2004




58