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UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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Form 10-QSB

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(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended March 31, 2003

o

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



For the transition period from______________to______________

Commission file number 000-27915

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MOLECULAR IMAGING CORPORATION

A
Delaware Corporation(Exact name of small business issuer as specified in its charter)

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| | Delaware(State or other jurisdiction ofincorporation or organization) |  | 11-2787966(IRS EmployerIdentification No.) | 
| | --------------------------------------------------------------------- |  | ------------------------------------------ | 

2150 West Washington Street, Suite 110San Diego, California 92110(Address of principal executive offices)

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

Former Name: Mobile PET Systems, Inc.(Former name, former address and former fiscal year,if changed since
last report)

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

There were 55,531,272 shares outstanding of the issuers Common Stock as of May 5, 2003.

Transitional Small Business Disclosure Format (Check one): Yes o No x

MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

For the quarterly period ended March 31, 2003

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##### Table of Contents



Table of Contents

|         |  |                       |    |                                                                                                   | PageNo.
|-------- |  | --------------------- | -- | ------------------------------------------------------------------------------------------------- | -------
|         |  |                       |    |                                                                                                   |        
|PART I.  |  | FINANCIAL INFORMATION | 1 
|         |  |                       |    |                                                                                                   |        
|         |  | Item 1.               |    | Financial Statements (unaudited)                                                                  | 1      
|         |  |                       |    |                                                                                                   |        
|         |  |                       |    | Consolidated Balance Sheetsas of March 31, 2003 and June 30, 2002                                 | 1      
|         |  |                       |    |                                                                                                   |        
|         |  |                       |    | Consolidated Statements of Operationsfor the three and nine months ended March 31, 2003 and 2002  | 2      
|         |  |                       |    |                                                                                                   |        
|         |  |                       |    | Consolidated Statement of Changes in Shareholders Equityfor the nine months ended March 31, 2003 | 3      
|         |  |                       |    |                                                                                                   |        
|         |  |                       |    | Consolidated Statements of Cash Flowsfor the nine months ended March 31, 2003 and 2002            | 4      
|         |  |                       |    |                                                                                                   |        
|         |  |                       |    | Notes to Consolidated Financial Statements                                                        | 5      
|         |  |                       |    |                                                                                                   |        
|         |  | Item 2.               |    | Managements Discussion and Analysis                                                              | 11     
|         |  |                       |    |                                                                                                   |        
|         |  | Item 3.               |    | Controls and Procedures                                                                           | 18     
|         |  |                       |    |                                                                                                   |        
|PART II. |  | OTHER INFORMATION     | 19
|         |  |                       |    |                                                                                                   |        
|         |  | Item 1.               |    | Legal Proceedings                                                                                 | 19     
|         |  |                       |    |                                                                                                   |        
|         |  | Item 2.               |    | Changes in Securities                                                                             | 19     
|         |  |                       |    |                                                                                                   |        
|         |  | Item 4.               |    | Submission of Matters to a Vote of Security Holders                                               | 19     
|         |  |                       |    |                                                                                                   |        
|         |  | Item 6.               |    | Exhibits and Reports on Form 8-K                                                                  | 19     

|SIGNATURES     | 20
|-------------- | --
|               |   
|CERTIFICATIONS | 21





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##### Table of Contents

PART I.FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS (Unaudited)

MOLECULAR IMAGING CORPORATION AND SUBSIDIARIESConsolidated Balance SheetsMarch 31, 2003 (Unaudited) and June 30, 2002



|                                                                                                                                                                         |  | March 31, 2003 |             | June 30, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | ----------- | ------------- | -
|                                                                                                                                                                         |  |                |             |               |  
|                                                                                                                                                                         |  |                |             |               |  
|ASSETS                                                                                                                                                                   |  |                |             |               |  
|Current assets                                                                                                                                                           |  |                |             |               |  
|Cash                                                                                                                                                                     |  | $              | 127,181     |               | $
|Accounts receivable, net of allowance for doubtful accounts of $110,000 at March 31, 2003 and $116,000 at June 30,
2002                                                  |  |                | 3,594,780   |               |  
|Prepaid expenses                                                                                                                                                         |  |                | 848,786     |               |  
|Deposits and other assets                                                                                                                                                |  |                | 291,487     |               |  
|                                                                                                                                                                         |  |                |             |               |  
|Total current assets                                                                                                                                                     |  |                | 4,862,234   |               |  
|Property and equipment, net                                                                                                                                              |  |                | 15,828,674  |               |  
|Other assets                                                                                                                                                             |  |                |             |               |  
|Accrued interest receivable                                                                                                                                              |  |                | 10,573      |               |  
|Due from London Radiosurgical Centre, Ltd                                                                                                                                |  |                | 127,123     |               |  
|Subordinated equity participation                                                                                                                                        |  |                | 200,000     |               |  
|Restricted cash                                                                                                                                                          |  |                | 347,098     |               |  
|                                                                                                                                                                         |  |                |             |               |  
|Total assets                                                                                                                                                             |  | $              | 21,375,702  |               | $
|                                                                                                                                                                         |  |                |             |               |  
|                                                                                                                                                                         |  |                |             |               |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                     |  |                |             |               |  
|Current liabilities                                                                                                                                                      |  |                |             |               |  
|Accounts payable                                                                                                                                                         |  | $              | 2,376,132   |               | $
|Current portion of long-term debt                                                                                                                                        |  |                | 27,868      |               |  
|Loans payable to related parties                                                                                                                                         |  |                | 122,000     |               |  
|Accrued and other liabilities                                                                                                                                            |  |                | 433,720     |               |  
|Other liabilities                                                                                                                                                        |  |                |            |               |  
|Obligations under capital leasecurrent                                                                                                                                  |  |                | 5,023,397   |               |  
|                                                                                                                                                                         |  |                |             |               |  
|Total current liabilities                                                                                                                                                |  |                | 7,983,117   |               |  
|Noncurrent liabilities                                                                                                                                                   |  |                |             |               |  
|Obligations under capital lease                                                                                                                                          |  |                | 9,550,288   |               |  
|Long-term debt                                                                                                                                                           |  |                | 52,422      |               |  
|                                                                                                                                                                         |  |                |             |               |  
|Total liabilities                                                                                                                                                        |  |                | 17,585,827  |               |  
|                                                                                                                                                                         |  |                |             |               |  
|Shareholders equity                                                                                                                                                     |  |                |             |               |  
|Preferred stock; $0.001 par value; 10,000,000 shares authorized:                                                                                                         |  |                |             |               |  
|Preferred stock; Series A; 0 and 23 shares issued and outstanding at March 31, 2003 and June 30,
2002, respectively                                                      |  |                |            |               |  
|Preferred stock; Series B; 0 and 27 shares issued and outstanding at March 31, 2003 and June 30, 2002, respectively                                                      |  |                |            |               |  
|Common stock; $0.0001 par value; 90,000,000 shares authorized; 55,215,482 and 44,966,267 shares
issued and outstanding at March 31, 2003 and June 30, 2002, respectively |  |                | 5,522       |               |  
|Additional paid in capital                                                                                                                                               |  |                | 27,506,303  |               |  
|Accumulated deficit                                                                                                                                                      |  |                | (23,721,950 | )             |  
|Foreign currency translation adjustment                                                                                                                                  |  |                |            |               |  
|                                                                                                                                                                         |  |                |             |               |  
|Total shareholders equity                                                                                                                                               |  |                | 3,789,875   |               |  
|                                                                                                                                                                         |  |                |             |               |  
|Total liabilities and shareholders equity                                                                                                                               |  | $              | 21,375,702  |               | $
|                                                                                                                                                                         |  |                |             |               |  

See accompanying notes.

1



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##### Table of Contents

PART I.FINANCIAL INFORMATION (continued)

MOLECULAR IMAGING CORPORATION AND
SUBSIDIARIESConsolidated Statements of OperationsFor the Three and Nine Months Ended March 31, 2003 and 2002(Unaudited)



|                                                                                                                              |  | Three Months Ended March 31, |           | Nine Months Ended March 31, |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | --------- | --------------------------- | -
|                                                                                                                              |  |                              |           |                             |  
|                                                                                                                              |  | 2003                         |           | 2002                        |  
|                                                                                                                              |  |                              |           |                             |  
|Service revenues                                                                                                              |  | $                            | 5,650,896 |                             | $
|Cost of service revenues                                                                                                      |  |                              | 3,141,296 |                             |  
|                                                                                                                              |  |                              |           |                             |  
|Gross profit                                                                                                                  |  |                              | 2,509,600 |                             |  
|                                                                                                                              |  |                              |           |                             |  
|Expenses                                                                                                                      |  |                              |           |                             |  
|Selling and marketing                                                                                                         |  |                              | 385,981   |                             |  
|General and administrative                                                                                                    |  |                              | 1,534,882 |                             |  
|                                                                                                                              |  |                              |           |                             |  
|Total expenses                                                                                                                |  |                              | 1,920,863 |                             |  
|                                                                                                                              |  |                              |           |                             |  
|Income (loss) from operations                                                                                                 |  |                              | 588,737   |                             |  
|                                                                                                                              |  |                              |           |                             |  
|Other income (expense)                                                                                                        |  |                              |           |                             |  
|Other income (expense)                                                                                                        |  |                              | (20,165   | )                           |  
|Interest expense                                                                                                              |  |                              | (506,651  | )                           |  
|                                                                                                                              |  |                              |           |                             |  
|Total other income (expense)                                                                                                  |  |                              | (526,816  | )                           |  
|                                                                                                                              |  |                              |           |                             |  
|Income (loss) from continuing operations before provision for income taxes                                                    |  |                              | 61,921    |                             |  
|Provision for income taxes                                                                                                    |  |                              |          |                             |  
|                                                                                                                              |  |                              |           |                             |  
|Income (loss) from continuing operations                                                                                      |  |                              | 61,921    |                             |  
|Income (loss) from discontinued operations (including a $2,219,300 gain on the sale for the nine months ended March 31,
2003) |  |                              |          |                             |  
|                                                                                                                              |  |                              |           |                             |  
|Net income (loss)                                                                                                             |  |                              | 61,921    |                             |  
|Preferred stock dividend                                                                                                      |  |                              |          |                             |  
|                                                                                                                              |  |                              |           |                             |  
|Net income (loss)available to common shareholders                                                                            |  | $                            | 61,921    |                             | $
|                                                                                                                              |  |                              |           |                             |  
|Income (loss) per share from continuing operationsbasic                                                                      |  | $                            |          |                             | $
|                                                                                                                              |  |                              |           |                             |  
|Income (loss) per share from discontinued operationsbasic                                                                    |  | $                            |          |                             | $
|                                                                                                                              |  |                              |           |                             |  
|Net income (loss) per share available to common shareholdersbasic                                                            |  | $                            |          |                             | $
|                                                                                                                              |  |                              |           |                             |  
|Income (loss) per share from continuing operationsdiluted                                                                    |  | $                            |          |                             | $
|                                                                                                                              |  |                              |           |                             |  
|Income (loss) per share from discontinued operationsdiluted                                                                  |  | $                            |          |                             | $
|                                                                                                                              |  |                              |           |                             |  
|Net income (loss) per share available to common shareholdersdiluted                                                          |  | $                            |          |                             | $
|                                                                                                                              |  |                              |           |                             |  

See accompanying notes.

2



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##### Table of Contents

PART I .FINANCIAL INFORMATION (continued)

MOLECULAR IMAGING CORPORATION AND SUBSIDIARIESConsolidated Statement of Changes in Shareholders Equity(Unaudited)



|                                                                |  |                 |   |              |            |                          |                    |        |   | ForeignCurrencyTranslationAdjustment |                          |   |           
|--------------------------------------------------------------- |  | --------------- | - | ------------ | ---------- | ------------------------ | ------------------ | ------ | - | ------------------------------------ | ------------------------ | - | ----------
|                                                                |  |                 |   |              |            | AdditionalPaid InCapital |                    |        |   |                                      | TotalShareholdersEquity |  
|                                                                |  | Preferred Stock |   | Common Stock |            |                          | AccumulatedDeficit |        |   |                                     
|                                                                |  |                 |   |              |            |                          |                    |        |  
|                                                                |  | Shares          |   | Amount       |            | Shares                   |                    | Amount |   |                                      |                          |   |           
|                                                                |  |                 |   |              |            |                          |                    |        |   |                                      |                          |   |           
|Balance June 30, 2002                                           |  | 50              |   | $            | 2,946,834  |                          | 44,966,267         |        | $ | 4,497                                |                          | $ | 20,186,052
|Common stock issued in private placement, net of offering costs |  |                 |   |              |            |                          | 9,821,429          |        |   | 982                                  |                          |   | 6,184,424 
|Preferred stock redemption                                      |  | (50             | ) |              | (2,946,834 | )                        | (374,000           | )      |   | (37                                  | )                        |   | (837,201  
|Preferred stock dividend-beneficial conversion feature realized |  |                 |   |              |            |                          |                    |        |   |                                      |                          |   | 1,599,740 
|Common stock issued for services                                |  |                 |   |              |            |                          | 801,786            |        |   | 80                                   |                          |   | 344,920   
|Noncash charge for stock options issued                         |  |                 |   |              |            |                          |                    |        |   |                                      |                          |   | 28,368    
|Net income-July 1, 2002 to March 31, 2003                       |  |                 |   |              |            |                          |                    |        |   |                                      |                          |   |           
|Foreign currency translation adjustment                         |  |                 |   |              |            |                          |                    |        |   |                                      |                          |   |           
|                                                                |  |                 |   |              |            |                          |                    |        |   |                                      |                          |   |           
|Balance March 31, 2003                                          |  |                |   | $            |           |                          | 55,215,482         |        | $ | 5,522                                |                          | $ | 27,506,303
|                                                                |  |                 |   |              |            |                          |                    |        |   |                                      |                          |   |           

See accompanying notes.

3



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##### Table of Contents

PART I .FINANCIAL INFORMATION (continued)

MOLECULAR IMAGING CORPORATION AND SUBSIDIARIESConsolidated Statements of Cash Flows(Unaudited)



|                                                                                    |  | Nine Months Ended March 31, |           
|----------------------------------------------------------------------------------- |  | --------------------------- | ----------
|                                                                                    |  |                             |           
|                                                                                    |  | 2003                        |           
|                                                                                    |  |                             |           
|Cash flows from operating activities                                                |  |                             |           
|Net income (loss)                                                                   |  |                             |           
|Adjustments to reconcile net income (loss) to net cash used in operating activities |  | $                           | 1,082,307 
|Depreciation                                                                        |  |                             | 2,260,975 
|Noncash stock options and warrants charge (credit)                                  |  |                             | 28,368    
|Common stock issued for compensation                                                |  |                             |          
|Common stock issued for services                                                    |  |                             | 345,000   
|Gain on sale of discontinued operations                                             |  |                             | (2,219,300
|(Increase) decrease in operating assets                                             |  |                             |           
|Accounts receivable                                                                 |  |                             | (349,820  
|Due from London Radiosurgical Center, LTD                                           |  |                             | 2,194     
|Prepaid expenses                                                                    |  |                             | (210,049  
|Deposits and other assets                                                           |  |                             | 154,002   
|Restricted cash                                                                     |  |                             | 5,392     
|Cash of discontinued operations                                                     |  |                             | (37,574   
|Increase (decrease) in operating liabilities                                        |  |                             |           
|Accounts payable                                                                    |  |                             | (1,561,199
|Accrued and other liabilities                                                       |  |                             | (491,884  
|                                                                                    |  |                             |           
|Net cash (used in) provided by operating activities                                 |  |                             | (991,588  
|                                                                                    |  |                             |           
|                                                                                    |  |                             |           
|Cash flows from investing activities                                                |  |                             |           
|Capital expenditures                                                                |  |                             | (160,538  
|Loan made                                                                           |  |                             | (250,000  
|Proceeds from sale of discontinued operations                                       |  |                             | 1,884,917 
|                                                                                    |  |                             |           
|Net cash provided by (used in) investing activities                                 |  |                             | 1,474,379 
|                                                                                    |  |                             |           
|                                                                                    |  |                             |           
|Cash flows from financing activities                                                |  |                             |           
|Payments on loans                                                                   |  |                             | (402,284  
|Payments on obligations under capital lease                                         |  |                             | (3,261,464
|Preferred stock redeemed                                                            |  |                             | (3,284,072
|Common stock issued                                                                 |  |                             | 6,185,406 
|                                                                                    |  |                             |           
|Net cash used in financing activities                                               |  |                             | (762,414  
|                                                                                    |  |                             |           
|Effect of exchange rate on changes in cash                                          |  |                             | 312,661   
|                                                                                    |  |                             |           
|Net increase in cash                                                                |  |                             | 33,038    
|Cashbeginning of period                                                            |  |                             | 94,143    
|                                                                                    |  |                             |           
|Cashend of period                                                                  |  | $                           | 127,181   
|                                                                                    |  |                             |           
|Supplemental disclosures                                                            |  |                             |           
|Interest paid                                                                       |  | $                           | 1,378,898 
|                                                                                    |  |                             |           
|Income taxes paid                                                                   |  | $                           |          
|                                                                                    |  |                             |           
|Noncash investing and financing activities                                          |  |                             |           
|Equipment under capital lease                                                       |  | $                           | 4,057,414 
|                                                                                    |  |                             |           
|Common stock issued under consulting agreements                                     |  | $                           | 345,000   
|                                                                                    |  |                             |           
|Preferred stock dividendwarrants re-priced in redemption                           |  | $                           | 23,176    
|                                                                                    |  |                             |           
|Obligations under capital lease                                                     |  | $                           | 4,057,414 
|                                                                                    |  |                             |           

See accompanying notes.

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##### Table of Contents

PART 1.FINANCIAL INFORMATION (continued)

Notes to Consolidated Financial Statements  Molecular Imaging
Corporation and Subsidiaries

Note 1The Company

Molecular Imaging Corporation (formerly
Mobile PET Systems, Inc.) and subsidiaries (the Company) were organized to provide Positron Emission Tomography (PET) patient imaging services to hospitals and other health care providers on a fixed or 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.

Note 2Summary of Significant Accounting Policies

Basis of Presentation

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

Unaudited Financial Statements

The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-QSB and Article S-X. Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the Form 10-KSB for the fiscal year ended June 30, 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.

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 subject to adjustment 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.

Reclassifications

Reclassifications of revenues and expenses from operations of discontinued subsidiaries in addition to certain other reclassifications have been made in the March 31, 2002 financial statements to
conform to the March 31, 2003 presentation.

Note 3Recent Accounting Pronouncements

In
November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a liability be
recorded in the guarantors balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees, including indemnifications, that an entity has issued and a rollforward of the entitys product warranty
liabilities. The disclosure provisions of FIN 45 were effective for financial statements of interim periods or annual periods ending after December 15, 2002. The Company adopted the recognition provisions of FIN 45 effective January 1, 2003. The
adoption of FIN 45 did not have a material impact on the Companys financial position, results of operations or cash flows.

In January 2003, the FASB issued Interpretation
No. 46 (FIN 46), Consolidation of Variable Interest Entities, which clarifies the application of Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements, relating to the consolidation of certain variable
interest entities (VIEs). FIN 46 is effective for all new Vies created or acquired after January 31, 2003. FIN 46 also sets forth certain disclosures regarding interests in Vies that are deemed significant, even if consolidation is not required. The
Company is currently evaluating the effect that the adoption of FIN 46 will have on its financial position, results of operations and cash flows.

Note 4Discontinued
Operations

On July 12, 2002, the Company discontinued operations of The London PET Centre, LTD and Mobile PET Leasing Limited, a stationary PET facility in the United
Kingdom. The Company recognized a gain on the disposal of $2,219,300. No income tax effect was recognized due to net operating loss carry-forwards.

Revenues and expenses from the
operations of discontinued operations for the period July 1, 2002 to July 12, 2002 were $80,059 and $74,715, respectively. Revenues from the operations of discontinued operations for the three and nine months ended March 31, 2002 were $349,633 and
$908,420, respectively. Expenses from the operations of discontinued operations for the three and nine months ended March 31, 2002 were $475,437 and $1,210,828, respectively.

5



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##### Table of Contents

PART 1.FINANCIAL INFORMATION (continued)

Notes to Consolidated Financial Statements  Molecular Imaging Corporation and Subsidiaries

Note 5Deposits and Other Assets

Deposits and assets consist of the following at March 31, 2003 and June 30, 2002:



|                                    |  | March 31,2003 |         | June 30,2002 |  
|----------------------------------- |  | ------------- | ------- | ------------ | -
|                                    |  |               |         |              |  
|Equipment depositsMobile PET Units |  | $             | 25,000  |              | $
|Other                               |  |               | 16,487  |              |  
|Loan receivable                     |  |               | 250,000 |              |  
|Preferred stock redemption deposit  |  |               |        |              |  
|                                    |  |               |         |              |  
|                                    |  | $             | 291,487 |              | $
|                                    |  |               |         |              |  

Equipment depositsMobile PET Units are generally refundable upon the Company securing lease
financing or may be applied to subsequent equipment orders. The loan receivable is due from a non-affiliated entity and is secured by certain assets of that entity, bears interest at a rate of 9% per year and is due on May 12, 2003; provided,
however, the parties have agreed that all or a portion of such amount may be offset against our purchase from the non-affiliated entity of the radiopharmaceutical used in our business or for the purchase of certain assets of the non-affiliated
entity.

Note 6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 entered into a
Securities Purchase Agreement, pursuant to which the Company issued 60 shares of 8% Cumulative Convertible Redeemable Preferred Series A Stock for cash in the amount of $2,700,000, net of acquisition fees. Under this Securities Purchase Agreement,
the Company also issued 120,000 warrants to purchase shares of common stock, at an exercise price of $5 per share, which expire in March 2003. In addition, the buyer of the preferred stock agreed to purchase shares of common stock in the Company in
tranches, subject to certain limitations, for an aggregate purchase price of up to $10,000,000, at a price equal to eighty five percent (85%) of the average closing bid price five (5) consecutive days immediately prior to the Company providing a
tranche notice to the buyer. The Company has received an aggregate $1,075,000, net of offering costs, and issued 2,703,093 shares of common stock under this facility. This facility has not been utilized subsequent to June 30, 2001. On May 30, 2001
the liquidation value was increased to $58,937 when the Company entered into a Settlement Agreement and Conditional Release of a lawsuit surrounding the Securities Purchase Agreement. The sixty (60) shares of Series A Stock provided an intrinsic
value of beneficial conversion feature of approximately $1,206,000. The holders converted cumulative preferred dividends in the amount of $66,274 and converted 37 shares of Series A into 3,459,361 shares of common stock at various dates through June
30, 2002.

On September 21, 2000, the Company designated and subsequently issued thirty (30) shares of 8% Cumulative Convertible Redeemable Preferred Series B Stock (Series
B) for cash in the amount of $1,385,000, net of acquisition fees. In addition, under this Securities Purchase Agreement, the Company issued 50,000 warrants to purchase shares of common stock at an exercise price of $3 per share and 29,851
warrants to purchase shares of common stock at an exercise price of $2.5125 per share. The warrants expire on September 30, 2005. On May 30, 2001 the liquidation value was increased to $58,937 when the Company entered into a Settlement Agreement and
Conditional Release of a lawsuit surrounding the Securities Purchase Agreement. The thirty (30) shares of Series B Stock issued provided an intrinsic value of beneficial conversion feature of approximately $414,580.

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. At that time, the Company recorded $1,599,740 in the Statement of Changes in Shareholders Equity as the realization of a preferred stock dividend beneficial conversion feature. This amount had previously been
recognized as an increase in the amount of net loss attributable to common shareholders in the periods the Series A and B stock was issued. 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 shares 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.

6



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##### Table of Contents

PART 1.FINANCIAL INFORMATION (continued)Notes to Consolidated Financial Statements
 Molecular Imaging Corporation and SubsidiariesNote 6Capitalization (Continued)

Stock Options

The Companys Board of Directors and shareholders adopted the 1999 Stock Option Plan pursuant to which incentive stock options or nonstatutory stock options to purchase up to 8,000,000 shares of
common stock may be granted to employees, directors and consultants. Stock options generally expire on various dates extending to June 14, 2006 and vest over service periods that range from zero to four years.

As of December 31, 2002, the Company has granted options to purchase 3,676,501 shares of common stock, including options granted outside of the 1999 Stock Option Plan to purchase 200,000 shares of
common stock, as follows:



|                                |  | Exercise Price |            | Number of Shares |            | Vested Shares |           
|------------------------------- |  | -------------- | ---------- | ---------------- | ---------- | ------------- | ----------
|                                |  |                |            |                  |            |               |           
|Outstanding, June 30, 2000      |  | $              | 1.00-$4.63 |                  | 5,988,000  |               | 2,662,000 
|Granted                         |  | $              | .45-$3.25  |                  | 1,282,250  |               | 1,504,170 
|Exercised                       |  |                |            |                  | (25,000    | )             | (25,000   
|Cancelled                       |  | $              | 1.00-$5.31 |                  | (2,364,500 | )             | (295,000  
|                                |  |                |            |                  |            |               |           
|Outstanding, June 30, 2001      |  | $              | .45-$4.63  |                  | 4,880,750  |               | 3,846,170 
|Granted                         |  | $              | .50-$3.00  |                  | 2,096,043  |               | 1,662,792 
|Exercised                       |  |                |            |                  |           |               |          
|Cancelled                       |  | $              | 1.00-$4.63 |                  | (2,894,084 | )             | (2,240,917
|                                |  |                |            |                  |            |               |           
|Outstanding, June 30, 2002      |  | $              | .45-$4.63  |                  | 4,082,709  |               | 3,268,045 
|Granted                         |  |                |            |                  |           |               | 94,166    
|Exercised                       |  |                |            |                  |           |               |          
|Cancelled                       |  | $              | .56-$3.25  |                  | (220,415   | )             | (153,916  
|                                |  |                |            |                  |            |               |           
|Outstanding, September 30, 2002 |  | $              | .45-$4.63  |                  | 3,862,294  |               | 3,208,295 
|Granted                         |  | $              | .31-$.74   |                  | 700,000    |               | 269,444   
|Exercised                       |  |                |            |                  |           |               |          
|Cancelled                       |  | $              | .43-$3.25  |                  | (735,794   | )             | (559,126  
|                                |  |                |            |                  |            |               |           
|Outstanding, December 31, 2002  |  |                |            |                  | 3,826,500  |               | 2,918,613 
|Granted                         |  | $              | .18-$0.62  |                  | 400,000    |               | 162,501   
|Exercised                       |  |                |            |                  |            |               |           
|Cancelled                       |  | $              | .56-$2.63  |                  | (399,999   | )             | (179,444  
|                                |  |                |            |                  |            |               |           
|Outstanding, March 31, 2003     |  |                |            |                  | 3,826,501  |               | 2,901,670 
|                                |  |                |            |                  |            |               |           

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 issued to employees is recognized for the stock option awards granted at or above fair market value.
Compensation expense is recognized for stock option awards granted below fair market value with credits recorded from previously recognized expense for grants cancelled by termination of employment. The Company recognized net non-cash charges of
$9,638 and $28,368 for the three and nine months ended March 31, 2003, respectively, and net non-cash charges (credits) of $95,554 and ($495,560) for the three and nine months ended March 31, 2002, respectively.

Had compensation expense for options and warrants issued to employees and directors been determined upon fair values at the grant dates in accordance with SFAS Nos. 123 and 148, the Companys net
income and net income per share would have been decreased, and net loss and net lose per share would have been increased, to the pro forma amounts indicated below.



|                                                                     |  | Three MonthsEndedMarch 31, 2003 |        | Three MonthsEndedMarch 31, 2002 |   | Nine MonthsEndedMarch 31, 2003 |   | Nine MonthsEndedMarch 31, 2002 |           
|-------------------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------- | - | ------------------------------ | - | ------------------------------ | ----------
|                                                                     |  |                                 |        |                                 |   |                                |   |                                |           
|Income (loss) from continuing operations                             |  |                                 |        |                                 |   |                                |   |                                |           
|As reported                                                          |  | $                               | 61,921 |                                 | $ | (1,035,957                     | ) | $                              | (1,142,337
|Pro forma                                                            |  | $                               | 5,544  |                                 | $ | (1,044,360                     | ) | $                              | (1,252,906
|Net income (loss) available to common shareholders                   |  |                                 |        |                                 |   |                                |   |                                |           
|As reported                                                          |  | $                               | 61,921 |                                 | $ | (1,223,379                     | ) | $                              | 1,059,131 
|Pro forma                                                            |  | $                               | 5,544  |                                 | $ | (1,231,782                     | ) | $                              | 948,562   
|Net income (loss) per share available to common shareholders - Basic |  |                                 |        |                                 |   |                                |   |                                |           
|As reported                                                          |  | $                               |       |                                 | $ | (0.04                          | ) | $                              | 0.02      
|Pro forma                                                            |  | $                               |       |                                 | $ | (0.04                          | ) | $                              | 0.02      

Warrants

At December 31, 2002 warrants were outstanding to purchase 14,725,041 shares of common stock at exercise prices between $0.29 to $7.00 per share, including warrants to purchase 1,388,888 shares of common stock which are
subject to vesting through December 1, 2007 and the warrants re-priced in connection with the redemption of preferred stock. These warrants expire between December 31, 2002 and December 1, 2008.

Note 7Related Party Transactions

Subordinated Equity Participation

During the year ended June 30, 2001, the Company entered into a Memorandum of Agreement and retroactive to June 1, 1999 restructured an 8% interest in a subordinated equity participation in London Radiosurgical Centre
Ltd (LRC), a foreign corporation with a common shareholder, officer and director. The market value of the subordinated equity participation is not readily determinable, and is recorded at cost in the amount of $200,000, which management
believes approximates fair value. The original

7



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##### Table of Contents

PART 1.FINANCIAL INFORMATION (continued)

Notes to Consolidated Financial Statements  Molecular Imaging Corporation and Subsidiaries

Note 7Related Party Transactions (Continued)

Subordinated Equity Participation (Continued)

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 March 31, 2003 and 2002
accrued interest on the investment was $10,573. The related shareholder, officer and director personally guarantee the investment.

Loans

On August 23, 2000, the Company received an eight percent (8%) bridge loan from a director and shareholder in the amount of $200,000, with an original due date of October 11, 2000. The loans due
date has been extended several times and the Company has agreed to make monthly payments of $10,000 per month beginning on January 8, 2002, until paid in full. At March 31, 2003 and June 30, 2002, the loan has a balance of $110,000 and $160,000,
respectively.

On January 17, 2001, the Company received an eight percent (8%) bridge loan from an officer, director and shareholder in the amount of $150,000, with an original
due date of March 12, 2001. The note has been extended several times and was due on October 1, 2002. At March 31, 2003 and June 30, 2002, the loan has a balance of $12,000 and $150,000, respectively.

On October 12, 2001, the Company converted $253,050 due to an individual and director of the Company into a promissory note without interest and payable in monthly installments of $14,000 per month beginning on October
15, 2001, until paid in full. At March 31, 2003, and June 30, 2002, the individual is no longer a director and the loan has a balance of $0 and $127,050, respectively.

On June
6, 2002, the Company received an eight percent (8%) bridge loan from an officer, director and shareholder in the amount of $77,600, due on demand. At March 31, 2003 and June 30, 2002, the loan has a balance of $0 and $67,600, respectively, with
accrued interest of $0 and $371, respectively.

Note 8Long Term Debt



|                                                                                                                                                                                                  |  | March 31,2003 |         | June 30,2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ------------ | -
|                                                                                                                                                                                                  |  |               |         |              |  
|Long-term debt at March 31, 2003 and June 30, 2002 consists of the following:                                                                                                                     |  |               |         |              |  
|Promissory Note with no interest, due in monthly installments of $500, with first payment beginning on February 1, 2002                                                                           |  | $             | 12,500  |              | $
|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 |  |               | 67,790  |              |  
|                                                                                                                                                                                                  |  |               |         |              |  
|                                                                                                                                                                                                  |  |               | 80,290  |              |  
|Less current portion                                                                                                                                                                              |  |               | (27,868 | )            |  
|                                                                                                                                                                                                  |  |               |         |              |  
|Long term debt, net of current portion                                                                                                                                                            |  | $             | 52,422  |              | $
|                                                                                                                                                                                                  |  |               |         |              |  

8



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##### Table of Contents

PART 1.FINANCIAL INFORMATION (continued)

Notes to Consolidated Financial Statements  Molecular Imaging Corporation and Subsidiaries

Note 8Long Term Debt (Continued)

The maturities of long-term debt for each of the succeeding four years subsequent to March 31, 2003, are as follows:



|December 31, |  |   |       
|------------ |  | - | ------
|             |  |   |       
|2003         |  |   | 27,868
|2004         |  |   | 30,413
|2005         |  |   | 22,009
|             |  |   |       
|             |  | $ | 80,290
|             |  |   |       

Note 9Commitments

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



|                              |  | March 31, 2002 |            | June 30, 2002 |  
|----------------------------- |  | -------------- | ---------- | ------------- | -
|                              |  |                |            |               |  
|Equipment                     |  | $              | 22,071,686 |               | $
|Less accumulated amortization |  |                | (6,939,800 | )             |  
|                              |  |                |            |               |  
|Net capital lease assets      |  | $              | 15,131,886 |               | $
|                              |  |                |            |               |  

The Company leases office space and certain PET equipment under non-cancelable operating leases. The
office lease expires in April 2005 and the equipment leases expire through August 2006. Rent expense under these operating leases was $405,486 and $,1472,297, respectively for the three and nine months ended March 31, 2003, compared to $433,181 and
$1,174,042, respectively, for the three and nine months ended March 31, 2002.

The Company leases certain other PET equipment under capital leases. The equipment leases expire
through January 2008. The capital leases are secured by the Companys assets.

The following is a schedule by year of the future minimum lease payments at March 31, 2003:



|March 31,                                                                         |  | Capital Lease |            | Operating Leases |  
|--------------------------------------------------------------------------------- |  | ------------- | ---------- | ---------------- | -
|                                                                                  |  |               |            |                  |  
|2004                                                                              |  | $             | 6,863,083  |                  | $
|2005                                                                              |  |               | 6,215,182  |                  |  
|2006                                                                              |  |               | 3,548,731  |                  |  
|2007                                                                              |  |               | 1,153,212  |                  |  
|2008                                                                              |  |               | 736,291    |                  |  
|                                                                                  |  |               |            |                  |  
|                                                                                  |  |               | 18,516,499 |                  | $
|                                                                                  |  |               |            |                  |  
|Less amount representing interest at 12.0%                                        |  |               | (3,942,814 | )                |  
|                                                                                  |  |               |            |                  |  
|Present value of minimum lease payments (including current portion of $5,023,397) |  | $             | 14,573,685 |                  |  
|                                                                                  |  |               |            |                  |  

9



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##### Table of Contents

PART 1.FINANCIAL INFORMATION (continued)

Notes to Consolidated Financial Statements

Note 10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
three months and nine months ended March 31, 2003.

Note 11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 12Earnings (Loss) Per Share

Computations of basic and diluted earnings per share for the three and nine months ended March 31, 2003 and 2002 were as follows:



|                                                                     |  | Three monthsendedMarch 31, 2003 |            | Three monthsendedMarch 31, 2002 |   | Nine monthsendedMarch 31, 2003 |   | Nine monthsendedMarch 31, 2002 |           
|-------------------------------------------------------------------- |  | ------------------------------- | ---------- | ------------------------------- | - | ------------------------------ | - | ------------------------------ | ----------
|                                                                     |  |                                 |            |                                 |   |                                |   |                                |           
|Net income (loss) per share available to common shareholdersbasic   |  |                                 |            |                                 |   |                                |   |                                |           
|Numerator:                                                           |  |                                 |            |                                 |   |                                |   |                                |           
|Net income (loss)available to common shareholders                   |  | $                               | 61,921     |                                 | $ | (1,223,379                     | ) | $                              | 1,059,131 
|Denominator:                                                         |  |                                 |            |                                 |   |                                |   |                                |           
|Weighted-average shares                                              |  |                                 | 54,138,199 |                                 |   | 32,823,114                     |   |                                | 53,891,686
|Net income (loss) per share available to common shareholdersbasic   |  | $                               |           |                                 | $ | (0.04                          | ) | $                              | 0.02      
|Net income (loss) per share available to common shareholdersdiluted |  |                                 |            |                                 |   |                                |   |                                |           
|Numerator:                                                           |  |                                 |            |                                 |   |                                |   |                                |           
|Net income (loss)available to common shareholders                   |  | $                               | 61,921     |                                 | $ | (1,223,379                     | ) | $                              | 1,059,131 
|Denominator:                                                         |  |                                 |            |                                 |   |                                |   |                                |           
|Weighted-average shares                                              |  |                                 | 73,636,220 |                                 |   | 32,823,114                     |   |                                | 71,968,209
|Net income (loss) per share available to common shareholdersdiluted |  | $                               |           |                                 |   | (0.04                          | ) |                                | 0.01      

Note 13Subsequent Events

In April 2003, the Company granted to eligible employees and directors, under the 1999 Stock Option Plan, options to purchase 1,214,000 shares of common stock at exercise prices equal to the fair market value of the common stock at the date
of grant.

In April 2003, the Company committed to enter into definitive agreements with a public university to establish two limited liability companies. The limited liability
companies will then enter into a facility sharing and sublease agreement with a non-affiliated entity for the purpose of offering several imaging modalities at an existing fixed site location. In the event the definitive agreements with the public
university are not executed by June 3, 2003, the Company has agreed to pay $400,000 to the nonaffiliated entity and commence operations at the fixed site location as the sole owner of the limited liability corporations until such time as the
definitive agreements with the public university are executed.

In May 2003, certain leases, which previously had restricted the use of cash and accounts receivable, contained
financial ratio covenants and required the personal guarantee of the chief executive officer, were assigned to a nonaffiliated party and the lease provisions were modified. These leases had previously been in default because of the Companys
failure to meet a required debt service coverage ratio. As a result of the default, obligations under capital leasecurrent previously included the full amount of these lease obligations. The modified provisions of the leases contain no
restrictions on the use of cash, do not contain any financial ratio covenants and do not require any personal guarantee. As a result, the default on these leases has been released and the amount of lease obligations previously included in
obligations under capital leasecurrent that extend beyond one year has been reclassified to noncurrent liabilities. In connection with this transaction, the Company also issued to the nonaffiliated party warrants to purchase 100,000 shares of
common stock at an exercise price of $0.20 per share, expiring in three years.

In addition, in May 2003, the Company entered into a $3,200,000 asset based financing arrangement
with a financial institution. Amounts available under the financing arrangement, with expires in May 2006, are limited to approximately 80% of qualified accounts receivable, which will be less than the balance of accounts receivable as reflected on
our balance sheet. In connection with this transaction, the Company also issued to the financial institution warrants to purchase 10,000 shares of common stock at an exercise price of $0.20 per share, expiring in three years.

In May 2003, the Company entered into an agreement to establish a limited liability company for the purpose of owning and operating a fixed site PET facility in Houston, Texas. The Company estimates
that the limited liability company will require approximately $500,000 of working capital, which will be contributed by the Company or other investors in the limited liability company.

On May 12, 2003, the Company entered into an agreement with a nonaffiliated third party to purchase certain assets used for the manufacture of the radiopharmaceutical used in our business, at an existing site. The purchase price for the
assets is $1,000,000, of which a refundable deposit of $500,000 has been paid. The refundable deposit includes $250,000 recorded as a loan receivable as of March 31, 2003. If the transaction is not consummated by May 26, 2003, in lieu of repayment
of the refundable deposit to the Company, the seller has the option to negotiate with the Company for the establishment of a joint venture between the seller and the Company to operate the facility.

10



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##### Table of Contents

PART I. Item 2.MANAGEMENTS DISCUSSION AND ANALYSIS

Overview

Molecular Imaging Corporation (formerly Mobile PET Systems, Inc.) is a national service provider of Positron Emission Tomography (PET) imaging services. PET is a molecular imaging procedure used to diagnose and stage
cancer, heart disease and neurological deficits. Our medical service business enables hospitals and other healthcare professionals the ability to access this advanced diagnostic imaging patient service.

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

As of March 31, 2003, we had eighteen mobile units
deployed providing our services to approximately 76 healthcare facilities in 22 states. We believe there are and will be significant opportunities to develop and operate additional mobile and stationary PET facilities.

We owned and operated the only private sector stationary PET facility in the United Kingdom (London PET Centre). We sold this facility in July 2002. The results of operations of the London PET Centre
for the three and nine month periods ended March 31, 2002 and 2003 have been reclassified as income (loss) from operations of discontinued operations.

Critical Accounting
Policies

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

Revenue Recognition

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

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

Results of Operations

Three Months Ended March 31, 2003

Service revenues for the three months ended March 31, 2003 were $5,650,896, compared to service revenues for the three months ended March 31, 2002 of $4,249,770. Our cost of service revenues for the
three months ended March 31, 2003 were $3,141,296, compared to $2,727,053 for the three months ended March 31, 2002. These results exclude the operations of the London PET Centre. The substantial difference in service revenues is largely
attributable to eighteen units being deployed during the three months ended March 31, 2003 as compared to fifteen units being deployed during the three months ended March 31, 2002, as well as better utilization of each existing unit. The cost of
service revenues represents salaries paid to technologists and drivers, system maintenance, transportation and insurance on our mobile PET systems.

The gross profit percentage
increased from 35.8% for the three months ended March 31, 2002 to 44.4% for the three months ended March 31, 2003 primarily for the following reasons:



|Gross profit percentage for the three months ended March 31, 2002 |  | 35.8 | %
|----------------------------------------------------------------- |  | ---- | -
|Transportation services                                           |  | 3.0  |  
|Depreciation expense                                              |  | 2.1  |  
|Equipment rental                                                  |  | 2.3  |  
|Service contracts and repairs                                     |  | (1.1 | )
|Medical supplies                                                  |  | 2.0  |  
|Other                                                             |  | .3   |  
|                                                                  |  |      |  
|Gross profit percentage for the three months ended March 31, 2003 |  | 44.4 | %
|                                                                  |  |      |  

Our cost of transportation services decreased because we hired more of our own drivers and used fewer
outside transportation services in the three months ended March 31, 2003. While our depreciation expense increased in absolute dollars in the three months ended March 31, 2003, it decreased as a percentage of service revenues because of the
substantial increase in service revenues. Equipment rental remained relatively constant in terms of absolute dollars, but decreased as a percentage of service revenues since a greater portion of our service revenues are generated from units that we
are purchasing as opposed to renting. Our cost of service contracts and repairs increased over the three months ended March 31, 2002 since more of our units are no longer covered by warranty and require maintenance contracts or the use of other
repair sources. Our cost of medical supplies decreased as a percent of service revenues since more of our customers now provide their own medical supplies.

The gross profit
percentage increased from 39.5% for the three months ended December 31, 2002 to 44.4% for the three months ended March 31, 2003 primarily for the following reasons:



|Gross profit percentage for the three months ended December 31, 2002 |  | 39.5 | %
|-------------------------------------------------------------------- |  | ---- | -
|Equipment rental                                                     |  | 2.6  |  
|Service contracts and repairs                                        |  | 2.8  |  
|Other                                                                |  | (.5  | )
|                                                                     |  |      |  
|Gross profit percentage for the three months ended March 31, 2003    |  | 44.4 | %
|                                                                     |  |      |  

Equipment rental decreased as a percentage of service revenues since a greater portion of our service
revenues are generated from units that we are purchasing as opposed to renting. Our cost of service contracts and repairs decreased in the three months ended March 31, 2003 from the three months ended December 31, 2002 as we utilized a fewer number
of maintenance contracts. We would expect that our service contracts and repairs costs will increase as a percentage of service revenues as we add maintenance contracts to cover all of our units in the fourth quarter of fiscal year 2003.

Selling and marketing expenses increased from $363,639 for the three months ended March 31, 2002 to $385,981 for the three months ended March 31, 2003 primarily because of higher sales
salaries and commissions. General and administrative expenses decreased from $1,703,492 for the three months ended March 31, 2002 to $1,534,882 for the three months ended March 31, 2003 primarily because of common stock issued for services during
the three months ended March 31, 2002.

We realized net income for the three months ended March 31, 2003 of $61,921 as compared to a net loss of $1,161,761 for the three months
ended March 31, 2002. The March 31, 2003 quarter is the first quarter the Company has realized net income from continuing operations. The quarterly net income was the result of increased service revenues, higher gross profit margins and decreased
general and administrative expenses, as discussed above.

Nine Months Ended March 31, 2003

Service
revenues for the nine months ended March 31, 2003 were $15,262,591 as compared to service revenues for the nine months ended March 31, 2002 of $11,519,484. The substantial difference in service revenues is largely attributable to the deployment of
three new units during the nine months ended March 31, 2003 (including two new units at the end of calendar year 2002), as well as better utilization of each existing unit. Our cost of service revenues for the nine months ended March 31, 2003 were
$9,262,883 as compared to cost of service revenues for the nine months ended March 31, 2002 of $7,171,873.

The gross profit percentage increased from 37.7% for the nine months
ended March 31, 2002 to 39.3% for the nine months ended March 31, 2003 primarily for the following reasons:



|Gross profit percentage for the nine months ended March 31, 2002 |  | 37.7 | %
|---------------------------------------------------------------- |  | ---- | -
|Transportation services                                          |  | 2.3  |  
|Depreciation expense                                             |  | 4.0  |  
|Service contracts and repairs                                    |  | (4.1 | )
|Other                                                            |  | (.6  | )
|                                                                 |  |      |  
|Gross profit percentage for the nine months ended March 31, 2003 |  | 39.3 | %
|                                                                 |  |      |  

Our cost of transportation services decreased because we hired more of our own drivers and used fewer
outside transportation services in the nine months ended March 31, 2003. Our depreciation expense remained relatively constant in terms of absolute dollars in the nine months ended March 31, 2003, but decreased as a percentage of service revenues
because of the substantial increase in service revenues. Our cost of service contracts and repairs increased over the nine months ended March 31, 2002 since more of our units are no longer covered by warranty and require maintenance contracts or the
use of other repair sources.

Selling and marketing expenses increased from $1,134,555 for the nine months ended March 31, 2002 to $1,354,014 for the nine months ended March 31,
2003 primarily because of higher sales salaries and commissions. General and administrative expenses decreased from $4,893,479 for the nine months ended March 31, 2002 to $4,491,913 for the nine months ended March 31, 2003 primarily because of
common stock issued for services during the nine months ended March 31, 2002.

Other income (expenses) for the nine months ended March 31, 2003 consists primarily of income
resulting from the settlement of claims under a Preferred Provider Radiopharmaceutical Agreement with P.E.T. Net Pharmaceuticals, Inc.

Expanding Our Business

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

One measure that management uses to evaluate our progress is average revenues per weekday for all units. We calculate average
revenues per weekday for all units by dividing total weekday revenues by the number of weekdays in the relevant period, excluding holidays. We exclude Saturdays from this calculation since not all of our units are scheduled for Saturday service. For
reasons described above, for the three and nine months ended March 31, 2003, our average revenues per weekday for all units increased to approximately $84,141 and $75,427, respectively, from average revenues per weekday for all units of
approximately $63,658 and $58,975 for the three and nine months ended March 31, 2002, respectively. Our future revenues will principally be a function of the number of operating units in service, the volume of patient procedures and the fees earned
per procedure. We generate substantially all our revenues from our service agreements with hospitals and other health care providers. We have a satisfactory record of account collections, however there can be no assurance that this trend will
continue and, accordingly, we have established an allowance for uncollectable accounts receivable. Lower reimbursement by public and private insurers may also impact the revenues we can generate from our operations. There can be no assurance that we
will be able to maintain or increase the number of patient procedures or that our allowances for doubtful accounts receivable will be sufficient.

We are working with third
parties to develop stationary imaging centers that we will operate as Independent Diagnostic Testing Facilities (IDTF). Under the IDTF model, patient billings will be submitted directly to Medicare or insurance carriers at higher rates
than billings for mobile services to hospitals or clinics. In addition, Medicare and insurance reimbursement rates are currently higher for PET services performed at an IDTF than for the same services performed as a hospital based service. Under the
IDTF model, lower scans per day are typically necessary to reach break-even because of the higher amount of reimbursement. Because patient billings are submitted directly to Medicare and insurance carriers under the IDTF model, we may experience a
longer period of time between billing and collection than we experience from our traditional mobile services.

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

Since our inception we have incurred significant losses. Through March 31, 2003, we have an accumulated deficit of $23,721,950, which we have financed
primarily through equity sales. For the three and nine months ended March 31, 2003, we recognized income (loss) from continuing operations of $61,921 and $(1,142,337), respectively, compared to losses from continuing operations of $(1,035,957) and
$(3,202,223) for the three and nine months ended March 31, 2002, respectively. Because of the sale of the London PET Centre, there was net income available to common shareholders of $1,059,131 for the nine months ended March 31, 2003, compared to a
net loss available to common shareholders of $(3,718,936) for the nine months ended March 31, 2002.

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

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PART I. ITEM 2.MANAGEMENTS DISCUSSION AND ANALYSIS (continued)

Liquidity and Capital Resources

At March 31, 2003, our total assets were $21,375,702, compared to $20,876,584 at June 30, 2002. The
increase was primarily the result of new mobile units being added as fixed assets, offset by the sale of assets from the London PET Centre Ltd. Our current assets at March 31, 2003 totaled $4,862,234, and our current liabilities were $7,983,117, as
compared to current assets of $5,037,607 and current liabilities of $12,581,697 at June 30, 2002. Our current liabilities exceed current assets because, under Generally Accepted Accounting Principles, we are required to record as a current liability
our capital lease obligations due within the next twelve months. As discussed in Note 9 - Commitments, several of our units are also financed under non-cancelable operating leases that are not recorded as liabilities until the monthly payment is
due. Our current assets, on the other hand, include only those accounts receivable that are outstanding from service revenues recognized and typically represent 30 to 60 days of service revenues. Shareholders equity increased to $3,789,875 at
March 31, 2003, from ($379,795) at June 30, 2002, due primarily to the gain on the sale of the London PET Centre of $2,219,300 and private placements of common stock of $6,185,406, net of offering costs less the redemption of the Series A and Series
B Preferred Stock of $3,784,072 and the loss from continuing operations of $1,142,337. We used the net proceeds from these transactions to make payments of accounts payable and certain other obligations.

While we believe that our available cash, short-term assets, and other resources will be sufficient to fund our operations and capital expenditures through the current fiscal year, our results of operations will have an
impact on our cash needs beyond that time. We are currently pursuing several financing opportunities as well as working to achieve sustained profitability from operations. In May 2003, certain leases, which previously had restricted the use of cash
and accounts receivable, contained financial ratio covenants and required the personal guarantee of the chief executive officer, were assigned to a non-affiliated party and the lease provisions were modified. These leases had previously been in
default because of our failure to meet a required debt service coverage ratio. As a result of the default, obligations under capital leasecurrent previously included the full amount of these lease obligations. The modified provisions of the
leases contain no restrictions on the use of cash, do not contain any financial ratio covenants and do not require any personal guarantee. As a result, the default on these leases has been released and the amount of lease obligations previously
included in obligations under capital leasecurrent that extend beyond one year has been reclassified to noncurrent liabilities. In addition, in May 2003, we entered into a $3,200,000 asset based financing arrangement with a financial
institution. Amounts available for borrowing under the financing arrangement, which expires in May 2006, are limited to approximately 80% of qualified accounts receivable, which will be less than the balance of accounts receivable as reflected on
our balance sheet. The ability to borrow against these assets will provide us greater flexibility with our cash needs. If we are unable to generate sufficient service revenues to fund continuing operations or achieve sustained profitability, or if
we are unable to successfully complete any of the proposed financing activities, our operations will need to be significantly reduced or will otherwise suffer. In addition, we may be required to raise additional capital to add or acquire additional
mobile units or stationary sites, or for other operating purposes. We are continually exploring various financing alternatives, but there can be no assurance that any additional debt or equity financing will be available on commercially reasonable
terms or at all.

Seasonality

We experience seasonality in the sale of our services. For example,
first quarter client and patient vacation schedules may affect revenues. Second quarter revenues may be affected by client and patient holiday and vacation schedules and inclement weather, the results of which may be fewer patients scans during the
period. Third quarter revenues may be affected by fewer calendar days and inclement weather, the results of which may be fewer patient scans during the period. We may not be able to reduce our expenses, including our debt service obligations,
quickly enough to respond to these declines in revenue, which would make our business difficult to operate and would harm our financial results. In addition, we may be unable to adjust our expenditures if revenues in a particular period fail to meet
our expectations, which would harm our operating results for that period.

Factors That May Affect Future Results

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

We have lost money in the past and may lose money in the future.

We have incurred
significant losses since our formation. In the past we have been successful in generating sufficient revenues to fund our continuing operations. In the future we may not be able to generate sufficient revenues from sales to fund continuing
operations or sustain profitability.

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PART I. ITEM 2.MANAGEMENTS DISCUSSION AND ANALYSIS (continued)

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

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



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



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



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



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



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



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

Equipment and other assets of the Company secure certain of our indebtedness. If creditors foreclose as a result of a company default or
our failure to timely pay our obligations, the Company and its operations could be materially and adversely affected.

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

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

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

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

Our future revenues and profitability depend in part on our ability to demonstrate to hospitals the potential cost savings and patient benefits of the PET procedure over traditional diagnostic imaging
procedures. Our ability to achieve profitability in the future will depend in part on our ability to successfully market and sell PET services on a wide scale. If we do not become profitable, we may not be able to continue our operations.

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

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

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PART I. ITEM 2.MANAGEMENTS DISCUSSION AND ANALYSIS (continued)

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

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

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

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

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

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

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

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

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

Upon expiration of our clients contracts,
we are subject to the risk that clients will cease using our services and purchase or lease their own PET systems, use our competitors services or rely on alternate imaging technologies. Approximately twenty-eight percent of our client
contracts expire in 2003; thirty-two percent in 2004; twenty-two percent in 2005; fourteen percent in 2006; three percent in 2007; and one percent in 2008. Moreover, one-third of our client contracts permit the client, upon typically 180 days
notice, to terminate the contract without cause, and two-thirds of our client contracts permit the client, upon typically 180 days notice, to terminate the contract if the client develops their own fixed site PET services. In addition, a
portion of our contracts do not have minimum usage requirements.

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PART I. ITEM 2.MANAGEMENTS DISCUSSION AND ANALYSIS (continued)

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

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



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



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



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



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



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



state law equivalents of the foregoing;



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



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

If our operations are found to be in violation of
any of the laws described in this risk factor or the other governmental regulations to which our clients or we are subject, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages,
fines and the curtailment of our operations. Any penalties, damages, fines or curtailment of our operations would adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws
is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we
successfully defend against it, could cause us to incur significant legal expenses and divert our managements attention from the operation of our business.

The 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 the IDTF model, and our selection of quality business partners.

We are working with third parties to develop stationary imaging centers that we will operate as IDTFs. These stationary imaging centers are identified and selected based on input from hospital
administrators, imaging center operators or physician groups who want to offer molecular imaging on their campus. We analyze the marketplace demographics, local competition, tumor board statistics, referring physician demographics and the
availability of an on-site PET champion to increase the vitality of the PET service. As permitted under state and federal laws, we may also partner with third party investors in the development and operation of these stationary imaging centers. 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 PET 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. Also, there are
no assurances that the current reimbursement rates for IDTF imaging centers will remain 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 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 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.

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

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

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

Many of our competitors have substantially greater financial resources and experience than us. Furthermore, we expect that other companies will enter
the mobile and stationary PET market, particularly as PET services gain increasing market acceptance. Our competitors may be able to develop technologies, procedures or products that are more effective or economical than ours, or that would render
the PET procedure 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 PET imaging systems. In addition, the hospital industry has been

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PART I. ITEM 2.MANAGEMENTS DISCUSSION AND ANALYSIS (continued)

experiencing a trend towards consolidation, which trend could reduce a sector of our potential customer base and increase competition for available customers.

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

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

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

Our PET service involves the controlled storage, use and disposal of material containing
radioactive isotopes. While this material has a short half-life, meaning it quickly breaks down into inert, or non-radioactive substances, using these materials presents the risk of accidental environmental contamination and physical
injury.

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

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

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

The impact of 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 service provider such as a hospital or medical group 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 regulations, some of our clients may have difficulty qualifying our services for provider-based status. If a client cannot obtain provider-based status for our services, then the provider might decide not to contract or
to continue to contract with us or might acquire a fixed base PET system.

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PART I. ITEM 2.MANAGEMENTS DISCUSSION AND ANALYSIS (continued)

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

Some states require a
certificate of need or similar regulatory approval prior to the acquisition of high-cost capital items, including diagnostic imaging systems, or provision of diagnostic imaging services by us or our clients. While currently only one of the seventeen
states in which we operate requires a certificate of need, more states are adopting similar licensing requirements. In many cases, a limited number of these certificates are available in a given state. If we are unable to obtain the applicable
certificate or approval or additional certificates or approvals necessary to expand our operations, these regulations may limit or preclude our operations in the relevant jurisdictions. Conversely, states in which we have obtained or will obtain a
certificate of need may repeal existing certificate of need regulations or liberalize exemptions from the regulations. The repeal of certificate of need regulations in states in which we have obtained a certificate of need or a certificate of need
exemption would lower barriers to entry for competition in those states and could adversely affect our business.

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

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

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

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



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



changes in the number of days of service we can offer with respect to a given system due to equipment malfunctions or the seasonal factors of our business.

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

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

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

Timely, effective service is essential to maintaining our reputation and high utilization rates on our systems. Repairs to one of our systems can take up to two
weeks and result in a loss of revenue. Our warranties and maintenance contracts do not fully compensate us for loss of revenue when our systems are not working.

The principal
components of our operating costs include depreciation; salaries paid to technologists and drivers, annual system maintenance costs, insurance and transportation costs. Because the majority of these expenses are fixed, a reduction in the number of
scans performed due to out-of-service equipment will result in lower revenues and margins. The equipment manufacturers perform repairs of our equipment for us. We cannot guarantee that these manufacturers will be able to perform repairs or supply
needed parts

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PART I. ITEM 2.MANAGEMENTS DISCUSSION AND ANALYSIS (continued)

in a timely manner. Thus, if we experience greater than anticipated system malfunctions or if we are unable to promptly obtain the service necessary to keep our systems functioning effectively, our revenues could
decline and our ability to provide services would be harmed.

We have a limited operating history.

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

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

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

ITEM 3. CONTROLS AND PROCEDURES

Within 90 days prior to the filing date of this 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-14(c) and 15d-14(c) 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.

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.

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PART II. OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS

From time to time the Company becomes involved in legal proceedings,
either as a plaintiff or defendant. The Company is currently involved in one such proceeding to enforce the termination provisions or minimum number of procedure provisions of its service contract. The Company does not believe that this proceeding
is material.

Although there is currently no pending legal proceeding, the Company received notice, dated April 4, 2002, from Finova Capital Corporation of an event of default
relating to certain violations of debt service ratio covenants contained in capital equipment leases with the Company. These leases were assigned to a non-affiliated entity on May 5, 2003 and the provisions of the leases were modified. As a result,
the default on these leases was released.

ITEM 2. CHANGES IN SECURITIES

Changes in Securities.

In January 2003,
we granted 187,500 options to American Financial Communications, Inc. as compensation for services provided. These options vested immediately, were exercisable at a price of $0.01 per share and were exercised in January 2003. The issuance of options
was in reliance on Section 4(2) of the Act.

Effective October 28, 2002, we entered into an employment agreement with Craig Froley pursuant to which he became our Senior Vice
President of Business Development. Pursuant to the terms of that agreement, we granted Mr. Froley 250,000 options under the 1999 Stock Option Plan to purchase common stock at a price of $0.60 per share, and a warrant to purchase 100,000 shares of
common stock at a price of $0.60 per share. The issuance of warrants was in reliance on Section 4(2) of the Act. Mr. Froleys employment with the Company concluded in March 2003. Pursuant to the terms of the employment and option and warrant
agreements with Mr. Froley, all options and warrants granted by the Company to Mr. Froley terminated effective upon the conclusion of his employment with the Company.

Effective
March 18, 2003, we entered into an employment agreement with John H. Mishalanie pursuant to which he became our Senior Vice President of Sales and Marketing. Pursuant to the terms of that agreement, we granted Mr. Mishalanie 250,000 options under
the 1999 Stock Option Plan to purchase common stock at a price of $0.18 per share. The options vest at a rate of 6,944 shares per month with a final month vesting of 6,960 shares, commencing on April 30, 2003. The options are exercisable until March
31, 2007.

In May 2003, we granted 100,000 warrants to Ascendiant Capital Group, Inc. in consideration for the assignment and modification of the provisions of certain leases. The
warrants vest immediately, are exercisable at a price of $0.20 per share and expire in three years. The issuance of warrants was in reliance on Section 4(2) of the Act.

In May
2003, we granted 10,000 warrants to Meridian Commercial Healthcare Finance, LLC in consideration for the establishment of an asset based financing arrangement. The warrants vest immediately, are exercisable at a price of $0.20 per share and expire
in three years. The issuance of warrants was in reliance on Section 4(2) of the Act.

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

On May 1, 2003, the Company held its Annual Meeting of Stockholders at The Bay Club Hotel
& Marina, 2131 Shelter Island Drive, San Diego, California at 10:00 AM. A quorum of shareholders was present in person or by proxy.

Proposal 1.

At the meeting, the following directors were elected to serve until the next annual meeting or their successor is elected, by the indicated votes:



|                         |  | For        |  | Abstain |  | Withheld | 
|------------------------ |  | ---------- |  | ------- |  | -------- | 
|                         |  |            |  |         |  |          | 
|Paul Crowe               |  | 46,575,461 |  | 88,802  |  | 73,637   | 
|Robert Bush              |  | 46,575,461 |  | 88,802  |  | 91,008   | 
|Axel Steudle             |  | 46,575,461 |  | 88,802  |  | 11,717   | 
|Jeffrey Rush, M.D.       |  | 46,575,461 |  | 88,802  |  | 9,962    | 
|Peter Conti, M.D., Ph.D. |  | 46,575,461 |  | 88,802  |  | 55,167   | 
|Albert Haussener         |  | 46,575,461 |  | 88,802  |  | 55,017   | 
|Thomas Insley            |  | 46,575,461 |  | 88,802  |  | 90,842   | 

Proposal 2.

At the same meeting, the shareholders approved of an amendment to our Amended and Restated Certificate of Incorporation to change our name to Molecular Imaging Corporation. This proposal was approved by the
following vote:



|For:     |  | 46,461,510 | 
|-------- |  | ---------- | 
|Against: |  | 50,050     | 
|Abstain: |  | 41,711     | 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit
10.48Employment Agreement dated March 18, 2003 by and between Mobile PET Systems, Inc. and John H. Mishalanie

Exhibit 99.1Certification Pursuant to Section 906 of
Sarbanes-Oxley Act 2002 (furnished, not filed).

(b) Reports on Form 8-K

Form 8-K was filed with the
Securities and Exchange Commission on May 2, 2003 regarding a press release, dated May 1, 2003 announcing unaudited results of operations for the three and nine months ended March 31, 2003.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.



| | MOLECULAR IMAGING CORPORATIONa Delaware corporation |                                                        | 
| | --------------------------------------------------- | ------------------------------------------------------ | 
| | By:                                                 | /s/ THOMASH. INSLEY                                    | 
| |                                                     |                                                        | 
| |                                                     | Thomas H. Insley,Chief Financial Officer and Secretary | 



Date: May 15, 2003

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CERTIFICATIONS

1. Chief Executive Officer

I, Paul J. Crowe, certify
that:

1.

I have reviewed this quarterly report on Form 10-QSB of Molecular
Imaging Corporation;

2.

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

3.

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

4.

The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the
Evaluation Date); and

c)

presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent functions):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and
report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and

6.

The registrants other certifying officers and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.



| |     |                                      | 
| | --- | ------------------------------------ | 
| | By: | /s/ PAULJ. CROWE                     | 
| |     |                                      | 
| |     | Paul J. CroweChief Executive Officer | 



Date: May 15, 2003

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2. Chief Financial Officer

I, Thomas H. Insley, certify that:

1.

I have reviewed this quarterly report on Form 10-QSB of Molecular Imaging Corporation;

2.

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

3.

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

4.

The registrants other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the
Evaluation Date); and

c)

presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent functions):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and
report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and

6.

The registrants other certifying officers and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.



| |     |                                          | 
| | --- | ---------------------------------------- | 
| | By: | /s/ THOMASH. INSLEY                      | 
| |     |                                          | 
| |     | Thomas H. Insley,Chief Financial Officer | 



Date: May 15, 2003

22