##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-QSB



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(Mark One)



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



For the quarterly period ended September 30, 2003



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



For the transition period from
 to



Commission file number 000-27915



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MOLECULAR IMAGING CORPORATION

A Delaware Corporation

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



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|Delaware                                                       |  | 11-2787966                       
|-------------------------------------------------------------- |  | ---------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (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 55,806,430 shares outstanding of the issuers Common Stock as of November 7, 2003.



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



MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES



For the quarterly period ended September 30, 2003



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##### Table of Contents

Table of Contents



|                                                    |  |                                                            |  | Page No.
|--------------------------------------------------- |  | ---------------------------------------------------------- |  | --------
|PART I.        FINANCIAL INFORMATION                |  | 1                                                         
|                                                    |  |                                                           
|Item 1.                                             |  | Financial Statements (unaudited)                           |  | 1       
|                                                    |  |                                                           
|                                                    |  | Consolidated Balance Sheets                                |  | 1       
|                                                    |  |                                                           
|                                                    |  | Consolidated Statements of Operations                      |  | 2       
|                                                    |  |                                                           
|                                                    |  | Consolidated Statements of Changes in Stockholders Equity |  | 3       
|                                                    |  |                                                           
|                                                    |  | Consolidated Statements of Cash Flows                      |  | 4       
|                                                    |  |                                                           
|                                                    |  | Notes to Consolidated Financial Statements                 |  | 5       
|                                                    | 
|Item 2.       
Managements Discussion and Analysis |  | 13                                                        
|                                                    | 
|Item 3.       
Controls and Procedures              |  | 26                                                        
|                                                    | 
|PART II.      OTHER INFORMATION                     |  | 26                                                        
|                                                    | 
|Item 1.       
Legal Proceedings                    |  | 26                                                        
|                                                    | 
|Item 2.       
Changes in Securities                |  | 26                                                        
|                                                    | 
|Item 6.       
Exhibits and Reports on Form 8-K     |  | 27                                                        
|                                                    | 
|SIGNATURES                                          |  | 28                                                        
|                                                    |  |                                                           
|CERTIFICATIONS                                      |  |                                                            |  |         



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##### Table of Contents

PART I
.

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)



MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Formerly MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

as of September 30, 2003 (Unaudited) and June 30, 2003 (Audited)



|                                                                                                                                                                             |  | September 30,2003 |             |   | June 30,2003 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | - | ------------ | -
|ASSETS                                                                                                                                                                       |  |                   |             |   |              |  
|Current assets                                                                                                                                                               |  |                   |             |   |              |  
|Cash                                                                                                                                                                         |  | $                 | 745,333     |   |              | $
|Accounts receivable, net                                                                                                                                                     |  |                   | 4,232,278   |   |              |  
|Prepaid expenses                                                                                                                                                             |  |                   | 396,010     |   |              |  
|Deposits and other assets                                                                                                                                                    |  |                   | 35,083      |   |              |  
|                                                                                                                                                                             |  |                   |             |   |              |  
|Total current assets                                                                                                                                                         |  |                   | 5,408,704   |   |              |  
|Property and equipment, net                                                                                                                                                  |  |                   | 21,182,424  |   |              |  
|Other assets                                                                                                                                                                 |  |                   |             |   |              |  
|Accrued interest receivable                                                                                                                                                  |  |                   | 10,573      |   |              |  
|Due from London Radiosurgical Centre, Ltd                                                                                                                                    |  |                   | 127,123     |   |              |  
|Subordinated equity participation                                                                                                                                            |  |                   | 200,000     |   |              |  
|Loan receivable                                                                                                                                                              |  |                   |            |   |              |  
|Deferred asset                                                                                                                                                               |  |                   | 243,421     |   |              |  
|Prepaid rent and financing costs                                                                                                                                             |  |                   | 1,200,776   |   |              |  
|                                                                                                                                                                             |  |                   |             |   |              |  
|Total assets                                                                                                                                                                 |  | $                 | 28,373,021  |   |              | $
|                                                                                                                                                                             |  |                   |             |   |              |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                               |  |                   |             |   |              |  
|Current liabilities                                                                                                                                                          |  |                   |             |   |              |  
|Accounts payable                                                                                                                                                             |  | $                 | 2,536,864   |   |              | $
|Asset backed financing facility                                                                                                                                              |  |                   | 2,019,083   |   |              |  
|Current portion of long-term debt                                                                                                                                            |  |                   | 29,110      |   |              |  
|Loans payable to related parties                                                                                                                                             |  |                   | 88,219      |   |              |  
|Accrued and other liabilities                                                                                                                                                |  |                   | 437,066     |   |              |  
|Obligations under capital leasecurrent                                                                                                                                      |  |                   | 5,697,543   |   |              |  
|                                                                                                                                                                             |  |                   |             |   |              |  
|Total current liabilities                                                                                                                                                    |  |                   | 10,807,885  |   |              |  
|Noncurrent liabilities                                                                                                                                                       |  |                   |             |   |              |  
|Obligations under capital lease, net                                                                                                                                         |  |                   | 13,769,392  |   |              |  
|Long-term debt                                                                                                                                                               |  |                   | 30,810      |   |              |  
|Deferred gain                                                                                                                                                                |  |                   | 97,368      |   |              |  
|                                                                                                                                                                             |  |                   |             |   |              |  
|Total liabilities                                                                                                                                                            |  |                   | 24,705,455  |   |              |  
|Minority interest                                                                                                                                                            |  |                   | 237,122     |   |              |  
|Stockholders equity (deficit)                                                                                                                                               |  |                   |             |   |              |  
|Common stock; $0.0001 par value; 90,000,000 shares authorized; 55,786,121 and 55,531,272 shares issued and outstanding at
September 30, 2003 and June 30, 2003, respectively |  |                   | 5,579       |   |              |  
|Additional paid in capital                                                                                                                                                   |  |                   | 29,599,888  |   |              |  
|Accumulated deficit                                                                                                                                                          |  |                   | (26,175,023 | ) |              |  
|                                                                                                                                                                             |  |                   |             |   |              |  
|Total stockholders equity                                                                                                                                                   |  |                   | 3,430,444   |   |              |  
|                                                                                                                                                                             |  |                   |             |   |              |  
|Total liabilities and stockholders equity                                                                                                                                   |  | $                 | 28,373,021  |   |              | $
|                                                                                                                                                                             |  |                   |             |   |              |  



See accompanying notes.



1



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##### Table of Contents

PART I.

FINANCIAL INFORMATION (continued)



MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Formerly MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

for the three months ended September 30, 2003 and 2002 (Unaudited)



|                                                                                                                                        |  | 2003 |            |   | 2002 |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -
|Revenue, Net                                                                                                                            |  |      |            |   |      |  
|Medical imaging procedures                                                                                                              |  | $    | 5,624,237  |   |      | $
|Radiopharmaceuticals                                                                                                                    |  |      |           |   |      |  
|                                                                                                                                        |  |      |            |   |      |  
|                                                                                                                                        |  |      | 5,624,237  |   |      |  
|Cost of revenues                                                                                                                        |  |      |            |   |      |  
|Medical imaging procedures                                                                                                              |  |      | 3,472,017  |   |      |  
|Radiopharmaceuticals                                                                                                                    |  |      |           |   |      |  
|                                                                                                                                        |  |      |            |   |      |  
|                                                                                                                                        |  |      | 3,472,017  |   |      |  
|                                                                                                                                        |  |      |            |   |      |  
|Gross profit                                                                                                                            |  |      | 2,152,220  |   |      |  
|Expenses                                                                                                                                |  |      |            |   |      |  
|Selling and marketing                                                                                                                   |  |      | 382,394    |   |      |  
|General and administrative                                                                                                              |  |      | 1,619,835  |   |      |  
|                                                                                                                                        |  |      |            |   |      |  
|Total expenses                                                                                                                          |  |      | 2,002,229  |   |      |  
|                                                                                                                                        |  |      |            |   |      |  
|Income (loss) from operations                                                                                                           |  |      | 149,991    |   |      |  
|Other income (expense)                                                                                                                  |  |      |            |   |      |  
|Interest income                                                                                                                         |  |      | 317        |   |      |  
|Other income (expense)                                                                                                                  |  |      | (9,089     | ) |      |  
|Interest expense                                                                                                                        |  |      | (562,145   | ) |      |  
|                                                                                                                                        |  |      |            |   |      |  
|Total other income (expense)                                                                                                            |  |      | (570,918   | ) |      |  
|                                                                                                                                        |  |      |            |   |      |  
|Loss from continuing operations before provision for income taxes                                                                       |  |      | (420,927   | ) |      |  
|Provision for income taxes                                                                                                              |  |      |           |   |      |  
|                                                                                                                                        |  |      |            |   |      |  
|Net loss from continuing operations                                                                                                     |  |      | (420,927   | ) |      |  
|Minority interest                                                                                                                       |  |      | (12,878    | ) |      |  
|Income from operations of discontinued subsidiaries (including a $2,219,300 gain on sale for the three months ended September 30,
2002) |  |      |            |   |      |  
|                                                                                                                                        |  |      |            |   |      |  
|Net (loss) income                                                                                                                       |  |      | (408,049   | ) |      |  
|Preferred stock dividend                                                                                                                |  |      |           |   |      |  
|                                                                                                                                        |  |      |            |   |      |  
|Net (loss) incomeavailable to common stockholders                                                                                      |  | $    | (408,049   | ) |      | $
|                                                                                                                                        |  |      |            |   |      |  
|Earnings per share                                                                                                                      |  |      |            |   |      |  
|Loss per share from continuing operationsbasic                                                                                         |  | $    | (0.01      | ) |      | $
|                                                                                                                                        |  |      |            |   |      |  
|Income per share from discontinued operationsbasic                                                                                     |  |      |            |   |      | $
|                                                                                                                                        |  |      |            |   |      |  
|Net (loss) income per share available to common stockholdersbasic                                                                      |  | $    | (0.01      | ) |      | $
|                                                                                                                                        |  |      |            |   |      |  
|Loss per share from continuing operationsdiluted                                                                                       |  | $    | (0.01      | ) |      | $
|                                                                                                                                        |  |      |            |   |      |  
|Income per share from discontinued operationsdiluted                                                                                   |  |      |            |   |      | $
|                                                                                                                                        |  |      |            |   |      |  
|Net (loss) income per share available to common stockholdersdiluted                                                                    |  | $    | (0.01      | ) |      | $
|                                                                                                                                        |  |      |            |   |      |  
|Weighted average number of sharesbasic                                                                                                 |  |      | 55,808,104 |   |      |  
|                                                                                                                                        |  |      |            |   |      |  
|Weighted average number of sharesdiluted                                                                                               |  |      | 55,808,104 |   |      |  
|                                                                                                                                        |  |      |            |   |      |  



See accompanying
notes.



2



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##### Table of Contents

Part I.

FINANCIAL
INFORMATION (continued)



MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Formerly MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders Equity

for the three months ended September 30, 2003 (Unaudited) and the year ended June 30, 2003 (Audited)



|                                                                |  | Common Stock |   |  | AdditionalPaid InCapital |       |   | AccumulatedDeficit |   |            | ForeignCurrencyTranslationAdjustment |  |   | TotalStockholdersEquity |  
|--------------------------------------------------------------- |  | ------------ | - |  | ------------------------ | ----- | - | ------------------ | - | ---------- | ------------------------------------ |  | - | ------------------------ | -
|                                                                |  | Shares       |   |  | Amount                   |       |   |                    |   |           
|BalanceJune 30, 2002                                           |  | 44,966,267   |   |  | $                        | 4,497 |   |                    | $ | 22,852,226 |                                      |  | $ | (26,410,567              | )
|Common Stock issued in private placement, net of offering costs |  | 9,821,429    |   |  |                          | 982   |   |                    |   | 6,184,424  |                                      |  |   |                          |  
|Preferred stock redemptioncommon stock surrendered             |  | (374,000     | ) |  |                          | (37   | ) |                    |   | 37         |                                      |  |   |                          |  
|Preferred stock redemptiondividend                             |  |              |   |  |                          |       |   |                    |   |            |                                      |  |   | (297,362                 | )
|Repriced warrants                                               |  |              |   |  |                          |       |   |                    |   | 23,176     |                                      |  |   | (23,176                  | )
|Common Stock issued for services                                |  | 930,076      |   |  |                          | 93    |   |                    |   | 344,907    |                                      |  |   |                          |  
|Common stock issued through the exercise of options             |  | 187,500      |   |  |                          | 19    |   |                    |   | (19        | )                                    |  |   |                          |  
|Options and warrants issued as compensation and for services    |  |              |   |  |                          |       |   |                    |   | 106,413    |                                      |  |   |                          |  
|Net Income                                                      |  |              |   |  |                          |       |   |                    |   |            |                                      |  |   | 964,131                  |  
|Foreign currency translation adjustment                         |  |              |   |  |                          |       |   |                    |   |            |                                      |  |   |                          |  
|                                                                |  |              |   |  |                          |       |   |                    |   |            |                                      |  |   |                          |  
|Balance June 30, 2003                                           |  | 55,531,272   |   |  |                          | 5,554 |   |                    |   | 29,511,164 |                                      |  |   | (25,766,974              | )
|Common stock issued through the exercise of warrants            |  | 224,999      |   |  |                          | 22    |   |                    |   | 78,727     |                                      |  |   |                          |  
|Common stock issued for financing fees                          |  | 29,850       |   |  |                          | 3     |   |                    |   | 9,997      |                                      |  |   |                          |  
|Net loss                                                        |  |              |   |  |                          |       |   |                    |   |            |                                      |  |   | (408,049                 | )
|                                                                |  |              |   |  |                          |       |   |                    |   |            |                                      |  |   |                          |  
|                                                                |  |              |   |  |                          |       |   |                    |   |            |                                      |  |   |                          |  
|Balance September 30, 2003                                      |  | 55,786,121   |   |  | $                        | 5,579 |   |                    | $ | 29,599,888 |                                      |  | $ | (26,175,023              | )
|                                                                |  |              |   |  |                          |       |   |                    |   |            |                                      |  |   |                          |  



See accompanying notes.



3



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##### Table of Contents

PART I.

FINANCIAL INFORMATION (continued)



MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES

Formerly MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

for the three months ended September 30, 2003 and 2002 (Unaudited)



|                                                                                                  |  | September 30, 2003 |           |   | September 30, 2002 |  
|------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | - | ------------------ | -
|Cash flows from operating activities                                                              |  |                    |           |   |                    |  
|Net (loss) income                                                                                 |  | $                  | (408,049  | ) |                    | $
|Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities |  |                    |           |   |                    |  
|Depreciation                                                                                      |  |                    | 984,822   |   |                    |  
|Non cash stock option and warrant charge                                                          |  |                    |          |   |                    |  
|Common stock issued for services                                                                  |  |                    |          |   |                    |  
|Gain on sale of discontinued operations                                                           |  |                    |          |   |                    |  
|Loss on sale and lease back                                                                       |  |                    | (150,000  | ) |                    |  
|Minority interest in net loss of subsidiary                                                       |  |                    | (12,878   | ) |                    |  
|Interest                                                                                          |  |                    | 10,000    |   |                    |  
|(Increase) decrease in operating assets                                                           |  |                    |           |   |                    |  
|Accounts receivable                                                                               |  |                    | (950,131  | ) |                    |  
|Due from London Radiosurgical Centre, Ltd.                                                        |  |                    |          |   |                    |  
|Prepaid expenses                                                                                  |  |                    |          |   |                    |  
|Prepaid rent and financing costs                                                                  |  |                    | 11,420    |   |                    |  
|Deposits and other assets                                                                         |  |                    | (31,742   | ) |                    |  
|Restricted cash                                                                                   |  |                    |          |   |                    |  
|Cash of discontinued operations                                                                   |  |                    |          |   |                    |  
|Deferred loss                                                                                     |  |                    | 6,579     |   |                    |  
|Increase (decrease) in operating liabilities                                                      |  |                    |           |   |                    |  
|Accounts payable                                                                                  |  |                    | 1,042,414 |   |                    |  
|Accrued and other liabilities                                                                     |  |                    | 16,595    |   |                    |  
|Deferred gain                                                                                     |  |                    | (2,632    | ) |                    |  
|                                                                                                  |  |                    |           |   |                    |  
|Net cash provided by (used in) operating activities                                               |  |                    | 516,398   |   |                    |  
|Cash flows from investing activities                                                              |  |                    |           |   |                    |  
|Capital expenditures                                                                              |  |                    | (900,000  | ) |                    |  
|Proceeds from sale of capital assets                                                              |  |                    | 1,250,000 |   |                    |  
|Proceeds from sale of discontinued operations                                                     |  |                    |          |   |                    |  
|                                                                                                  |  |                    |           |   |                    |  
|Net cash provided by investing activities                                                         |  |                    | 350,000   |   |                    |  
|Cash flows from financing activities                                                              |  |                    |           |   |                    |  
|Asset backed financing facility, net                                                              |  |                    | 464,455   |   |                    |  
|Payments on loans                                                                                 |  |                    | (46,747   | ) |                    |  
|Payments on obligations under capital lease                                                       |  |                    | (980,652  | ) |                    |  
|Investment in subsidiary                                                                          |  |                    | 250,000   |   |                    |  
|Preferred stock redeemed                                                                          |  |                    |          |   |                    |  
|Common stock issued through exercise of warrants                                                  |  |                    | 78,749    |   |                    |  
|                                                                                                  |  |                    |           |   |                    |  
|Net cash used in financing activities                                                             |  |                    | (234,195  | ) |                    |  
|                                                                                                  |  |                    |           |   |                    |  
|Net increase (decrease) in cash                                                                   |  |                    | 632,203   |   |                    |  
|Effect of exchange rate changes in cash                                                           |  |                    |          |   |                    |  
|Cashbeginning of period                                                                          |  |                    | 113,130   |   |                    |  
|                                                                                                  |  |                    |           |   |                    |  
|Cashend of period                                                                                |  | $                  | 745,333   |   |                    | $
|                                                                                                  |  |                    |           |   |                    |  
|SUPPLEMENTAL DISCLOSURES                                                                          |  |                    |           |   |                    |  
|Interest paid                                                                                     |  | $                  | 552,145   |   |                    | $
|Income taxes paid                                                                                 |  | $                  |          |   |                    | $
|NON CASH INVESTING AND FINANCING ACTIVITIES                                                       |  |                    |           |   |                    |  
|Equipment under capital lease (See Note 12)                                                       |  | $                  | 6,195,179 |   |                    | $
|Preferred stock dividend-warrants re-priced in redemption                                         |  | $                  |          |   |                    | $
|Common stock issued under consulting agreement                                                    |  | $                  |          |   |                    | $
|Obligations under capital lease                                                                   |  | $                  | 6,195,179 |   |                    | $
|Conversion of note receivable to capital expenditure                                              |  | $                  | 500,000   |   |                    | $
|Capitalized interest                                                                              |  | $                  | 27,679    |   |                    | $



See accompanying notes.



4



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##### Table of Contents

PART 1.

FINANCIAL INFORMATION (continued)



Notes to Consolidated Financial Statements  Molecular Imaging Corporation and Subsidiaries



Note 1The Company



Molecular Imaging Corporation (formerly Mobile PET Systems, Inc.) and subsidiaries (the Company) were organized to provide molecular imaging (MI) services to hospitals and other health care
providers on a fixed or mobile-shared user basis. The Companys MI services include providing high technology imaging systems, technologists to operate the imaging systems, the management of day-to-day operations, and educational and marketing
support.



Note 2Summary of Significant Accounting Policies



Basis of Presentation



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



Unaudited Financial Statements



The
accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-QSB and Article S-X. Accordingly,
they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the Form 10-KSB for the fiscal year ended
June 30, 2003.



Estimates



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



Revenue Recognition



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



Service revenues from third party payors are reported at net realizable amounts. Revenue under third party payor agreements is subject to adjustment. Provisions for estimated third party payor settlements are provided in the period the
related services are rendered and are subject to adjustment based on final settlement history. Differences between estimated amounts and accrued and interim and final settlements are reported in operations in the period of settlement. Contractual
allowances are $300,000 at September 30, 2003 and June 30, 2003



Note
3Recent Accounting Pronouncements



In June 2002, the FASB issued SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities.SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and nullifies the guidance
of Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),which recognized a
liability for an exit cost at the date of an entitys commitment to an exit plan. SFAS No. 146 requires that the initial measurement of a liability be at fair value. SFAS No. 146 is effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of SFAS No. 146 did not have any impact on the Companys financial position, results of operations or cash flows.



5



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##### Table of Contents

PART 1.

FINANCIAL INFORMATION (continued)



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation Transition and
Disclosure (SFAS 148). SFAS 148 amends SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), to provide alternative methods of transition to SFAS 123s fair value method of accounting for
stock-based employee compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of
an entitys accounting policy with respect to stock-based employee compensation reported net income and earnings per share in annual and interim financial statements. While SFAS 148 does not amend SFAS 123 to require companies to account for
employee stock options using the fair value method, the disclosure provisions of SFAS 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for the compensation using the fair value method of
SFAS 123 or the intrinsic value method of APBO 25. The Company has adopted the disclosure requirements of SFAS 148 and will continue to use the intrinsic value method described in ABPO 25 in accounting for the fair value of stock awards issued to
employees.



In May 2003, the FASB issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 changes the accounting guidance for certain financial instruments that, under previous guidance, could be classified as equity or
mezzanine equity by now requiring those instruments to be classified as liabilities (or assets in some circumstances) on the balance sheet. Further, SFAS No. 150 requires disclosure regarding the terms of those instruments and settlement
alternatives. SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS
No. 150 has required the presentation of the mandatory redeemable preferred stock in the liability section of the consolidated balance sheets, rather than the mezzanine equity section, as previously presented. The mandatory redeemable
preferred stock has been redeemed as of June 30, 2003.



Note 4Accounts
Receivable



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



|                                      |  | September 30,2003 |           |   | June 30,2003 |  
|------------------------------------- |  | ----------------- | --------- | - | ------------ | -
|Accounts receivable                   |  | $                 | 4,632,278 |   |              | $
|Less: Allowance for doubtful accounts |  |                   | (100,000  | ) |              |  
|Contractual allowance                 |  |                   | (300,000  | ) |              |  
|                                      |  |                   |           |   |              |  
|Accounts receivable, net              |  | $                 | 4,232,278 |   |              | $
|                                      |  |                   |           |   |              |  



Note 5Property and Equipment



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



|                              |  | September 30,2003 |            | June 30, 2003
|----------------------------- |  | ----------------- | ---------- | -------------
|Computer equipment            |  | $                 | 1,075,286  |              
|Office furniture and fixtures |  |                   | 164,562    |              
|Office equipment              |  |                   | 12,752     |              
|Leasehold improvements        |  |                   | 7,071      |              
|MI and related equipment      |  |                   | 27,091,902 |              
|                              |  |                   |            |              
|                              |  |                   | 28,351,573 |              



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|Less accumulated depreciation and amortization           |  |   | (9,320,629 | ) |  |   | (8,277,473 | )
|-------------------------------------------------------- |  | - | ---------- | - |  | - | ---------- | -
|                                                         |  |   |            |   |  |   |            |  
|                                                         |  |   | 19,030,945 |   |  |   | 15,944,388 |  
|Cyclotron equipment held for use  not ready for service |  |   | 2,151,479  |   |  |   |           |  
|                                                         |  |   |            |   |  |   |            |  
|                                                         |  | $ | 21,182,424 |   |  | $ | 15,944,388 |  
|                                                         |  |   |            |   |  |   |            |  



Depreciation and amortization expense
for the three months ended September 30, 2003 and 2002 was $984,822 and $696,689, respectively. Cyclotron equipment held for use  not ready for service includes capitalized interest in the amount of $27,679.



Note 6Asset Based Financing



In May 2003, the Company entered into a $3,200,000 asset-based financing arrangement with a
financial institution, which expires on May 12, 2006. Amounts available under the arrangement are limited to approximately 80% of qualified accounts receivable. The balance at September 30, 2003 and June 30, 2003 was $2,019,083 and $1,554,628,
respectively. The purchase fee percent is calculated at 0.032% per day.



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



Note 7Purchase, Sale and Lease Back



On July 23, 2003, the Company entered into an Operating Agreement with two of its directors for the formation and operation of Molecular Imaging Cyclotron LLC, a Delaware
limited liability company (Cyclotron LLC). Under the terms of the Operating Agreement, the Company purchased 662/3% of the equity of Cyclotron LLC through the assignment of a loan receivable in the amount of $500,000, due from Vital Imaging, Inc The loan receivable carried interest at a rate of 9% per annum and was due on May 12, 2003. On August
15, 2003, Cyclotron LLC completed the purchase of a cyclotron located in San Diego, California from an unaffiliated third party for cash in the amount of $500,000 and the offset of the loan receivable in the amount of $500,000 for a total of
$1,000,000; the right of the unaffiliated third party to receive a portion of the future distributable cash from the operations of Cyclotron LLC; and Cyclotron LLCs assumption of an equipment lease in the amount of $2,123,800.



On August 15, 2003, Cyclotron LLC entered into an Asset Purchase and
Lease-Back Agreement (the UCSD Agreement) with The Regents of the University of California (the Regents) pursuant to which Cyclotron LLC agreed to sell and leaseback the cyclotron and certain related assets to the Regents for
a purchase price of $750,000 and the Regents assumption of the equipment lease in the amount of $2,123,800. The Company has a deferred loss on the sale and lease back in the amount of $250,000 and is recognizing the loss over the life of the
lease. The effective interest rate on this equipment lease is 7.79%.



Under the
terms of the UCSD Agreement, The Regents also has the right to contribute the cyclotron assets of Cyclotron LLC in exchange for a membership interest in Cyclotron LLC. Cyclotron LLC intends to produce, market and sell FDG and other
radiopharmaceuticals to third party providers and users of molecular imaging services, including the Company and its subsidiaries.



On August 15, 2003, Molecular Imaging Sorrento Valley LLC (PET LLC), a Delaware limited liability company and a wholly owned subsidiary of the Company, purchased a PET
scanner located in San Diego, California from an unaffiliated third party for cash in the amount of $400,000; the right of the unaffiliated third party to receive a portion of the future distributable cash from the operations of PET LLC; and PET
LLCs assumption of an equipment lease in the amount of $1,976,200.



On
August 15, 2003, PET LLC entered into an Asset Purchase and Lease-Back Agreement (the UCSD Agreement) with The Regents of the University of California (the Regents) pursuant to which PET LLC agreed to sell and leaseback the
PET scanner and certain related assets to the Regents for a purchase price of $500,000 and the Regents assumption of the equipment lease in the amount of $1,976,200. The Company has a deferred gain on the sale and lease back in the amount of
$100,000 and is recognizing the gain over the life of the lease. The effective interest rate on this transaction is 7.79%.



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Note 8Prepaid Rent and Financing Costs



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



|                                 |  | September 30,2003 |           | June 30,2003
|-------------------------------- |  | ----------------- | --------- | ------------
|Prepaid equipment rent           |  | $                 | 1,073,986 |             
|Prepaid financing costs          |  |                   | 126,790   |             
|                                 |  |                   |           |             
|Prepaid rent and financing costs |  | $                 | 1,200,776 |             
|                                 |  |                   |           |             



Note 9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. There are no shares issued and outstanding at September 30, 2003 and June 30, 2003.



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 September 30,
2003 and June 30, 2003 the Company had 55,786,121 and 55,531,272 shares of common stock issued and outstanding, respectively.



During the year ended June 30, 2003 the Company issued shares of common stock in cash transactions: 9,821,429 shares for cash in the amount of $6,185,406. Also during the
year ended June 30, 2003 the Company issued shares of common stock in non-cash transactions: 930,076 shares for services valued at $345,000; and 187,500 shares for exercised options. Also during the year ended June 30, 2003, 374,000 shares were
surrendered pursuant to the preferred stock Redemption Agreement.



During the
three months ended September 30, 2003 the Company issued 224,999 shares of common stock through the exercise of warrants for cash in the amount of $78,749. Also during the three months ended September 30, 2003 the Company issued 29,850 shares of
common stock for financing fees valued at $10,000.



Stock Options



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



As of September 30, 2003,, the Company has granted options to purchase 4,006,491 shares of common stock, including options granted outside of the 1999 Stock Option Plan to purchase 200,000 shares of common stock, as
follows:



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|                    |  | Three Months EndedSeptember 30, 2003 |            |                  | Year Ended June 30, 2003 |  
|------------------- |  | ------------------------------------ | ---------- | ---------------- | ------------------------ | -
|                    |  | ExercisePrice                        |            | Number of Shares |                          |  
|Beginning of period |  | $                                    | 0.17-$4.63 |                  | 4,319,157                |  
|Granted             |  |                                      |           |                  |                         |  
|Exercised           |  |                                      |           |                  |                         |  
|Cancelled           |  | $                                    | 0.56-$3.75 |                  | (312,666                 | )
|                    |  |                                      |            |                  |                          |  
|End of period       |  | $                                    | 0.17-$3.25 |                  | 4,006,491                |  
|Vested              |  |                                      |            |                  | 2,483,406                |  



The Company accounts for stock-based
compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, under which no compensation cost for stock options issued to employees is recognized for
the stock option awards granted at or above fair market value. Compensation expense is recognized for stock option awards granted below fair market value with credits recorded from previously recognized expense for grants cancelled by termination of
employment. However, during the three months ended September 30, 2003 and 2002 the Company recognized compensation expense of $0 and $11,120, respectively.



Had compensation expense for the Companys 1999 Stock Option Plan been determined based on fair values at the grant dates for awards under the plan in accordance
with SFAS No. 123, Accounting for Stock-Based Compensation, the Companys net income (loss) and income (loss) per share would have been reduced to the following pro forma amounts:



|                                                             |  | Three Months EndedSeptember 30,
|------------------------------------------------------------ |  | -------------------------------
|                                                             |  | 2003                           
|Net (loss) income per share available to common stockholders |  |                                
|As reported                                                  |  | $                              
|Pro forma                                                    |  |                                
|Earnings per sharebasic                                     |  |                                
|As reported                                                  |  | $                              
|Pro forma                                                    |  |                                
|Earnings per sharediluted                                   |  |                                
|As reported                                                  |  | $                              
|Pro forma                                                    |  |                                



The fair value of each option granted
is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants:



|                        |  | Three Months EndedSeptember 30, |  
|----------------------- |  | ------------------------------- | -
|                        |  | 2003                            |  
|Risk free interest rate |  | 1.92                            | %
|Expected life           |  | 1.82 years                      |  
|Expected volatility     |  | 1.53                            | %
|Expected dividend yield |  | 0.0                             | %



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FINANCIAL INFORMATION (continued)



Warrants



At September 30, 2003 warrants were outstanding to purchase 9,510,185 shares of common stock at exercise prices between $0.29 to $7.00 per share, including warrants to
purchase 340,006 shares of common stock which are subject to vesting through December 1, 2007 and the warrants re-priced in connection with the redemption of preferred stock. These warrants expire between October 5, 2003 and December 1, 2008.



Note 10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 September 30, 2003 and 2002 accrued interest on the investment was $10,573. The related shareholder, officer and director personally guarantee the investment.



Loans



On August 23, 2000, the Company received an eight percent (8%) bridge loan from a director and shareholder in the amount of $200,000, with
an original due date of October 11, 2000. The loans due date has been extended several times and the Company has agreed to make monthly payments of $10,000 per month beginning on January 8, 2002, until paid in full. At September 30, 2003, and
June 30, 2003, the loan has a balance of $88,219 and $122,692, respectively



Molecular Imaging Cyclotron LLC



On July 23, 2003, we entered
into an Operating Agreement with two of our directors, Jeffrey Rush and Paul Crowe, for the formation and operation of Cyclotron LLC. Under the terms of the Operating Agreement, the Company owns 662/3% of the equity of Cyclotron LLC, and Mr. Crowe, Mr. Rush, and a third unaffiliated investor, together own 331/3% of the equity of Cyclotron LLC. The Company has contributed $500,000 to Cyclotron LLC and Mr. Crowe and Mr. Rush, together with the unaffiliated third
party investor, have contributed $250,000 to Cyclotron LLC. On August 15, 2003, Cyclotron LLC completed the purchase of the cyclotron located in San Diego, California from Vital Imaging, Inc. for $1,000,000 and the assumption of an equipment lease
in the amount of approximately $2,100,000. On August 15, 2003, Cyclotron LLC entered into the UCSD Agreement with the Regents pursuant to which Cyclotron LLC agreed to sell and leaseback the cyclotron and certain related assets to the Regents for a
purchase price of $750,000 and the Regents assumption of the equipment lease in the amount of approximately $2,100,000. Under the terms of the UCSD Agreement, the Regents also have the right to contribute the cyclotron assets to Cyclotron LLC in
exchange for a membership interest in Cyclotron LLC. Cyclotron LLC intends to produce, market and sell FDG and other radiopharmaceuticals to third party providers and users of MI services, including the Company and its subsidiaries.



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Note 11Long Term Debt



Long-term debt at September 30, 2003 and June 30, 2003 consist of the following:



|                                                                                                                                                                                                  |  | September 30,2003 |         |   | June 30,2003 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------ | -
|Promissory Note with no interest, due in monthly installments of $500, with first payment beginning on February 1,
2002                                                                           |  | $                 | 9,500   |   |              | $
|Promissory Note with interest at a rate of 11% per annum, due in monthly installments of $2,343, with the First payment beginning
on January 1, 2002, with a variable 5% to 1% prepayment penalty |  |                   | 50,420  |   |              |  
|                                                                                                                                                                                                  |  |                   |         |   |              |  
|                                                                                                                                                                                                  |  |                   | 59,920  |   |              |  
|Less current portion                                                                                                                                                                              |  |                   | (23,110 | ) |              |  
|                                                                                                                                                                                                  |  |                   |         |   |              |  
|Long-term debt, net of current portion                                                                                                                                                            |  | $                 | 36,810  |   |              | $
|                                                                                                                                                                                                  |  |                   |         |   |              |  



The maturities of long-term debt for
each of the three years subsequent to September 30, 2003, are as follows:



|September 30, |  |  
|------------- |  | -
|2004          |  | $
|2005          |  |  
|2006          |  |  
|              |  |  
|              |  |  
|              |  |  



Note 12Commitments



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



|                                                                     |  | September 30,2003 |            |   | June 30, 2003 |  
|-------------------------------------------------------------------- |  | ----------------- | ---------- | - | ------------- | -
|MI scanners and related equipment                                    |  | $                 | 27,091,902 |   |               | $
|Less accumulated amortization                                        |  |                   | (8,744,667 | ) |               |  
|                                                                     |  |                   |            |   |               |  
|                                                                     |  |                   | 18,347,235 |   |               |  
|Cyclotron equipment held for use in operationsnot ready for service |  |                   | 2,151,479  |   |               |  
|                                                                     |  |                   |            |   |               |  
|Net capital lease assets                                             |  | $                 | 20,498,714 |   |               | $
|                                                                     |  |                   |            |   |               |  



The Company leases office space and
certain MI equipment under non-cancelable operating leases. The office lease expires in March 2004 and the equipment leases expire through August 2006. Rent expense under these operating leases was $434,756 and $417,504, respectively for the three
months ended September 30, 2003, and 2002.



The Company leases certain other MI
equipment under capital leases. The equipment leases expire through January 2008. The Companys assets secure the capital leases.



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The following is a schedule by of the future minimum lease payments as of September 30, 2003 for our equipment under
capital leases and operating leases:



|                                                                                  |  | Capital Lease |            |   | OperatingLease
|--------------------------------------------------------------------------------- |  | ------------- | ---------- | - | --------------
|Oct 2003                                                                          |  |               | 648,029    |   |               
|Nov 2003                                                                          |  |               | 648,029    |   |               
|Dec 2003                                                                          |  |               | 648,029    |   |               
|Jan 2004                                                                          |  |               | 670,872    |   |               
|Feb 2004                                                                          |  |               | 670,873    |   |               
|Mar 2004                                                                          |  |               | 670,872    |   |               
|Apr 2004                                                                          |  |               | 670,873    |   |               
|May 2004                                                                          |  |               | 670,872    |   |               
|Jun 2004                                                                          |  |               | 670,872    |   |               
|Jul 2004                                                                          |  |               | 643,407    |   |               
|Aug 2004                                                                          |  |               | 643,407    |   |               
|Sep 2004                                                                          |  |               | 643,407    |   |               
|                                                                                  |  |               |            |   |               
|2004                                                                              |  | $             | 7,989,542  |   |               
|2005                                                                              |  |               | 7,605,592  |   |               
|2006                                                                              |  |               | 3,986,459  |   |               
|2007                                                                              |  |               | 2,428,185  |   |               
|2008                                                                              |  |               | 1,539,023  |   |               
|2009                                                                              |  |               | 822,364    |   |               
|2010                                                                              |  |               | 685,302    |   |               
|                                                                                  |  |               |            |   |               
|Total                                                                             |  | $             | 24,966,467 |   |               
|                                                                                  |  |               |            |   |               
|Less amount representing interest at 12.0%                                        |  |               | (5,499,532 | ) |               
|                                                                                  |  |               |            |   |               
|Present value of minimum lease payments (including current portion of $5,697,543) |  | $             | 19,466,935 |   |               
|                                                                                  |  |               |            |   |               



Note 13Retirement Plan



On August 1, 2001, the Company established a defined contribution plan
covering substantially all of its employees. Participation is limited to all regular employees who meet specific age and service requirements. The Company made no contributions during the three months ended September 30, 2003.



Note 14Concentrations of Credit Risk



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



Note 15Earnings (Loss) Per Share



The weighted average shares listed below were not included in the computation of diluted loss
per share for the three months ended September 30, 2003 because to do so would have been antidilutive.



|Employee Stock Options |  | 3,856,083
|---------------------- |  | ---------
|Warrants               |  | 9,510,185



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Note 16  Segment Information



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



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



Note 17Subsequent Events



In October 2003 the Company entered into a definitive agreement with a third party to
purchase an MI scanner and related assets located in Houston, Texas. The total purchase price for the assets is $200,000 and an equity ownership interest in the subsidiary of the Company that has been established to operate the MI scanner. Under the
terms of the definitive agreement, the Company has paid the third party $50,000 of the purchase price, and has agreed to pay the remaining $150,000 of the purchase price upon the first to occur of the accomplishment of certain events relating to the
purchase or February 7, 2004.



PART I. Item 2.

MANAGEMENTS DISCUSSION AND ANALYSIS



Overview



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



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



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



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



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PART I. ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



Under the mobile service model, a higher number of procedures are necessary to reach break-even, and conversely under
the IDTF model, fewer scans per day are typically necessary to reach break-even because of the higher amount of reimbursement.



We have a stationary MI imaging facility in San Diego, California that is owned by our subsidiary, Molecular Imaging Sorrento Valley, LLC (Sorrento Valley
LLC), and is managed by the Company. The center is operated with the University of California, San Diego (UCSD) as the University of California, San Diego Center For Molecular Imaging. The UCSD School of Medicine
radiology faculty provides all clinical patient support services at the center and the Company manages the business operations of the center. The facility is intended to serve the UCSD Healthcare patient population and the greater San Diego
metropolitan area. We also have a stationary MI imaging center in St. Petersburg, Florida which is operated by the Company under an operating agreement with a third party where patient scheduling, physician education and professional services are
rendered through an independent imaging center operator and professional radiology group, to serve the patient population of TampaSt. Petersburg.



In August of 2003 we acquired a cyclotron facility located in San Diego, California. A cyclotron is used to produce radiopharmaceuticals such as Fluorine-18, Nitrogen-13,
Oxygen-15 and Flurodeoxyglucose (FDG), which are some of the radiopharmaceuticals used for MI procedures. FDG is the primary radiopharmaceutical that is injected into a patient before a MI procedure. Abnormal concentrations of FDG can
indicate areas of malignancies. In conjunction with UCSD, the Company plans to use the cyclotron in future research programs for the development of other radioisotopes that may be useful in the fields of neuroscience and cardiology. We believe that
the vertical integration of the cyclotron will offer significant commercial benefits for our existing physician and hospital customer base in Southern California and provide us with a competitive advantage.



On September 30, 2003 the Company entered into a Committed Alliance-Sole Source Agreement
with Siemens Medical Solutions USA, Inc. (Siemens). This agreement provides for the two companies to collaborate and exchange information regarding prospective medical service providers. Under the terms of the five-year agreement, the
Company has committed to purchase its MI equipment from Siemens at a discount from Siemens list price, and Siemens has agreed to provide sales and marketing support to the Company, in addition to equipment and project financing.



Critical Accounting Policies



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



Revenue Recognition



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



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PART I. ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



Recent Accounting Pronouncements



In June 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and nullifies the guidance of Emerging Issues Task Force (EITF) Issue No. 94-3,Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), which recognized a liability for an exit cost at the date of an entitys commitment to an exit plan. SFAS No. 146
requires that the initial measurement of a liability be at fair value. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have any impact on the Companys
financial position, results of operations or cash flows.



In December 2002, the
FASB issued SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure (SFAS 148). SFAS 148 amends SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), to provide
alternative methods of transition to SFAS 123s fair value method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 and APB Opinion No. 28, Interim Financial Reporting,
to require disclosure in the summary of significant accounting policies of the effects of an entitys accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim
financial statements. While SFAS 148 does not amend SFAS 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS 148 are applicable to all companies with stock-based employee
compensation, regardless of whether they account for the compensation using the fair value method of SFAS 123 or the intrinsic value method of APBO 25. The Company has adopted the disclosure requirements of SFAS 148 and will continue to use the
intrinsic value method described in ABPO 25 in accounting for the fair value of stock awards issued to employees.



In May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 changes
the accounting guidance for certain financial instruments that, under previous guidance, could be classified as equity or mezzanine equity by now requiring those instruments to be classified as liabilities (or assets in some
circumstances) on the balance sheet. Further, SFAS No. 150 requires disclosure regarding the terms of those instruments and settlement alternatives. SFAS No. 150 is generally effective for all financial instruments entered into or modified after May
31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 has required the presentation of the mandatory redeemable preferred stock in the liability section of the
consolidated balance sheets, rather than the mezzanine equity section, as previously presented. The mandatory redeemable preferred stock has been redeemed as of June 30, 2003.



Results of Operations



Three Months Ended September 30, 2003



Service revenues for the three months ended September 30, 2003 were $5,624,237, compared to service revenues for the three months ended September 30, 2002 of $4,552,329.
Our cost of service revenues for the three months ended September 30, 2003 were $3,472,017, compared to $3,059,278 for the three months ended September 30, 2002. These results exclude the operations of the London PET Centre. The substantial
difference in service revenues is largely attributable to eighteen mobile units and two stationary facilities being deployed during the three months ended September 30, 2003 as compared to fifteen units being deployed during the three months ended
September 30, 2002, as well as better utilization of each existing unit. The cost of service revenues represents salaries paid to technologists and drivers, system maintenance, transportation and insurance on our mobile MI systems.



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PART I. ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



The gross profit percentage increased from 32.8% for the three months ended September 30, 2002 to 38.3%

for the three months ended September 30, 2003 primarily for the following reasons:



|Gross profit percentage for the three months ended September 30, 2002 |  | 32.8 | %
|--------------------------------------------------------------------- |  | ---- | -
|Transportation services                                               |  | 1.1  |  
|Depreciation expense                                                  |  | (3.1 | )
|Capital equipment rental                                              |  | 4.9  |  
|Capital equipment service contracts and repairs                       |  | 2.9  |  
|Medical supplies                                                      |  | (0.9 | )
|Other                                                                 |  | 0.6  |  
|Gross profit percentage for the three months ended September 30, 2003 |  | 38.3 | %



Our cost of transportation services
decreased because we hired more of our own drivers and used fewer outside transportation services in the three months ended September 30, 2003. Depreciation expense increased in the three months ended September 30, 2003, mainly due to the additional
units plus the two stationary facilities. Equipment rental costs decreased mainly due to the transfer of one rental unit to a leased vehicle in January 2003. Our cost of capital equipment service contracts and repairs decreased during the three
months ended September 30, 2003 over the three months ended September 30, 2002 due to the termination of certain maintenance contracts that were replaced with time and materials service. Our cost of medical supplies decreased as a percent of service
revenues because our customers now provide their own medical supplies.



Selling
and marketing expenses decreased by 23.9% from $502,341 for the three months ended September 30, 2002, to $382,394 for the three months ended September 30, 2003, mainly due to a reduction in marketing expenses. General and administrative expenses
increased by 9.2% from $1,482,227 for the three months ended September 30, 2002, to $1,619,835 for the three months ended September 30, 2003, mainly due to an increase in the cost of capital relating of our asset-backed line of credit, increased
payroll expenses for additional staff for our business expansion, the increased costs of insurance, and an increase in the amount we spent for investor relations.



Our net income from operations improved from a loss of ($491,517) for the three months ended September 30, 2002 to an income of $149,991,
for the three months ended September 30, 2003. This improvement was due mainly to the decrease in our cost of service revenues.



Net cash provided by (used in) operating activities for the three months ended September 30, 2003 improved to a positive $516,398, compared to a negative ($1,215,315) for
the three months ended September 30, 2002. This change was mainly attributable to the increase in accounts payable.



Expanding Our Business



We continue our efforts to develop and expand our service business by increasing utilization of our existing units, and deploying additional mobile and stationary MI and MI/CT systems. We may continue to incur
additional losses as we pursue our development and expansion efforts. The majority of our costs are fixed; so increased revenues as a result of increased utilization may increase our gross profit and income, while lower utilization may result in
lower gross profit and income. As discussed above, we are also working with third parties and existing customers to develop stationary imaging centers that we will operate as Independent Diagnostic Testing Facilities.



One measure that management uses to evaluate our progress is average revenues per weekday for
all units. We calculate average revenues per weekday for all units by dividing total weekday revenues by the number of weekdays in the relevant period, excluding holidays. We exclude Saturdays from this calculation since not all of our units are
scheduled for Saturday service. For reasons described above, for the three months ended September 30, 2003, our average revenues per weekday for all units increased by 23.5% to approximately $89,274, from average revenues per weekday for all units
of approximately $72,259 for the three months ended September 30, 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.



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PART I. ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



We generate substantially all our revenues from our service agreements with hospitals and other health care
providers. We have a satisfactory record of account collections, however there can be no assurance that this trend will continue and, accordingly, we have established an allowance for uncollectable accounts receivable. Lower reimbursement by public
and private insurers may also impact the revenues we can generate from our operations. There can be no assurance that we will be able to maintain or increase the number of patient procedures or that our allowances for doubtful accounts receivable
will be sufficient.



Since our inception we have incurred significant losses.
Through September 30, 2003, we have an accumulated deficit of ($26,175,023), which we have financed primarily through equity sales. For the three months ended September 30, 2003, we recognized a loss from continuing operations of ($408,049),
compared to losses from continuing operations of ($821,974) for the three months ended September 30, 2002. The loss from continuing operations of ($408,049) for the three months ended September 30, 2003 includes the following increased costs which
were not incurred by the Company during the three months ended September 30, 2002; the amount of $70,658 of increased depreciation expense relating to our refinancing of three leases in May of 2003, $49,821 of increased expenses relating to the
additional capital equipment lease for our new MI/CT unit added in July of 2003, and $100,435 of extraordinary equipment repair costs.



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



Liquidity and Capital Resources



At
September 30, 2003, our total assets were $28,373,021, compared to $21,788,908 at June 30, 2002. The increase was primarily the result of adding one mobile unit, transferring one mobile unit to a stationary facility and adding another stationary
facility and the cyclotron, offset by the sale of assets from the London PET Centre Ltd in July 2002. Our current assets at September 30, 2003 totaled $5,408,704, and our current liabilities were $10,801,885, compared to current assets of $3,805,598
and current liabilities of $8,434,193 at June 30, 2003. Our current liabilities exceed current assets because, under Generally Accepted Accounting Principles, we are required to record as a current liability our capital lease obligations due within
the next twelve months. As discussed in Note 12Commitments, several of our units are also financed under non-cancelable operating leases that are not recorded as liabilities until the monthly payment is due. Our current assets, on the other
hand, include only those accounts receivable that are outstanding from service revenues recognized and typically represent 30 to 60 days of service revenues.



Shareholders equity decreased to $3,430,445 at September 30, 2003, from 3,749,744 at June 30, 2003, due primarily to the net loss of $408,049.



We believe that our available cash, short-term assets, and other resources will be sufficient
to fund our operations and capital expenditures through the current fiscal year. We also believe we will continue to be able to convert our accounts receivable into cash to meet our operating costs. However, if we are unable to generate sufficient
service revenues to fund continuing operations, convert our accounts receivable into cash, or achieve sustained profitability, we will need to raise additional capital to sustain or operations or significantly reduce our operations. In addition, we
will be required to raise additional capital to add or acquire additional mobile units or stationary sites. We are actively exploring various financing alternatives. Management has recently met with and had discussions with numerous financing
sources and investment banking companies that have expressed an interest in investing in, or raising money for, the Company. The Company has received several term sheets as a result of these discussions and is the process of evaluating and
negotiating these term sheets. While we will continue to actively pursue these financing opportunities and work towards completing a financing, there can be no assurance that any additional debt or equity financing will be available on commercially
reasonable terms to the Company or at all.



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PART I. ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



Risks Related to Our Business



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



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



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



We have a relatively limited operating history.



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



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



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



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



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



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



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



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



Equipment and other assets of the Company secure certain of our indebtedness. If the Company defaults and the creditors foreclose, the
Company and its operations would be materially and adversely affected.



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



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



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PART I. ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



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



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



Our future revenues and
profitability depend in part on our ability to demonstrate to hospitals the potential cost and performance advantages of the MI and MI/CT system over traditional diagnostic imaging systems. Our ability to achieve sustained profitability in the
future will depend in part on our ability to successfully market and sell MI services on a wide scale. If we are unable to do so, we will be unable to grow revenues and achieve sustained profitability from operations.



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



Our capital requirements associated with our operations have been and will continue to be
substantial. We may 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. Also, our ability to raise additional funds through the issuance of equity or convertible securities is restricted by our number of authorized shares and certain covenants contained in the June 2002 private
placement agreements.



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 MI services.



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



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



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PART I.

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)



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



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



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



We
obtain our MI and MI/CT systems from a limited group of qualified suppliers: CTI of Knoxville, TN, Siemens Medical Systems, Inc. of Iselin NJ and GE Medical Systems of Milwaukee, WS. While we believe that alternative suppliers could be found for the
MI 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 MI or MI/CT systems could materially harm our ability to expand our revenues and thereby adversely
affect our financial condition and results from operations.



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



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



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



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



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



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



Upon expiration of our clients
contracts, we are subject to the risk that clients will cease using our MI systems and purchase or lease their own MI systems, use our competitors MI systems or rely on alternate imaging technologies. Approximately fourteen percent of our
client contracts expire in 2003, thirty-two percent in 2004, twenty-four percent in 2005, nineteen percent in 2006, three percent in 2007 and 2008, and eight percent in 2012. Moreover, approximately one-third of our client contracts permit the
client, upon typically 180 days notice, to terminate the contract without cause, and approximately two-thirds of our client contracts permit the client, upon typically 180 days notice, to terminate the contract if the client obtains a
fixed site for a MI system. In addition, a portion of our contracts do not have minimum usage requirements.



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PART I. ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



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



While we will use our experience and knowledge of the MI marketplace to select IDTF imaging centers that we believe will be successful,
there can be no assurances that our selection process will result in an IDTF that is profitable. Also, the factors upon which we select the IDTF imaging center may change after commencement of operations of the site that could result in reduced
patient use and revenues and have an adverse impact on our business. There are no assurances that the current reimbursement rates for IDTF imaging centers will remain higher than those for hospital based services. A reduction in such reimbursement
rates could have an adverse impact on the operation of the IDTF model. The IDTF model may also result in a longer period of time between when we perform the MI procedure and receive payment then under our typical mobile services model. This could
have an adverse impact on our cash flow.



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



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



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



| |  | variations in the rate at which clients terminate or fail to renew their contracts; and
| | - | ---------------------------------------------------------------------------------------



| |  | changes in the number of days of service we can offer with respect to a given system due to equipment malfunctions or the seasonal factors discussed below.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------



We may experience seasonality in the sale of our services. For example, first quarter
client and patient vacation schedules may affect revenues. Second quarter revenues may be affected by client and patient holiday and vacation schedules and inclement weather, the results of which may be fewer patient scans during the period. Third
quarter revenues may be affected by fewer calendar days and inclement weather, the results of which may be fewer patient scans during the period. We may not be able to reduce our



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expenses, including our debt service obligations, quickly enough to respond to these factors, which would make our business difficult to operate and would
harm our financial results. In addition, we may be unable to adjust our expenditures if revenues in a particular period fail to meet our expectations, which would harm our operating results for that period.



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



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



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



Many of our competitors have substantially greater
financial and marketing resources and experience than us. We believe some of our competitors are offering MI services to our existing and potential customers at lower rates than we are charging or proposing to charge such customers. These lower
rates could cause us to lose our existing customers or fail to gain new customers that could have a material adverse impact on our business and results of operations. Furthermore, we expect that other companies will enter the mobile and stationary
MI and MI/CT market, particularly as MI systems gain increasing market acceptance. Our competitors may be able to develop technologies, procedures or products that are more effective or economical than ours, or that would render the MI system
obsolete or noncompetitive. Some of our customers may be capable of providing the same services to their patients directly by purchasing or leasing their own imaging systems. In addition, the hospital industry has been experiencing a trend towards
consolidation, which trend will reduce our potential customer base and increase competition for available customers.



We have no operating history with respect to the cyclotron.



We completed the purchase of the cyclotron in August of 2003 and have no operating history with respect to the cyclotron. Although our officers and employees have
substantial business experience in the MI industry and the healthcare industry generally, and we plan to employ and retain skilled and qualified employees consultants and/or pharmaceutical delivery companies to assist us with the day-to-day
operation of the cyclotron and delivery of FDG, there can be no assurances that our cyclotron operations will be successful. The operation of the cyclotron and delivery of FDG is also subject to local, state and federal licensing and permitting
requirements. Although we have retained a consultant to assist us with this licensing and permitting, and anticipate contracting with a third party for the delivery of the FDG, any failure to maintain these licenses and permits, or obtain such third
party agreements upon terms favorable to the Company, or at all, could have a material adverse impact on our operations.



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



Providing mobile MI and MI/CT shared services, and producing, selling and
distributing FDG, involves the inherent risk of professional and product liability claims against us. We currently maintain insurance coverage in the types and amounts which we deem adequate for our operations, but this insurance is expensive,
subject to various coverage exclusions and may not be obtainable in the future on terms acceptable to us. We do not know whether claims against us arising from our use of the MI and MI/CT systems, or the production, delivery and sale of FDG, will be
successfully defended or that our insurance will be sufficient to cover liabilities arising from these claims. A successful claim against us in excess of our insurance coverage could materially harm our business.



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PART I. ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



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



We are subject to federal, state and local regulations governing the
production, delivery, use, storage, handling and disposal of materials and waste products. Although we believe that our safety procedures for handling and disposing of these hazardous materials comply with the standards prescribed by law and
regulation, we cannot completely eliminate the risk of accidental contamination or injury from those hazardous materials. In the event of an accident or a defect in the FDG, we could be held liable for any damages that result, and any liability
could 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.



Under the non-IDTF model, MI services are generally purchased by hospitals, which then bill various third-party payers, such as government programs, and private insurance
plans, for the procedures conducted using the MI system. Third party payers carefully review, and are increasingly challenging, the prices charged for medical products and services, and scrutinizing whether to cover new products and evaluating the
level of reimbursement for covered products. While we believe that the hospitals using the MI system have generally been reimbursed, payers may deny coverage and reimbursement for the MI system if they determine that the device was not reasonable
and necessary for the purpose for which it was used, was investigational or not cost-effective. As a result, we cannot assure that reimbursement from third-party payers for use of the MI system will be available or, if available, that reimbursement
will not be limited. If third-party reimbursement of these procedures is not available, it will be more difficult for us to offer our services on a profitable basis.



Moreover initiatives are periodically proposed which, if implemented, would have the effect of substantially decreasing reimbursement rates
for diagnostic imaging services. We cannot guarantee that these or similar initiatives will not be adopted in the future. Any change in the rates of or conditions for reimbursement could substantially reduce the number of procedures for which these
healthcare providers can obtain reimbursement or the amounts reimbursed to our clients for services provided by us. Any change in the rates of or conditions for reimbursement could also substantially reduce the number of procedures that we perform
under our IDTF model. Because unfavorable reimbursement policies have constricted, and may continue to constrict, the profit margins of the hospitals and clinics we bill directly, we have lowered, and may continue to need to lower, our fees to
retain existing clients and attract new ones. These reductions could have a significant adverse effect on our revenues and financial results by decreasing demand for our services or creating downward pricing pressure.



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



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



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PART I. ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



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



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



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



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



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



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PART I. ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



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



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



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



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



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



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



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



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



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



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PART I. ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



the FDIC up to $100,000 of the funds lost. The loss of the excess funds could have a material adverse effect on our
business.



ITEM 3. CONTROLS AND PROCEDURES



As of the end of
the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Vice President, Finance, of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, the Chief Executive Officer and our Vice President, Finance, concluded
that as of the date of that evaluation our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. It should be noted that the design of any systems of
controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.



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



PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS



In August of 2003 the
Company was served with a summons and complaint, filed by CTI Molecular Imaging, Inc. (CTI) on August 1, 2003 in the Chancery Court for Knox County, Tennessee. This action by CTI seeks to recover the amount of $389,166.79, plus
pre-judgment interest at the rate of 10%, for the Companys alleged breach of eight service agreements entered into with CTI. The Company provided written notice to CTI on February 11, 2003 that the eight service agreements were effectively
terminated by CTI on January 30, 2003 due to CTIs refusal to provide services to the Company under the service agreements. CTI did not provide any services to the Company under the service agreements during the period from January 30, 2003 to
July 30, 2003, the period for which CTI is demanding payment. The Company has filed an answer and counterclaim to CTIs complaint. The Company intends to defend the case vigorously.



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



ITEM 2. CHANGES IN SECURITIES



Changes in
Securities.



On or about July 8, 2003 we received a notice to convert
common stock warrants into 149,999 shares of Common Stock at an exercise price of $.35 per share. This conversion was in reliance on Section 4(2) of the Securities Exchange Act (the Act).



On or about September 15, 2003 we received a notice to convert common stock warrants into
75,000 shares of Common Stock at an exercise price of $.35 per share. This conversion was in reliance on Section 4(2) of the Securities Exchange Act (the Act).



On July 28, 2003 the Company entered into a Business Advisory and Financial Consulting Services Agreement (the Agreement) with
Ascendiant Capital Group, LLC (Ascendiant) pursuant to which Ascendiant agreed to provide certain financial advisory and consulting services to the Company. Pursuant to the terms of the Agreement, the Company agreed to compensate
Ascendiant for each month of service provided by Ascendiant in shares of the Companys common stock (the Engagement Shares). The number of Engagement Shares to be issued to Ascendiant for each month of service shall be the
determined by dividing $10,000.00 by the average closing price of our common stock over the period of such month; provided, however, in no event shall the number of Engagement Shares exceed 35,000 shares per month. Under the terms of the Agreement,
the Engagement Shares are to be issued and delivered to Ascendiant within ten (10) business days after each month that Ascendiant provides services. Either Ascendiant or the Company upon 15 days prior written notice may terminate the Agreement. The
Company has issued a total of 50,159 shares of its common stock to Ascendiant under the terms of the Agreement as of the date of this report. The Engagement Shares were issued in reliance upon Section 4(2) of the Act.



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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



(a)
Exhibits



Exhibit 10.58Compliant Alliance Sole Source Agreement
dated September 30, 2003 between Siemens Medical Solutions USA, Inc. and the Company



Exhibit 31.1Certification of Paul J. Crowe, Chief Executive Officer



Exhibit 31.2Certification of Anthony R. Turnbull, Vice President, Finance



Exhibit 32Certifications of Chief Executive Officer and Vice President, Finance Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



(b) Reports on Form 8-K



Form 8-K was filed with the Securities and Exchange Commission (the SEC) on July 10, 2003 regarding the Companys filing of
certain amendments to its public reports in response to technical comments from the SEC.



Form 8-K was filed with the SEC on August 26, 2003 regarding a press release dated August 26, 2003 announcing the un-audited revenues of the Company for the fourth quarter and fiscal year ended 2003.



Form 8-K was filed with the SEC on September 30, 2003 regarding a press release dated
September 30, 2003 announcing the audited financial results of the Company for fiscal year ended 2003.



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SIGNATURES



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



|MOLECULAR IMAGING CORPORATION a Delaware corporation
|----------------------------------------------------
|                                                    
|By:                                                 
|                                                    
|                                                    



Date:
November 13, 2003



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