##### Table of Contents

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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




Form 10-QSB





(Mark One)x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OFTHE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended December 31, 2001 ̈

TRANSITION REPORT UNDER SECTION 13 OR 15(D) OFTHE SECURITIES EXCHANGE ACTFor the transition period from
                        
to





Commission file number 000-27915





MOBILE PET SYSTEMS, INC.,


A Delaware Corporation


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





DELAWARE (State or other jurisdiction of incorporation or organization)

11-2787966 (IRS Employer Identification No.)





2150 West Washington Street, Suite 110


San Diego, California 92110


(Address of principal executive offices)





(619) 226-6738


(Issuers telephone number)





---




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   ̈





There were
38,477,767 shares outstanding of the issuers Common Stock as of February 12, 2002.





Transitional Small Business Disclosure Format (Check one):


Yes   ̈  No x





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##### Table of Contents




MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





For the quarterly period ended December 31, 2001





Table of Contents





Page No.PART I.    FINANCIAL INFORMATION

1Item 1.    Financial Statements (unaudited)

1Consolidated Balance Sheets as of December 31, 2001 and 2000

1Consolidated Statements of Operations for the three months ended December 31, 2001 and 2000

2Statement of Changes in Shareholders Equity for the three months ended December 31, 2001 and 2000

3Consolidated Statements of Cash Flows for the three months ended December 31, 2001 and 2000

4Notes to Financial Statements

5Item 2.    Managements Discussion and Analysis

14PART II.    OTHER INFORMATION

23Item 1.    Legal Proceedings

23Item 2.    Changes in Securities

23Item 6.    Exhibits and Reports on Form 8-K

24Signatures

25




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##### Table of Contents








PART 1.


FINANCIAL INFORMATION





Consolidated Balance Sheets  Mobile Pet Systems, Inc. and Subsidiaries (Unaudited)





---

December 31, 2001 and 2000

2001


2000AssetsCurrent assets:Cash

$
66,913


$
2,699Accounts receivable, net of allowance for doubtful accounts of $129,320 at December 31, 2001 and 2000


2,465,271



808,127Other receivables


15,450



35,614Prepaid expenses


1,928,558



24,803Deposits and other assets


503,411



819,608Total current assets


4,979,603



1,690,851Property and equipment, net


16,364,018



18,548,867Other assets:Accrued interest receivable


10,573



10,573Related party receivables


128,037



315,701Subordinated equity participation


200,000



200,000Restricted cash


349,560



337,723Total assets

$
22,031,791


$
21,103,715Liabilities and Shareholders EquityCurrent liabilities:Accounts payable

$
2,681,663


$
1,910,975Loans payable


621,050



300,000Current portion of long-term debt


19,091



18,101Income taxes payable






800Accrued and other liabilities


857,133



255,086Obligations under capital leasecurrent


5,649,258



3,352,729Total current liabilities


9,828,195



5,837,691Non-current liabilities:Long-term debt


71,561



90,652Obligations under capital lease


10,709,837



15,286,726Total liabilities


20,609,593



21,215,069Shareholders equityPreferred stock; 10,000,000 shares authorizedPreferred stock; series A; 32 and 42 shares issued and outstanding at December 31, 2001 and 2000, respectively


1,915,437



2,125,000Preferred stock, series B; 30 shares issued and outstanding at December 31, 2001 and 2000


1,768,110



1,500,000Common stock; $0.0001 par value; 90,000,000 shares authorized; 38,235,951 and 15,737,172 shares issued and outstanding at
December 31, 2001 and 2000, respectively


3,824



1,574Additional paid in capital


19,105,358



10,093,070Accumulated deficit


(21,039,249
)


(13,892,271
)Foreign currency translation adjustment


(331,282
)


61,273Total shareholders equity


1,422,198



(111,354
)Total liabilities and shareholders equity

$
22,031,791


$
21,103,715





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




1




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)







Consolidated Statements of Operations  Mobile Pet Systems, Inc. and Subsidiaries  (Unaudited)


---

For the Three and Six Months Ended December 31, 2001 and 2000

Three Months Ended December 31,


Six Months Ended December 31,2001


2000


2001


2000Service revenues

$
4,147,776


$
1,118,687


$
7,828,500


$
1,959,668Cost of service revenues


2,521,035



1,735,898



4,615,967



2,348,651Gross profit (loss)


1,626,741



(617,211
)


3,212,533



(388,983
)ExpensesSelling and marketing


820,632



772,563



1,763,616



1,225,664General and administrative


1,890,560



1,625,493



3,051,051



3,425,114Total expenses


2,711,192



2,398,056



4,814,667



4,650,778Loss from operations


(1,084,451
)


(3,015,267
)


(1,602,134
)


(5,039,761
)Other income (expense)Interest income


2,597



11,712



5,198



24,989Other income (expense)


72



890



144



(6,362
)Interest expense


(511,833
)


(190,709
)


(1,106,821
)


(435,267
)Total other income (expense)


(509,164
)


(178,107
)


(1,101,479
)


(416,640
)Loss before provision for income taxes


(1,593,615
)


(3,193,374
)


(2,703,613
)


(5,456,401
)Provision for income taxes


11,758







14,014



Net loss


(1,605,373
)


(3,193,374
)


(2,717,627
)


(5,456,401
)Preferred stock dividend


76,033



375,094



152,687



651,481Net lossavailable to common shareholders

$
(1,681,406
)

$
(3,568,468
)

$
(2,870,314
)


(6,107,882
)Loss per sharebasic

$
(0.05
)

$
(0.25
)

$
(0.09
)

$
(0.43
)Loss per sharediluted

$
(0.05
)

$
(0.25
)

$
(0.09
)

$
(0.43
)

















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




2




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




Consolidated Statements of Changes in Shareholders Equity  Mobile Pet Systems, Inc. and Subsidiaries (Unaudited)





For the Three and Six Months Ended December 31, 2001 and 2000  (Unaudited)

Preferred Stock


Common Stock

Additional Paid In Capital


Accumulated Deficit


Foreign Currency Translation Adjustment


Total Shareholders EquityShares


Amount


Shares

AmountBalanceJune 30, 2000

60


$
3,000,000


14,944,658

$
1,495

$
8,580,888


$
(8,415,771
)

$
(42,938
)

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

20



1,000,000








(115,000
)










885,000Stock subscribed, net of offering costs














547,500











547,500Options issued as compensation














92,331











92,331Net lossJuly 1, 2000 to September 30, 2000


















(2,263,027
)






(2,263,027
)Foreign currency translation adjustment






















73,143



73,143BalanceSeptember 30, 2000

80



4,000,000


14,944,658


1,495


9,105,719



(10,678,798
)


30,205



2,458,621Preferred stock issued in private placement, net of offering costs

10



500,000








(500,000
)










Common stock issued through conversion of preferred stock

(18
)


(875,000
)

719,736


72


874,928











Common stock issued through conversion of preferred stock dividend








47,778


4


20,095



(20,099
)






Common stock issued from subscriptions paid, net of offering costs








25,000


3


(3
)










Options issued as compensation














92,331











92,331Common stock subscribed, net of offering costs














500,000











500,000Net lossOctober 1, 2000 to December 31, 2000


















(3,193,374
)






(3,193,374
)Foreign currency translation adjustment






















31,068



31,068BalanceDecember 31, 2000

72



3,625,000


15,737,172


1,574


10,093,070



(13,892,271
)


61,273



(111,354
)Recapitalization of preferred stock





621,456








(347,500
)


(273,956
)






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








3,710,584


371


1,320,779











1,321,150Common stock issued through conversion of preferred stock

(8
)


(445,035
)

1,023,999


103


444,932











Common stock issued through conversion of debt








1,875,000


188


749,812











750,000Common stock issued through settlement agreement








2,733,981


273


749,727











750,000Common stock subscribed, net of offering costs














1,000,000











1,000,000Common stock issued for services








403,350


40


201,635











201,675Options issued as compensation














229,253











229,253Convertible debt intrinsic beneficial conversion feature














7,800











7,800Net lossOctober 1, 2000 to June 30, 2001


















(4,064,322
)






(4,064,322
)Foreign currency translation adjustment






















(382,364
)


(382,364
)BalanceJune 30, 2001, as originally stated

64



3,801,421


25,484,086


2,549


14,449,508



(18,230,549
)


(321,091
)


(298,162
)Prior period adjustmentaccrued expenses


















(91,073
)


734



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

64



3,801,421


25,484,086


2,549


14,449,508



(18,321,622
)


(320,357
)


(388,501
)Common stock issued from subscriptions paid, net of offering costs








2,600,000


260


(260
)










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








4,014,285


401


1,404,599











1,405,000Common stock issued as finders fee








100,000


10


(10
)










Common stock issued for compensation








100,000


10


42,990











43,000Common stock issued for services








325,967


33


125,218











125,251Net lossJuly 1, 2001 to September 30, 2001


















(1,112,254
)






(1,112,254
)Foreign currency translation adjustment






















(13,386
)


(13,386
)BalanceSeptember 30, 2001, as adjusted

64



3,801,421


32,624,338


3,263


16,022,045



(19,433,876
)


(333,743
)


59,110Common stock issued in private placement, net of offering costs








2,728,571


273


1,119,727











1,120,000Common stock issued through conversion of preferred stock

(2
)


(117,874
)

221,328


22


117,852











Common stock issued as finders fee








61,714


6


(6
)










Common stock issued for services








2,600,000


260


1,845,740











1,846,000Net lossJuly 1, 2001 to December 31, 2001


















(1,605,373
)






(1,605,373
)Foreign currency translation adjustment






















2,461



2,461BalanceDecember 31, 2001, as adjusted

62


$
3,683,547


38,235,951

$
3,824

$
19,105,358


$
(21,039,249
)

$
(331,282
)

$
1,422,198





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







3




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)







Consolidated Statements of Cash Flows  Mobile Pet Systems, Inc. and Subsidiaries (Unaudited)





---

Three Months Ended December 31,


Six Months Ended December 31,For the Three and Six Months Ended December 31, 2001 and 2000

2001


2000


2001


2000Cash flows from operating activitiesNet loss

$
(1,605,373
)

$
(3,193,374
)

$
(2,717,627
)

$
(5,456,401
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


740,086



562,424



1,514,353



841,522Interest














47,508Options issued for compensation






92,331







184,662Common stock issued for compensation










43,000



Common stock issued for services


1,846,000







1,971,251



(Increase) decrease in operating assets:Accounts receivable


(124,004
)


(240,592
)


(408,519
)


(335,394
)Due from London Radiosurgical Centre, Ltd.


(140,733
)


214,835



110,529



119,399Other receivables


(11,135
)


586,709



(11,135
)


257,425Prepaid expenses


(1,089,699
)


111,590



(1,090,394
)


216,959Deposits and other assets


(21,508
)


834,561



(21,450
)


788,281Restricted cash


(2,016
)


(4,147
)


(4,690
)


(8,243
)Deferred Assets






(12,008
)






(12,714
)Increase (decrease) in operating liabilities:Accounts payable


116,707



804,572



178,154



1,247,541Income taxes payable










(1,600
)


Accrued and other liabilities


294,430



(227,950
)


(111,063
)


(220,767
)Net cash used in operating activities


2,755



(471,049
)


(549,191
)


(2,330,222
)Cash flows from investing activitiesCapital expenditures


(108,480
)


(65,474
)


(132,610
)


(166,050
)Net cash used in investing activities


(108,480
)


(65,474
)


(132,610
)


(166,050
)Cash flows from financing activitiesCash Overdraft






24,934







24,934Proceeds from loan






100,000







408,753Repayment of loan


(93,461
)






(97,774
)


Payments on obligations under capital lease


(918,012
)


(294,808
)


(1,693,898
)


(560,907
)Preferred stock issued














885,000Common Stock Issued


1,120,000



500,000



2,525,000



1,047,500Net cash provided by financing activities


108,527



330,126



733,328



1,805,280Effect of exchange rate changes on cash


45,093



31,068



(47,694
)


172,658Net (decrease) increase in cash


47,895



(175,329
)


3,833



(518,334
)Cashbeginning of year


19,018



178,028



63,080



521,033Cashend of year

$
66,913


$
2,699


$
66,913


$
2,699Supplemental DisclosuresInterest paid

$
505,784


$
190,709


$
1,108,735


$
104,640Income taxes paid

$
11,758


$



$
14,014


$
1,600Non Cash Investing ActivitiesEquipment under capital lease

$



$
11,737,082


$



$
1,433,863Non Cash Financing ActivitiesPreferred stock dividendbeneficial conversion feature

$



$
138,193


$



$
Cumulative preferred dividend

$



$
236,901


$



$
Obligations under capital lease

$



$
11,737,082


$



$
1,433,863





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




4




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




Notes to Financial Statements  Mobile PET Systems, Inc. and Subsidiaries







Note 1The Company





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





Note 2Summary of Significant Accounting Policies





Basis of Presentation





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





Unaudited Financial Statements





The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America 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 of America for complete financial statements.





Cash and Cash Equivalents





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





Property and Equipment





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





Foreign Currency Translation





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





Estimates





The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those
estimates.





Advertising





Advertising costs incurred for major new campaigns are expensed in the year in which the advertising takes place. Other advertising costs are expensed when incurred. Advertising expense for the six months ended
December 31, 2001 and 2000 was $12,398 and $0, respectively.





Income Taxes





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




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




Notes to Financial Statements  Mobile PET Systems, Inc. and Subsidiaries







Note
2Summary of Significant Accounting Policies (Continued)





Stock Option Plans





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





Reclassifications





Certain reclassifications have been made in the December 31, 2000 financial statements to conform to the December 31, 2001 presentation.





Note 3Acquisitions





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





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





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





Note 4Prepaid Expenses





Prepaid expenses consist of the following at December 31, 2001 and 2000:





2001

2000Investor relations

$
1,183,333

$
Prepaid equipment rent


547,990


Other


197,235


24,803$
1,928,558

$
24,803







6




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




Notes to Financial Statements  Mobile PET Systems, Inc. and Subsidiaries







Note
5Property and Equipment





Property and equipment at December 31, 2001 and 2000 consist of the following:





December 31,2001


2000Leasehold improvements

$
7,071


$
30,389Computer equipment


608,624



483,590Office furniture and fixtures


185,007



30,623Office equipment


44,366



9,443Equipment under capital lease


19,862,939



19,307,88220,708,007



19,861,927Less accumulated depreciation


(4,343,989
)


(1,313,060
)$
16,364,018


$
18,548,867





Depreciation expense for the six months ended December 31, 2001 and 2000 was
$1,514,353 and $841,522, respectively.





Note 6Deposits and Other Assets





Deposits and other assets consist of the following at December 31, 2001 and 2000:





2001

2000Equipment depositsMobile PET Units

$
388,130

$
719,838Equipment rental depositsother





49,000Lease deposits


115,271


Other





50,770$
503,411

$
819,608





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





Note 7Capitalization





Preferred Stock





On
January 20, 2000, the Company authorized for issuance ten million (10,000,000) shares of preferred stock having one hundredth of a cent ($0.0001) par value per share. On March 3, 2000 the Company designated and issued sixty (60) shares 8% Cumulative
Convertible Redeemable Preferred, Series A Stock (Series A) for cash in the amount of $2,700,000, net of acquisition fees. In addition, under this Securities Purchase Agreement the Company issued 120,000 warrants to purchase shares of
common stock at an exercise price of $5 per share, which expire in March 2003. The shares of Series A Stock have no voting rights, have an original liquidation value of $50,000 per share, and accrue dividends at a rate of eight percent (8%) per
annum per share on the liquidation value payable upon conversion. On May 30, 2001 the liquidation value was increased to $58,937 when the Company entered into a Settlement Agreement and Conditional Release of a lawsuit surrounding the Securities
Purchase Agreement. The total liquidation value of the shares outstanding at September 30, 2001 and 2000 in the amount of $2,364,264 and $3,000,000, respectively is classified on the Companys balance sheet as preferred stock. Cumulative
preferred dividends are payable upon conversion and at September 30, 2001 there are cumulative preferred dividends in arrears in the amount of $107,137 or $2,712 per share. In the event of any liquidation, dissolution or winding up of the affairs of
the Company, holders of the Series A Stock shall be paid the liquidation value plus all accrued dividends at that date before any payment to other shareholders. At the option of the holders, the Series A Stock and the cumulative preferred dividends
in arrears are convertible into shares of common stock determined by dividing $58,937 by the conversion price of the lesser of $5 or 75% of the average of the closing bid price of common stock during the five (5) trading days immediately prior to
the conversion date. If the Company fails to convert or is unable to issue shares of common stock, the holder may redeem the Series A Stock for cash in an amount equal to the fair value of the shares of common stock that would have been converted.
The sixty (60) shares of Series A Stock provide an intrinsic value of beneficial conversion feature of approximately $1,206,000. During the year ended June 30, 2001, the holders converted twenty-five and one half (251⁄2) shares of Series A into
1,743,735 shares of common stock. During the six months ended December 31, 2001, the holders converted two shares of Series A into 221,328 shares of common stock.




7




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




Notes to Financial Statements  Mobile PET Systems, Inc. and Subsidiaries







Note
7Capitalization (Continued)





On September 21, 2000, the Company designated and subsequently issued thirty (30)
shares 8% Cumulative Convertible Redeemable Preferred, Series B Stock (Series B) for cash in the amount of $1,385,000, net of acquisition fees. In addition, under this Securities Purchase Agreement the Company issued 50,000 warrants to
purchase shares of common stock at an exercise price of $3 per share and 29,851 warrants to purchase shares of common stock at an exercise price of $2.5125 per share. The warrants expire on September 30, 2005. The shares of Series B Stock have no
voting rights, have an original liquidation value of $50,000 per share, and accrue dividends at a rate of eight percent (8%) per annum per share on the liquidation value payable upon conversion. On May 30, 2001 the liquidation value was
increased to $58,937 when the Company entered into a Settlement Agreement and Conditional Release of a lawsuit surrounding the Securities Purchase Agreement. The total liquidation value of the shares outstanding at September 30, 2001 and 2000 in the
amount of $1,437,157 and $1,000,000, respectively is classified on the Companys balance sheet as preferred stock. Cumulative preferred dividends are payable upon conversion and at September 30, 2001 there are cumulative preferred dividends in
arrears in the amount of $33,808 or $1,352 per share. In the event of any liquidation, dissolution or winding up of the affairs of the Company, holders of the Series B Stock shall be paid, pari passu with holders of the Series A Stock, the
liquidation value plus all accrued dividends at the date of liquidation, dissolution or winding up of the affairs before any payment to other shareholders. At the option of the holders, the Series B Stock and the cumulative preferred dividends in
arrears are convertible into shares of common stock determined by dividing $58,937 by the conversion price of the lesser of $3 or 75% of the average of the closing bid price of common stock during the five (5) trading days immediately prior to the
conversion date. If the Company fails to convert or is unable to issue shares of common stock, the holder may redeem the Series B Stock for cash in an amount equal to the fair value of the shares of common stock that would have been converted. The
thirty (30) shares of Series B Stock issued provide an intrinsic value of beneficial conversion feature of approximately $414,580.





Common Stock





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





During the year ended June 30,
2001 the Company issued shares of common stock in cash transactions: 3,735,584 shares for cash in the amount of $1,868,650; and 2,733,981 shares for cash in the amount of $750,000 according to the terms of a settlement agreement between the Company
and holders of the Series A and Series B Stock. Also during the year ended June 30, 2001 the Company issued shares of common stock in non-cash transactions: 1,743,735 shares through the conversion of Series A Stock valued at $1,320,035; 47,778
shares through the conversion of Series A Stock dividends in arrears valued at $20,099; 1,875,000 shares through the conversion of debt valued at $750,000; and 403,350 shares for legal services valued at $201,675. During the six months ended
December 31, 2001 the Company issued shares of common stock in cash transactions: 2,600,000 shares from paid subscriptions at June 30, 2001 in the amount of $1,000,000; 4,014,285 shares for cash in the amount of $1,405,000; and 2,728,571 shares for
cash in the amount of $1,120,000. Also during the six months ended December 31, 2001 the Company issued shares of common stock in non-cash transactions: 221,328 shares through the conversion of Series A Stock valued at $117,874; 161,714 shares as a
finders fee; 100,000 shares as compensation valued at $43,000; and 2,925,967 shares for services valued at $1,971,251.





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 June 30, 2002, with some options extending to 2005 and
vesting over service periods that range from zero to four years.




8




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




Notes to Financial Statements  Mobile PET Systems, Inc. and Subsidiaries







Note
7Capitalization (Continued)





As of December 31, 2001, the Company has granted options to purchase 5,760,126
shares of common stock as follows:





Exercise Price

Number of Shares


Vested SharesOutstanding, June 30, 1999

$1.90$4.46

1,735,000


975,000Granted

$1.00$5.00

4,252,986


2,619,000Exercised






Cancelled






Outstanding, June 30, 2000

$1.00$5.00

5,987,986


3,594,000Granted

$  .45$3.75

1,187,250


1,140,003Exercised






Cancelled

$1.70$3.75

(2,124,486
)

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

$  .45$5.00

5,050,750


3,457,003Granted

$  .43$2.76

1,632,500


1,143,916Exercised






Cancelled

$1.00$3.25

(942,500
)

(939,167
)Outstanding, September 30, 2001

$  .43$5.00

5,740,750


3,661,752Granted

$2.00$3.00

189,376


1,268,500Exercised

$3.00$4.63




Cancelled

$3.00$5.00

(170,000
)

(939,167
)Outstanding, December 31, 2001

$  .43$4.63

5,760,126


3,991,085





The Company accounts for stock-based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, under which no compensation cost for stock options is recognized for the stock option awards granted at or above fair market
value. However, during the six months ended December 31, 2001 and 2000 the Company recognized compensation expense using the intrinsic value method of $0 and $184,662, respectively.





Warrants





At December 31, 2001 warrants were outstanding
to purchase 7,188,427 common stock at exercise prices between $0.35 to $7.00 per share, and at the average of the last reported sale price of the common stock for the five trading days preceding the issue date. These warrants expire between
March 2001 and May 2006.





Note 8  Related Party Transactions





Subordinated Equity Participation





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





The Memorandum of Agreement provides for a distribution to the Company of 8.42% of LRCs net distributable cash flow, until a total of $210,573 has
been distributed and then the distribution of 5.05% of net distributable cash flow, subject to future dilution. The Memorandum of Agreement stopped the accrual of interest at June 1, 1999. At the date of the Memorandum of Agreement, the Company
canceled $47,447 of accrued interest from the original investment and at December 31, 2001 and 2000 accrued interest on the investment was $10,573 and $10,573, respectively. The related shareholder, officer and director personally guarantee the
investment.




9




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




Notes to Financial Statements  Mobile PET Systems, Inc. and Subsidiaries







Note
8Related Party Transactions (Continued)





Due from London Radiosurgical Centre, Ltd





LRC provides office space and administrative expenses under normal commercial terms to The London PET Centre Limited. The London PET Centre Limited made
cash payments of approximately $21,397 and $0 to LRC and office space and administrative expense was approximately $126,646 and $106,582 during the six months ended December 31, 2001 and 2000, respectively. During the six months ended December 31,
2001 and 2000, the Company advanced without interest $0 and $422,283, respectively to LRC for working capital during LRCs start-up period. The advances are covered by a continuing corporate and personal guarantee. There is a balance due from
London Radiosurgical Centre, Ltd in the amount of $128,037 and $315,701 at December 31, 2001 and 2000, respectively.





Loans





On August 23, 2000, the Company received an eight percent (8%) bridge loan from a director and shareholder in the amount of
$200,000, with an original due date of October 11, 2000. The loans due date has been extended several times and the Company has agreed to make monthly payments of $10,000 per month beginning on January 8, 2002, until paid in full. At December
31, 2001 and 2000, there is a balance of accrued interest in the amount of $17,852 and $5,655, respectively.





On October 24
2000, the Company received an eight percent (8%) bridge loan from an officer, director and shareholder in the amount of $100,000, which was due on or before November 30, 2000. The loan was extended to June 1, 2001. In October 2000, an eight percent
(8%) promissory note was issued in the amount of $100,000 in exchange for the loan. Principal, plus accrued interest is payable in installments: $20,000, plus accrued interest on October 8, 2001 and $10,000 plus accrued interest on the first day of
each successive month, until paid in full. At December 31, 2001 and 2000, the loan has a balance of $70,000 and $0, respectively, plus accrued interest of $7,474 and $1,490, respectively.





On January 12, 2001, the Company received an eight percent (8%) bridge loan from an officer, director and shareholder in the amount of $25,000, with an original due date of March 12,
2001, and extended to December 1, 2001. The loan was paid in December 2001.





On January 17, 2001, the Company received an eight
percent (8%) bridge loan from an officer, director and shareholder in the amount of $150,000, with an original due date of March 12, 2001. The note has been extended several times and is currently extended to March 1, 2002. At December 31, 2001,
there is a balance of accrued interest in the amount of $5,391.





On October 12, 2001, the Company converted $253,050 due to a
director 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 December 31, 2001, the loan has a balance of $211,050.





Note 9Securities Purchase Agreement





On
March 3, 2000, the Company entered into a Securities Purchase Agreement. As part of the Agreement, the Company issued 60 shares of 8% Cumulative Convertible Redeemable Preferred, Series A Stock for cash in the amount of $2,700,000, net of
acquisition fees and 120,000 warrants to purchase shares of common stock at an exercise price of $5.00 per share, which expire in March 2003. The buyer of the preferred stock agreed to purchase shares of common stock of the Company in tranches, for
an aggregate purchase price of up to $10,000,000, at a price equal to eighty five percent (85%) of the average closing bid price five (5) consecutive days immediately prior to the Company providing a tranche notice to the buyer. During the year
ended June 30, 2001 the Company received $1,075,000, net of offering costs and issued 2,703,093 shares of common stock. There is an aggregate commitment remaining in the amount of $8,925,000 at December 31, 2001.





Note 10Consulting Agreement





Effective
September 21, 2001 the Company entered into a Consulting Agreement for investor relation services. On October 9, 2001 the Company issued 2,500,000 shares of common stock, restricted during the term of the Agreement, valued at $1,775,000 in payment
for the services. In addition, the Company issued options to purchase 200,000 shares of common stock at a price of $1.00 per share. The options expire on September 21, 2002. The cost of the services is recorded in prepaid expenses and is being
amortized over the life of the Agreement, which expires on September 21, 2002.




10




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




Notes to Financial Statements  Mobile PET Systems, Inc. and Subsidiaries







Note
11Employment Agreements





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





Note 12Long Term Debt





Long term debt at
December 31, 2001 and 2000 consists of the following:





2001


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

$
90,652


$
108,753Less current portion


(19,091
)


(18,101
)Long term debt, net of current portion

$
71,561


$
90,652





The maturities of long term debt for each of the succeeding five years subsequent
to December 31, 2001, are as follows:





December 31,2002

$
19,0912003


21,3002004


23,7492005


26,512$
90,652





NOTE 13COMMITMENTS





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





December 31,2001


2000Equipment

$
19,862,940


$
18,985,457Less accumulated amortization


(4,126,397
)


(1,190,510
)Net capital lease assets

$
15,736,543


$
17,794,947





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





Rent expense for the six months ended December 31, 2001 and 2000 was $82,482 and $44,084, respectively. The following is a schedule by year of the future minimum lease payments at December 31, 2001:





December 31,

Capital Lease


Operating Leases2002

$
5,649,258


$
125,4182003


5,649,258



130,1192004


5,458,324



48,4622005


3,846,855



2006


365,935



2007


162,135



21,131,764


$
303,999Less amount representing interest at 12.07%


(4,772,669
)Present value of minimum lease payments (including current portion of $5,649,258)

$
16,359,095




11




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




Notes to Financial Statements  Mobile PET Systems, Inc. and Subsidiaries







Note
13Commitments (Continued)





The capital leases are secured by the Companys assets. There is restricted cash in
the amount of $349,560 reserved for these lease commitments. The chief executive officer of the Company personally guarantees one of the leases.





Note
14Concentration of Credit Risk





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





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





Note 15Earnings (Loss) Per Share





The
computations of basic and diluted earnings per share from continuing operations for the six months ended December 31, 2001 and 2000 were as follows:





---

December 31,2001


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

$
(2,870,314
)

$
(6,107,882
)Denominator:Weighted-average shares


32,823,714



14,319,644Loss per sharebasic

$
(.09
)

$
(.43
)Loss per sharediluted:Numerator:Net lossavailable to Common shareholders

$
(2,870,314
)

$
(6,107,882
)Denominator:Weighted-average shares


32,823,714



14,319,644Loss per sharediluted

$
(.09
)

$
(.43
)





The weighted average shares listed below were not included in the computation of
diluted loss per share because to do so would have been antidilutive for the six months ended December 31, 2001 and 2000:





---

December 31,2001

2000Cumulative convertible redeemable preferred stock common stock equivalent

642,391

900,000Stock options

5,740,560

4,465,310Warrants

6,822,362

1,309,437




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




Notes to Financial Statements  Mobile PET Systems, Inc. and Subsidiaries







Note 16
 Prior Period Adjustment





The opening balance of accumulated deficit at June 30, 2001 has been adjusted, reflecting an
increase in accrued liabilities. This increase is the correction of an error. The effect of the adjustment is as follows:





---

For the year ended June 30, 2001

As Previously Reported


As RestatedBalance sheet:Total liabilities

$
22,245,435


$
22,335,774Total shareholders deficit

$
(298,162
)

$
(388,501
)Statement of operations:Net loss

$
(9,520,723
)

$
(9,611,796
)Net loss  available to common shareholders

$
(9,999,248
)

$
(10,090,321
)Loss per share  basic

$
(0.60
)

$
(0.60
)Loss per share  diluted

$
(0.60
)

$
(0.60
)





Note 17  Subsequent Events





On January 16, 2002 the Company received $250,000 to issue 500,000 shares of common stock. According to the terms of the subscription agreement, the Company issued warrants to purchase
250,000 shares of common stock at an exercise price of $.50 per share. The warrants expire on January 16, 2004.




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##### Table of Contents

PART I.     ITEM 2.


MANAGEMENTS DISCUSSION AND ANALYSIS





Overview





Mobile PET Systems, Inc. is a medical service provider of Positron Emission
Tomography (PET) imaging services to hospitals and healthcare professionals in the United States and United Kingdom. PET is a molecular imaging procedure used to diagnose and stage cancer, heart disease and neurological deficits. Our medical service
business enables hospitals and other healthcare professionals the ability to access, offer and provide this advanced diagnostic imaging patient service efficiently and with little risk.





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





As of
December 31, 2001 we were providing our services to 75 accounts, which consisted of hospitals and physicians in the United States. We also operated a wholly owned subsidiary, The London PET Centre Ltd., which is the only private sector stationary
PET facility in the United Kingdom. We believe there are and will be significant opportunities to develop and operate additional mobile and stationary PET facilities in the United States, United Kingdom and in key European markets.





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





Results of Operations





For the three and six months ended December 31, 2001, we had fifteen mobile units and one fixed site accepted and placed into service, generating revenues for the three and six months
ending December 31, 2001 of $4,147,776 and $7,828,500 compared to the three and six months ending December 31, 2000, in which we had revenues of $1,118,687 and $1,959,668, respectively. Our costs of service for the three and six months ending
December 31, 2001 were $2,521,035 and $4,615,967 compared to $1,735,898 and $2,348,651 for the three and six months ending December 31, 2000. This substantial difference in revenues and costs is largely attributable to the number of units, which
were in service during the applicable periods. As a result of these activities, accounts receivables increased to $2,465,271 net of allowances for doubtful accounts, as of December 31, 2001, as compared to accounts receivables of $809,127, net of
allowances for doubtful accounts, as of December 31, 2000. The costs of service revenues represent salaries paid to technologists and drivers, system maintenance, transportation and insurance on our mobile PET systems. We have transitioned from a
development stage company and are now seeking to grow. Prior to this transition, our efforts have been principally focused on capitalization, organizational and business development activities.





We continue our efforts to develop and expand our service business by increasing utilization of our existing units, and developing and operating additional mobile and stationary PET
systems. We anticipate we may continue to incur additional losses as we pursue our development efforts. If we continue our unit growth and achieve targeted unit revenues, we believe cash flow will be sufficient to cover our cost of services on a
monthly basis commencing in the third quarter of fiscal year 2002.





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




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##### Table of Contents








Since our inception we have incurred significant losses. Through December 31,
2001, we have incurred a net loss of $21,039,249 which we have financed primarily through equity sales. For the three and six months ended December 31, 2001, we experienced a consolidated net loss from operations of $1,084,451 and $1,602,134,
compared to a consolidated net loss from operations of $3,015,267 for the three months, and $5,039,761 for the six months ended December 31, 2000. Our net loss available to common shareholders, after accrued preferred stock dividend, was $1,480,239
for the three months and $2,669,147 for the six months ended December 31, 2001, compared to the net loss of $3,568,468 for the three months and $6,107,882 for the six months ended December 31, 2000. We anticipate that our operating losses
during the third quarter of fiscal year 2002 should decrease from current levels as we decrease per unit operating costs by deploying additional mobile units or stationary sites, realize higher utilization of our services and subsequent growth in
revenues. We have implemented cost reductions by reducing administrative and travel expense and by negotiating higher discounts for new equipment, service and radiotracers. However, we can give no assurances that our efforts will have the desired
effects. As a result, in order to achieve and maintain profitability, we will need to continue to increase revenues and effectively manage our operating overhead.





Selling expenses for the three months and six months ended December 31, 2001 were $820,632 for the three months and $1,763,616 for the six months ended December 31, 2001, as compared to
$772,563 for the three months and $1,225,664 for the twelve months ended December 31, 2000. General and Administrative expenses for the three months and six months ended December 31, 2001 were $1,890,560 for the three months and $3,051,051 for the
six months ended December 31 2001, as compared to $1,625,493 for the three months and $3,425,114 for the six months ended December 31, 2000. The principal components of our operating costs, selling and general, consists of equipment leasing,
equipment service and maintenance, salaries and benefits, legal and accounting fees, insurance and transportation costs. Because the majority of these costs are fixed, increased revenues as a result of increased patient procedures may provide higher
profitability, while lower patient procedures may result in lower profitability.





Depreciation expense increased from $562,424
for the three months and $841,522 for the six months ended December 31, 2000 to $740,086 for the three months and $1,514,353 for the six months ended December 31, 2001 mainly due to the increase in mobile PET units deployed to fifteen mobile and one
fixed site at December 31, 2001 compared to twelve mobile units and one fixed site at December 31, 2000. In addition, we continue to incur costs in building our infrastructure and incur costs in connection with business development advertising and
marketing our mobile PET services.





Our interest income was $2,597 and $5,198 for the three months and six months ended December
31 2001, respectively as compared to $11,712 and $24,989 for the three and twelve months ended December 31, 2000 respectively. Our interest expense of $511,833 and $1,106,821 for the three and six months ended December 31, 2001, as compared to the
interest expense of $190,709 And $435,267 for the three and six months ended December 31, 2000, was principally due to the capitalization of our equipment leases of image scanners, coaches and computer equipment.





Liquidity and Capital Resources





At December 31,
2001, our total assets were $22,031,791, compared to $21,103,715 at December 31, 2000. Our current assets at December 31, 2001 totaled $4,979,603 and our current liabilities were $9,828,195, as compared to December 31, 2000, that reflected current
assets of $1,690,851 and current liabilities of $5,837,691. Shareholders equity at December 31, 2001 increased from ($111,354) to $1,422,198, due primarily to the increase in additional paid in capital of $3,083,313 for the three months and
$4,655,850 for the six months ended December 31, 2001.





Our foreign currency translation adjustment in shareholders equity
amounted to $(331,282) at December 31, 2001 compared to $61,273 at December 31, 2000. We have reflected the transaction gains and losses in the cash flow as the effect of exchange rate changes on cash of $47,895 for the three months and $(47,694)
for the six months ended December 31, 2001, compared to $31,068 for the three months and $172,658 for the six months ended December 31, 2000.





Our net cash used in investing activities for the three and six months ended December 31, 2001 was $108,480 and $132,610, respectively, as compared to $65,474 and $166,050 in the three and six months ended December
31, 2000 respectively. This difference is primarily a result of our investment in computers and related equipment for our business and personnel growth.





The net cash provided by our financing activities for the three and six months ended December 31, 2001 was $108,527, and $733,328, respectively, resulting mainly from the issuance of common stock of $1,120,000 during
the three months and $2,525,000 during the six months ended December 31, 2001, compared to $500,000 issued for the three months and $1,047,500 issued for the twelve months ended December 31, 2000, respectively; less the payments on obligations under
capital lease totaling $918,012 for the three months and $1,693,898 for the twelve months ended December 31, 2001, respectively compared to $294,808 for the three months and $560,907 for the twelve months ended December 31, 2000, respectively.





During the three and six months ended December 31, 2001, we have raised $3,083,313 for the three months and $4,655,850 for the
six months ended December 31, 2001 of new equity capital through private placements and warrants to purchase common stock, compared to $987,351 for the three months and $1,512,182 for the six months ended December 31, 2000.




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##### Table of Contents








As an additional potential source of funds if needed, we are entitled to put to
York, LLC, up to a total of $10,000,000 of common stock from time to time (but not after November 2003) under the Securities Purchase Agreement for the sale of our Series A Preferred Stock subject to certain conditions set forth in that agreement.
As of December 31, 2001, we have already drawn $1,820,000 against this put-equity line (for 3,950,565 common shares). All of these draws occurred on or before June 1, 2001. The per common share price of such a sale is 85% of the average closing
bid price for the 5 consecutive trading days prior to the date of the sale. We have the choice to elect to use an alternative pricing period that is the three trading days on which the closing bid price of our common stock is the lowest during the
number of trading days before the closing date for a sale of such shares, determined by dividing the dollar amount by 15% of the average daily dollar trading volume of our common stock for the 20 trading days before the date of our notice to
York, LLC. We must wait 30 days after the closing date of a sale for which we use this alternative pricing period before we can give York another notice of sale under this provision.





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 since inception, expect future losses and may never become profitable.





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





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





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





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




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




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




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




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




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




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





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





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





The acceptance of PET technology may be adversely affected by its high cost,
concerns by patients and physicians relating to its safety and efficacy, and the substantial market acceptance of other diagnostic tools such as MRIs and CT scans. We have a limited




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sales force and may need to hire additional technologists and sales and marketing personnel to increase the general acceptance of PET services. Of all the factors affecting our profitability, the
failure of PET services to achieve broad market acceptance may likely have the greatest negative impact on our business, financial condition and results of operations and our profitability.





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





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





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





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





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





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





We 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.




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





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





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





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





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





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





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





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





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





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





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





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





Upon expiration of our clients contracts, we are subject to the risk that clients will cease using our PET systems and purchase or lease their own PET systems, use our
competitors PET systems or rely on alternate imaging technologies. None of our client contracts expired in 2001, approximately seven percent in 2002, twenty-two percent in 2003, seventeen percent in 2004, twenty percent in 2005 and thirty-four
percent in 2006. Moreover, one-third of our client contracts permit the client, upon typically 180 days notice, to terminate the contract without cause, and two-thirds of our client contracts permit the client, upon typically 180 days
notice, to terminate the contract if the client obtains a fixed site for a PET system. In addition, a portion of our contracts does not have minimum usage requirements.




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





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





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




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




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




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




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




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




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




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




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





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





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





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





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




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





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





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





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





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





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





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





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





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




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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 discussed below.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------




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





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





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





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





Timely, effective service is essential to maintaining our reputation and high
utilization rates on our systems. Repairs to one of our systems can take up to two weeks and result in a loss of revenue. Our warranties and maintenance contracts do not fully compensate us for loss of revenue when our systems are not working. The
principal components of our operating costs include depreciation; salaries paid to technologists and drivers, annual system maintenance costs, insurance and transportation costs. Because the majority of these expenses are fixed, a reduction in the
number of scans performed due to out-of-service equipment will result in lower revenues and margins. The equipment manufacturers perform repairs of our equipment for us. We cannot guarantee that these manufacturers will be able to perform repairs or
supply needed parts in a timely manner. Thus, if we experience greater than anticipated system malfunctions or if we are unable to promptly obtain the service necessary to keep our systems functioning effectively, our revenues could decline and our
ability to provide services would be harmed.




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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.




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PART II    OTHER INFORMATION


ITEM 1.    LEGAL PROCEEDINGS





As previously reported, on February 27, 2001,
Twenty-Five-Forty, LLC filed suit against the Company in the Superior Court for the State of California (San Diego) for damages for breach of contract, alleging that the Company abandoned a sub-lease that the Company had entered into with
Twenty-Five Forty LLC. The monthly rent under the sub-lease was $2,990, and the space was re-let by the end of May, 2001. The Company filed a cross-complaint against Twenty-Five Forty LLC for intentional and negligent misrepresentation. The
cross-complaint allege, among other things, that Twenty-Five Forty LLC fraudulently induced the Company to enter into the contract and accordingly the lease contract is void.





On January 3, 2002, the Company settled this matter by agreeing to pay Twenty-Five Forty, LLC $5,000.00 and executed a promissory note for $20,000, bearing no interest, to be paid $500
per month until paid in full. Both parties also dismissed their respective complaints and executed mutual releases.





ITEM 2.     CHANGES IN SECURITIES





On September 21, 2001, we entered into a
Consulting Agreement with Dunlap & Kieft, Inc. (Dunlap), to provide written research coverage, security analyst, investment relations and other services for a one (1) year term. On October 9, 2001, we issued 100,000 shares of common
stock as a non-refundable retainer in connection with that agreement, in reliance on Section 4(2) of the Act, and we are obligated to file a registration statement for such shares on a subsequent registration filing. We are also obligated to pay a
finders fee equal to 2.5% of the gross consideration received by the Company in connection with certain financing and other transactions with, and investments made by third parties introduced by Dunlap to Company.





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





Between October 5, 2001 and October 10, 2001 we sold an additional 1,628,571 shares of common stock and 814,286 warrants
to purchase common stock exercisable for a period of 2 years at $0.35 per share, in reliance on Section 4(2) of the Act. We paid a finders fee of 6% in the form of warrants to purchase 25,714 shares of common stock at $0.35 per share in connection
with the placement of $150,000 of the shares and warrants to clients of the bank purchasing such shares for the account of its customers. The total proceeds of this offering was $570,000.





In November 2001 we received from York, LLC a notice of conversion of 2 Series A Preferred Shares, pursuant to which we issued 221,328 shares of common stock in December 2001, valued at
$100,000. This issuance was in reliance upon Section 4(2) of the Act. The re-sale of these shares is the subject of an SB-2 registration statement.





In December 2001 we received from York LLC a notice of conversion of 1 Series A Preferred Share, calling for the issuance of 121,452 common shares, valued at $50,000. We are in the process of issuing these shares. The
issuance will be in reliance upon Section 4(2) of the Act. The re-sale of these shares is the subject of an SB-2 registration statement.





Between November 5, 2001 and December 12, 2001 we sold 1,100,000 shares of common stock and warrants to purchase 300,000 shares of common stock exercisable for a period of two years at $0.50 per share, in reliance on Section 4(2) of the
Act. The total proceeds we received was $550,000. We issued 36,000 shares and warrants to purchase 18,000 shares exercisable at a price of $0.50 per share for a period of two years as a finders fee (having an estimated value of $18,000) in
connection with this issuance. This issuance was also in reliance on Section 4(2) of the Act.




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ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K





(a)   Exhibits





Exhibit 23.1    Consent of Independent Accountants dated February 14, 2002.





(b)  Reports on Form 8-K





None.




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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.





MOBILE PET SYSTEMS INC.By:

/s/    ANTHONY R. TURNBULLAnthony R. Turnbull Chief Financial Officer, Secretary and
Treasurer





Date:   February 13, 2002







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