##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Amendment No.1



to



Form 10-QSB



(Mark One)

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



For the quarterly period ended December 31, 2002



| ̈ |  | 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)



|Delaware                                                      |  | 11-2787966                      
|------------------------------------------------------------- |  | --------------------------------
|(State or other jurisdiction ofincorporation or organization) |  | (IRS EmployerIdentification 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 55,215,482 shares outstanding of the issuers Common Stock as of February 6, 2003.



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



MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES



For the quarterly period ended December 31, 2002



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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 as of December 31, 2002 and June 30, 2002                                |  | 1       
|               |  |                                                                                                     
|               |  | Consolidated Statements of Operations for the three and six months ended December 31, 2002 and 2001  |  | 2       
|               |  |                                                                                                     
|               |  | Consolidated Statement of Changes in Shareholders Equity for the six months ended December 31, 2002 |  | 3       
|               |  |                                                                                                     
|               |  | Consolidated Statements of Cash Flows for the six months ended December 31, 2002 and 2001            |  | 4       
|               |  |                                                                                                     
|               |  | Notes to Consolidated Financial Statements                                                           |  | 5       
|               |  |                                                                                                     
|Item 2.        |  | Managements Discussion and Analysis                                                                 |  | 14      
|               | 
|Signatures     |  | 25                                                                                                  
|               | 
|Certifications |  | 26                                                                                                  



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##### Table of Contents

PART I.



FINANCIAL INFORMATION



ITEM 1.
FINANCIAL STATEMENTS (Unaudited)



MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



December 31, 2002 (Unaudited) and June 30, 2002



|                                                                                                                                                                            |  | December 31, 2002 |             |   | June 30, 2002 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | - | ------------- | -
|ASSETS                                                                                                                                                                      |  |                   |             |   |               |  
|Current assets                                                                                                                                                              |  |                   |             |   |               |  
|Cash                                                                                                                                                                        |  | $                 | 377,086     |   |               | $
|Accounts receivable, net of allowance for doubtful accounts of $116,000 and $116,000 at December 31, 2002 and June 30, 2002
respectively                                    |  |                   | 3,113,180   |   |               |  
|Prepaid expenses                                                                                                                                                            |  |                   | 814,241     |   |               |  
|Deposits and other assets                                                                                                                                                   |  |                   | 309,960     |   |               |  
|                                                                                                                                                                            |  |                   |             |   |               |  
|Total current assets                                                                                                                                                        |  |                   | 4,614,467   |   |               |  
|Property and equipment, net                                                                                                                                                 |  |                   | 14,231,867  |   |               |  
|Other assets                                                                                                                                                                |  |                   |             |   |               |  
|Accrued interest receivable                                                                                                                                                 |  |                   | 10,573      |   |               |  
|Due from London Radiosurgical Centre, Ltd                                                                                                                                   |  |                   | 127,123     |   |               |  
|Subordinated equity participation                                                                                                                                           |  |                   | 200,000     |   |               |  
|Restricted cash                                                                                                                                                             |  |                   | 346,345     |   |               |  
|                                                                                                                                                                            |  |                   |             |   |               |  
|Total assets                                                                                                                                                                |  | $                 | 19,530,375  |   |               | $
|                                                                                                                                                                            |  |                   |             |   |               |  
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                                                                              |  |                   |             |   |               |  
|Current liabilities                                                                                                                                                         |  |                   |             |   |               |  
|Accounts Payable                                                                                                                                                            |  |                   | 1,609,229   |   |               |  
|Current portion of long-term debt                                                                                                                                           |  |                   | 27,300      |   |               |  
|Loans payable to related parties                                                                                                                                            |  |                   | 203,050     |   |               |  
|Accrued and other liabilities                                                                                                                                               |  |                   | 667,945     |   |               |  
|Other liabilities                                                                                                                                                           |  |                   |            |   |               |  
|Obligations under capital leasecurrent                                                                                                                                     |  |                   | 5,522,949   |   |               |  
|                                                                                                                                                                            |  |                   |             |   |               |  
|Total Current Liabilities                                                                                                                                                   |  |                   | 8,030,473   |   |               |  
|Noncurrent Liabilities                                                                                                                                                      |  |                   |             |   |               |  
|Obligations under capital lease                                                                                                                                             |  |                   | 7,783,324   |   |               |  
|Long-term debt                                                                                                                                                              |  |                   | 58,262      |   |               |  
|                                                                                                                                                                            |  |                   |             |   |               |  
|Total liabilities                                                                                                                                                           |  |                   | 15,872,059  |   |               |  
|Mandatorily redeemable preferred stock; 10,000,000 shares authorized                                                                                                        |  |                   |             |   |               |  
|Preferred stock series A; 0 and 23 shares issued and outstanding at December 31, 2002 and June 30, 2002,
respectively                                                       |  |                   |            |   |               |  
|Preferred stock series B; 0 and 27 shares issued and outstanding at December 31, 2002 and June 30, 2002,
respectively                                                       |  |                   |            |   |               |  
|Shareholders equity                                                                                                                                                        |  |                   |             |   |               |  
|Common stock; $0.0001 par value; 90,000,000 shares authorized; 55,027,982 and 44,966,267 shares issued and outstanding at December
31, 2002 and June 30, 2002, respectively |  |                   | 5,503       |   |               |  
|Additional paid in capital                                                                                                                                                  |  |                   | 29,363,532  |   |               |  
|Accumulated deficit                                                                                                                                                         |  |                   | (25,710,719 | ) |               |  
|Foreign currency translation adjustment                                                                                                                                     |  |                   |            |   |               |  
|                                                                                                                                                                            |  |                   |             |   |               |  
|Total shareholders equity                                                                                                                                                  |  |                   | 3,658,316   |   |               |  
|                                                                                                                                                                            |  |                   |             |   |               |  
|Total liabilities and shareholders equity                                                                                                                                  |  | $                 | 19,530,375  |   |               | $
|                                                                                                                                                                            |  |                   |             |   |               |  



See accompanying notes.



1



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##### Table of Contents

PART I.



FINANCIAL INFORMATION (continued)



MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



For the Three and Six Months Ended December 31, 2002 and 2001 (Unaudited)



|                                                                                                 |  | Three months Ended December 31, |           |   | Six months EndedDecember 31, |  
|------------------------------------------------------------------------------------------------ |  | ------------------------------- | --------- | - | ---------------------------- | -
|                                                                                                 |  | 2002                            |           |   | 2001                         |  
|Service revenues                                                                                 |  | $                               | 5,059,366 |   |                              | $
|Cost of service revenues                                                                         |  |                                 | 3,062,309 |   |                              |  
|                                                                                                 |  |                                 |           |   |                              |  
|Gross profit                                                                                     |  |                                 | 1,997,057 |   |                              |  
|Expenses                                                                                         |  |                                 |           |   |                              |  
|Selling and marketing                                                                            |  |                                 | 465,692   |   |                              |  
|General and administrative                                                                       |  |                                 | 1,474,804 |   |                              |  
|                                                                                                 |  |                                 |           |   |                              |  
|Total expenses                                                                                   |  |                                 | 1,940,496 |   |                              |  
|                                                                                                 |  |                                 |           |   |                              |  
|Income (loss) from operations                                                                    |  |                                 | 56,561    |   |                              |  
|Other Income (Expense)                                                                           |  |                                 |           |   |                              |  
|Interest income                                                                                  |  |                                 |          |   |                              |  
|Other income (expense)                                                                           |  |                                 | (4,057    | ) |                              |  
|Interest expense                                                                                 |  |                                 | (434,788  | ) |                              |  
|                                                                                                 |  |                                 |           |   |                              |  
|                                                                                                 |  |                                 | (438,845  | ) |                              |  
|Loss before provision for income taxes                                                           |  |                                 | (382,284  | ) |                              |  
|Provision for income taxes                                                                       |  |                                 |          |   |                              |  
|                                                                                                 |  |                                 |           |   |                              |  
|Loss from continuing operations                                                                  |  |                                 | (382,284  | ) |                              |  
|Income (loss) from operations of discontinued subsidiaries (including a $2,219,300 gain on sale) |  |                                 |          |   |                              |  
|                                                                                                 |  |                                 |           |   |                              |  
|Net income (loss)                                                                                |  |                                 | (382,284  | ) |                              |  
|Preferred stock dividend                                                                         |  |                                 |          |   |                              |  
|                                                                                                 |  |                                 |           |   |                              |  
|Net income (loss)available to common shareholders                                               |  | $                               | (382,284  | ) |                              | $
|                                                                                                 |  |                                 |           |   |                              |  
|Loss per share from continuing operationsbasic                                                  |  | $                               | (0.01     | ) |                              | $
|Income (loss) per share from discontinued operationsbasic                                       |  | $                               |          |   |                              | $
|Net income (loss) per share available to common shareholders  basic                             |  | $                               | (0.01     | ) |                              | $
|Loss per share from continuing operationsdiluted                                                |  | $                               | (0.01     | ) |                              | $
|Income (loss) per share from discontinued operationsdiluted                                     |  | $                               |          |   |                              | $
|Net income (loss) per share available to common shareholders  diluted                           |  | $                               | (0.01     | ) |                              | $



See accompanying notes.



2



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##### Table of Contents

PART I.



FINANCIAL INFORMATION (continued)



MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY



For the Six Months Ended December 31, 2002 (Unaudited)



|                                                                |  | Common Stock  |   |  | AdditionalPaid in Capital |       |   | AccumulatedDeficit |   |            | Foreign ExchangeAdjustment |  |   | Total       |  
|--------------------------------------------------------------- |  | ------------- | - |  | ------------------------- | ----- | - | ------------------ | - | ---------- | -------------------------- |  | - | ----------- | -
|                                                                |  | No. of Shares |   |  | Amount                    |       |   |                    |   |           
|Balance as previously reportedJune 30, 2002                    |  | 44,966,267    |   |  | $                         | 4,497 |   |                    | $ | 20,186,052 |                            |  | $ | (23,204,517 | )
|Prior period adjustmentreverse service credits                 |  |               |   |  |                           |       |   |                    |   | 1,585,470  |                            |  |   | (1,585,470  | )
|Reclassify mandatorily redeemable preferred stock liability     |  |               |   |  |                           |       |   |                    |   | (539,876   | )                          |  |   |             |  
|Preferred stock dividendbeneficial conversion feature          |  |               |   |  |                           |       |   |                    |   | 1,620,580  |                            |  |   | (1,620,580  | )
|                                                                |  |               |   |  |                           |       |   |                    |   |            |                            |  |   |             |  
|Balance as restated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    | )
|Preferred stock redemption   repriced warrant                  |  |               |   |  |                           |       |   |                    |   | 23,176     |                            |  |   | (23,176     | )
|Common stock issued for services                                |  | 614,286       |   |  |                           | 61    |   |                    |   | 284,939    |                            |  |   |             |  
|Options and warrants issued as compensation and for services    |  |               |   |  |                           |       |   |                    |   | 18,730     |                            |  |   |             |  
|Net income                                                      |  |               |   |  |                           |       |   |                    |   |            |                            |  |   | 1,020,386   |  
|Foreign currency translation adjustment                         |  |               |   |  |                           |       |   |                    |   |            |                            |  |   |             |  
|                                                                |  |               |   |  |                           |       |   |                    |   |            |                            |  |   |             |  
|BalanceDecember 31, 2002                                       |  | 55,027,982    |   |  | $                         | 5,503 |   |                    | $ | 29,363,532 |                            |  | $ | (25,710,719 | )
|                                                                |  |               |   |  |                           |       |   |                    |   |            |                            |  |   |             |  



See accompanying notes.



3



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##### Table of Contents

PART I.



FINANCIAL INFORMATION (continued)



MOBILE PET SYSTEMS, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS



For the Six Months Ended December 31, 2002 and 2001 (Unaudited)



|                                                                                    |  | 2002 |            |   | 2001 |  
|----------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -
|Cash flows from operating activities                                                |  |      |            |   |      |  
|Net income (loss)                                                                   |  | $    | 1,020,386  |   |      | $
|Adjustments to reconcile net income (loss) to net cash used in operating activities |  |      |            |   |      |  
|Depreciation and amortization                                                       |  |      | 1,414,619  |   |      |  
|Noncash stock option and warrant charges                                            |  |      | 18,730     |   |      |  
|Common stock issued for compensation                                                |  |      |           |   |      |  
|Common stock issued for services                                                    |  |      | 285,000    |   |      |  
|Gain on sale of discontinued operations                                             |  |      | (2,219,300 | ) |      |  
|(Increase) decrease in operating assets                                             |  |      |            |   |      |  
|Accounts receivable                                                                 |  |      | 131,780    |   |      |  
|Due from London Radiosurgical Centre, Ltd                                           |  |      | 2,194      |   |      |  
|Prepaid expenses                                                                    |  |      | (175,504   | ) |      |  
|Deposits and other assets                                                           |  |      | 135,529    |   |      |  
|Restricted cash                                                                     |  |      | 6,145      |   |      |  
|Cash from discontinued operations                                                   |  |      | (37,574    | ) |      |  
|Increase (decrease) in operating liabilities                                        |  |      |            |   |      |  
|Accounts payable                                                                    |  |      | (2,328,102 | ) |      |  
|Accrued and other liabilities                                                       |  |      | (257,659   | ) |      |  
|                                                                                    |  |      |            |   |      |  
|Net cash used in operating activities                                               |  |      | (2,003,756 | ) |      |  
|                                                                                    |  |      |            |   |      |  
|Cash flows from investing activities                                                |  |      |            |   |      |  
|Capital expenditures                                                                |  |      | (136,908   | ) |      |  
|Loan made                                                                           |  |      | (250,000   | ) |      |  
|Proceeds from sale of discontinued operations                                       |  |      | 1,884,917  |   |      |  
|                                                                                    |  |      |            |   |      |  
|Net cash provided by (used in) investing activities                                 |  |      | 1,498,009  |   |      |  
|                                                                                    |  |      |            |   |      |  
|Cash flows from financing activities                                                |  |      |            |   |      |  
|Repayment of loans                                                                  |  |      | (315,962   | ) |      |  
|Payments on obligations under capital lease                                         |  |      | (2,109,343 | ) |      |  
|Common stock issued                                                                 |  |      | 6,185,406  |   |      |  
|Preferred stock redeemed                                                            |  |      | (3,284,072 | ) |      |  
|                                                                                    |  |      |            |   |      |  
|Net cash provided by financing activities                                           |  |      | 476,029    |   |      |  
|                                                                                    |  |      |            |   |      |  
|Net increase in cash                                                                |  |      | (29,718    | ) |      |  
|Effect of exchange rate on changes in cash                                          |  |      | 312,661    |   |      |  
|Cashbeginning of period                                                            |  |      | 94,143     |   |      |  
|                                                                                    |  |      |            |   |      |  
|Cashend of period                                                                  |  | $    | 377,086    |   |      | $
|                                                                                    |  |      |            |   |      |  
|SUPLEMENTAL DISCLOSURES                                                             |  |      |            |   |      |  
|Interest paid                                                                       |  | $    | 434,459    |   |      | $
|NONCASH INVESTING AND FINANCING ACTIVITIES                                          |  |      |            |   |      |  
|Preferred stock dividend-redemption and repriced warrants                           |  | $    | 320,538    |   |      | $
|Common stock issued under consulting agreement                                      |  | $    | 225,000    |   |      | $



See accompanying notes.



4



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##### Table of Contents

PART I.



FINANCIAL INFORMATION (continued)



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



Note 1The Company



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



Note 2Summary of Significant Accounting Policies



Basis of Presentation



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



Unaudited Financial Statements



The
accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-QSB and Article S-X. Accordingly,
they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the Form 10-KSB for the fiscal year ended
June 30, 2002.



Estimates



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



Revenue Recognition



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



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



Reclassifications



Reclassifications of revenues and expenses from operations of discontinued subsidiaries in addition to certain other reclassifications have been made in the December 31,
2001 financial statements to conform to the December 31, 2002 presentation.



Note 3Discontinued Operations



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



Revenues and expenses from the operations
of discontinued operations for the period July 1, 2002 to July 12, 2002 were $80,059 and $74,715, respectively. Revenues from the operations of discontinued operations for the three and six months ended December 31, 2001 were $276,967 and $558,787
respectively. Expenses from the operations of discontinued operations for the three and six months ended December 31, 2001 were $421,157 and $735,391, respectively.



5



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##### Table of Contents

PART I.



FINANCIAL INFORMATION (continued)



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



Note 4Deposits and Other Assets



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



|                                    |  | December 31,2002 |         | June 30,2002
|----------------------------------- |  | ---------------- | ------- | ------------
|Equipment depositsMobile PET Units |  | $                | 50,000  |             
|Other                               |  |                  | 9,960   |             
|Loan receivable                     |  |                  | 250,000 |             
|Preferred stock redemption deposit  |  |                  |        |             
|                                    |  | $                | 309,960 |             



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



Note 5Capitalization



Preferred Stock



On January 20, 2000, the Company authorized for issuance ten million (10,000,000) shares of preferred stock having one hundredth of a cent
($0.0001) par value per share. On March 3, 2000 the Company designated and issued sixty (60) shares 8% Cumulative Convertible Redeemable Preferred, Series A Stock (Series A) for cash in the amount of $2,700,000, net of acquisition fees.
The sixty (60) shares of Series A Stock provided an intrinsic value of beneficial conversion feature of approximately $1,206,000, which was recognized as a preferred stock dividend and the Series A Stock was recorded at a fair value of $3,906,000.
Under this Securities Purchase Agreement the Company issued 120,000 warrants to purchase shares of common stock at an exercise price of $5 per share, which expire in March 2003. In addition, the buyer of the preferred stock agreed to purchase shares
of common stock in the Company in tranches, subject to certain limitations, for an aggregate purchase price up to $10,000,000, at a price equal to eighty-five percent (85%) of the average closing bid price five (5) consecutive days immediately prior
to the Company providing a tranche notice to the buyer. The Company has received an aggregate $1,075,000, net of offering costs, and issued 2,703,093 shares of common stock under this facility. This facility has not been utilized subsequent to June
30, 2001. On May 30, 2001 the liquidation value was increased $50,000 to $58,937 per share when the Company entered into a Settlement Agreement and Conditional Release of a lawsuit surrounding the Securities Purchase Agreement, increasing the fair
value of the Series A Stock an additional $376,238. The holders converted cumulative preferred dividends in the amount of $66,274 and converted 37 shares of Series A into 3,459,361 shares of common stock at various dates through June 30, 2002.



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



6



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##### Table of Contents

PART I.



FINANCIAL INFORMATION (continued)



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



Note 5Capitalization (Continued)



Preferred Stock (Continued)



acquisition fees. The thirty (30) shares of Series B Stock issued provided an intrinsic value of beneficial conversion feature of approximately $414,580, which was
recognized as a preferred stock dividend and the Series B Stock was recorded at fair value in the amount of $1,799,580.



In addition, under this Securities Purchase Agreement the Company issued 50,000 warrants to purchase shares of common stock at an exercise price of $3 per share and
29,851 warrants to purchase shares of common stock at an exercise price of $2.5125 per share. The warrants expire on September 30, 2005.



On May 30, 2001 the liquidation value was increased from $50,000 to $58,937 per share when the Company entered into a Settlement Agreement and Conditional Release of a
lawsuit surrounding the Securities Purchase Agreement, increasing the fair value of the Series B Stock an additional $376,238.



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



7



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##### Table of Contents

PART I.



FINANCIAL INFORMATION (continued)



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



Note 5Capitalization (Continued)



Stock Options



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



As of December 31, 2002, the Company has granted options to purchase 3,826,500 shares of
common stock, including options granted outside of the 1999 Stock Option Plan to purchase 200,000 shares of common stock, as follows:



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



The Company accounts for stock-based
compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, under which no compensation cost for stock options issued to employees is recognized for
the stock option awards granted at or above fair market value. Compensation expense is recognized for stock option awards granted below fair market value with credits recorded from previously recognized expense for grants cancelled by termination of
employment. The Company recognized compensation expense of $7,610 and $18,730 for the three and six months ended December 31, 2002, respectively, and $15,183 and $26,509 for the three and six months ended December 31, 2001, respectively.



Warrants



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



Note 6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



8



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##### Table of Contents

PART I.



FINANCIAL INFORMATION (continued)



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



Note 6Related Party Transactions (Continued)



Subordinated Equity Participation (Continued)



agreement provided for distributions of cash, if any, including interest at a rate of 15% per annum, up to the amount of the investment plus
accrued interest, after which the Company was to receive its proportionate share of 60% of net distributable income. According to the terms of the participation agreement, net income available for distribution is equal to net income less equipment
financing payments, operating expenses, reserve capital and taxes.



The
Memorandum of Agreement provides for a distribution to the Company of 8.42% of LRCs net distributable cash flow, until a total of $210,573 has been distributed and then the distribution of 5.05% of net distributable cash flow, subject to
future dilution. The Memorandum of Agreement stopped the accrual of interest at June 1, 1999. At the date of the Memorandum of Agreement, the Company canceled $47,447 of accrued interest from the original investment and at December 31, 2002 and 2001
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 December 31, 2002 and June 30, 2002, the loan has a balance of $110,000 and $160,000, respectively.



On January 17, 2001, the Company received an eight percent (8%) bridge loan
from an officer, director and shareholder in the amount of $150,000, with an original due date of March 12, 2001. The note has been extended several times and was due on October 1, 2002. At December 31, 2002 and June 30, 2002, the loan has a balance
of $50,000 and $150,000, respectively.



On October 12, 2001, the Company
converted $253,050 due to an individual and director of the Company into a promissory note without interest and payable in monthly installments of $14,000 per month beginning on October 15, 2001, until paid in full. At December 31, 2002, and June
30, 2002, the individual is no longer a director and the loan has a balance of $43,050 and $127,050, respectively.



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



Note 7Long Term Debt



|                                                                                                                                                                                                  |  | December 31, 2002 |         |   | June 30, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------- | -
|Long-term debt at December 31, 2002 and June 30, 2002 consists of the following:                                                                                                                  |  |                   |         |   |               |  
|Promissory Note with no interest, due in monthly installments of $500, with first payment beginning on February 1,
2002                                                                           |  | $                 | 14,000  |   |               | $
|Promissory Note with interest at a rate of 11% per annum, due in monthly installments of $2,343, with the First payment beginning
on January 1, 2002, with a variable 5% to 1% prepayment penalty |  |                   | 71,562  |   |               |  
|                                                                                                                                                                                                  |  |                   | 85,562  |   |               |  
|Less current portion                                                                                                                                                                              |  |                   | (27,300 | ) |               |  
|Long term debt, net of current portion                                                                                                                                                            |  | $                 | 58,262  |   |               | $



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##### Table of Contents

PART I.



FINANCIAL INFORMATION (continued)



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



Note 7Long Term Debt (Continued)



The maturities of long-term debt for each of the succeeding four years subsequent to December 31, 2002, are as follows:



|December 31, |  |  
|------------ |  | -
|2003         |  |  
|2004         |  |  
|2005         |  |  
|             |  | $



Note 8Commitments



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



|                              |  | December 31, 2002 |   |  | June 30, 2002 |  
|----------------------------- |  | ----------------- | - |  | ------------- | -
|Equipment                     |  | 19,652,153        |   |  | 18,014,272    |  
|Less accumulated amortization |  | (6,149,780        | ) |  | (4,843,966    | )
|Net capital lease assets      |  | 13,502,373        |   |  | 13,170,306    |  



The Company leases office space and
certain PET equipment under non-cancelable operating leases. The office lease expires in April 2005 and the equipment leases expire through October 2007. Rent expense under these operating leases was $527,392 and $1,132,107, respectively for the
three and six months ended December 31, 2002, compared to $309,981 and $740,861, respectively, for the three and six months ended December 31, 2001.



The Company leases certain other PET equipment under capital leases. The equipment leases expire through October 2007. The Companys assets secure the capital
leases. The chief executive officer of the Company has personally guaranteed certain leases. Certain leases contain covenants that restrict the use of cash and require the Company to maintain financial ratios. The Company has been advised of its
failure to maintain a debt service coverage ratio of not less than 1.25 to 1.00, placing three leases in default, although payments on these leases are otherwise current. Obligations under capital leasecurrent include $2,203,179 of lease
obligations currently in default.



The following is a schedule by year of the
future minimum lease payments at December 31, 2002:



|December 31,                                                                      |  | Capital Lease |            |   | Operating Leases
|--------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ----------------
|2003                                                                              |  |               | 5,903,376  |   |                 
|2004                                                                              |  |               | 5,654,247  |   |                 
|2005                                                                              |  |               | 3,255,255  |   |                 
|2006                                                                              |  |               | 474,984    |   |                 
|2007                                                                              |  |               | 435,403    |   |                 
|                                                                                  |  |               | 15,723,265 |   |                 
|Less amount representing interest at 11.49%                                       |  |               | (2,416,992 | ) |                 
|Present value of minimum lease payments (including current portion of $5,522,949) |  | $             | 13,306,273 |   |                 





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##### Table of Contents

PART I.



FINANCIAL INFORMATION (continued)



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



Note 9Retirement Plan



On August 1, 2001, the Company established a defined contribution plan covering substantially all of its employees. Participation is limited to all regular employees who
meet specific age and service requirements. The Company made no contributions during the three months and six months ended December 31, 2002.



Note 10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 11Earnings (Loss) Per Share



Computations of basic and diluted earnings per share for the three and six months ended December 31, 2002 and 2001 were as follows:



|                                                                     |  | Three monthsEndedDecember 31,2002 |            |   | Three monthsEndedDecember 31,2001 |   |            | Six monthsEndedDecember 31,2002 |  | Six monthsEndedDecember 31,2001 |           
|-------------------------------------------------------------------- |  | --------------------------------- | ---------- | - | --------------------------------- | - | ---------- | ------------------------------- |  | ------------------------------- | ----------
|Net income (loss) per share available to common shareholdersbasic   |  |                                   |            |   |                                   |   |            |                                 |  |                                 |           
|Numerator:                                                           |  |                                   |            |   |                                   |   |            |                                 |  |                                 |           
|Net income (loss)available to common shareholders                   |  | $                                 | (382,284   | ) |                                   | $ | (1,817,246 | )                               |  | $                               | 699,848   
|Denominator:                                                         |  |                                   |            |   |                                   |   |            |                                 |  |                                 |           
|Weighted-average shares                                              |  |                                   | 53,281,881 |   |                                   |   | 32,823,114 |                                 |  |                                 | 53,281,881
|Net income (loss) per share available to common shareholdersbasic   |  | $                                 | (0.01      | ) |                                   | $ | (0.06      | )                               |  | $                               | 0.01      
|Net income (loss) per share available to common shareholdersdiluted |  |                                   |            |   |                                   |   |            |                                 |  |                                 |           
|Numerator:                                                           |  |                                   |            |   |                                   |   |            |                                 |  |                                 |           
|Net income (loss)available to common shareholders                   |  | $                                 | (382,284   | ) |                                   | $ | (1,817,246 | )                               |  | $                               | 699,848   
|Denominator:                                                         |  |                                   |            |   |                                   |   |            |                                 |  |                                 |           
|Weighted-average shares                                              |  |                                   | 73,290,615 |   |                                   |   | 32,823,114 |                                 |  |                                 | 73,290,615
|Net income (loss) per share available to common shareholdersdiluted |  | $                                 | (0.01      | ) |                                   |   | (0.06      | )                               |  |                                 | 0.01      



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##### Table of Contents

PART I.



FINANCIAL INFORMATION (continued)



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



Note 12Restatement of Previously Issued Financial Statements



In response to technical comments from the Securities & Exchange Commission (SEC), and in consultation with SEC
staff, Company has restated its previously issued financial statements for the years ended June 30, 2002 and 2001. Unaudited quarterly financial information for the first three quarters of the years ended June 30, 2003 and 2002 is also being
restated in this filing. Set forth below is a comparison of the previously reported and restated consolidated balance sheets at December 31, 2002 and June 30, 2002, and a comparison of the previously reported and restated consolidated balance sheets
and statements of operation for the first three and six months ended December 31, 2002.



|                                       |  | December 31,          |            | June 30,    |  
|-------------------------------------- |  | --------------------- | ---------- | ----------- | -
|                                       |  | 2002                  |            | 2002        |  
|                                       |  | As OriginallyReported |            | As Restated |  
|Assets                                 |  | $                     | 19,530,375 |             | $
|Liabilities                            |  | $                     | 15,872,059 |             | $
|Mandatorily redeemable preferred stock |  | $                     |           |             | $
|Shareholders Equity                   |  | $                     | 3,658,316  |             | $



|                                                           |  | Three months ended December 31, |          
|---------------------------------------------------------- |  | ------------------------------- | ---------
|                                                           |  | 2002                            |          
|                                                           |  | As OriginallyReported           |          
|Revenues                                                   |  | $                               | 5,059,366
|Expenses                                                   |  | $                               | 5,441,650
|Income (loss) from operations                              |  | $                               | (382,284 
|Preferred stock dividend                                   |  | $                               |         
|Net income (loss)available to common shareholders         |  | $                               | (382,284 
|Net income (loss)available to common shareholdersbasic   |  | $                               | (0.01    
|Net income (loss)available to common shareholdersdiluted |  | $                               | (0.01    



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##### Table of Contents

PART I.



FINANCIAL INFORMATION (continued)



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



Note 12Restatement of Previously Issued Financial Statements (Continued)



|                                                           |  | Six months ended December 31, |          
|---------------------------------------------------------- |  | ----------------------------- | ---------
|                                                           |  | 2002                          |          
|                                                           |  | As OriginallyReported         |          
|Revenues                                                   |  | $                             | 9,611,695
|Expenses                                                   |  | $                             | 8,591,309
|Income (loss) from operations                              |  | $                             | 1,020,386
|Preferred stock dividend                                   |  | $                             | 23,176   
|Net income (loss)available to common shareholders         |  | $                             | 997,210  
|Net income (loss)available to common shareholdersbasic   |  | $                             | 0.02     
|Net income (loss)available to common shareholdersdiluted |  | $                             | 0.01     



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



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



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##### Table of Contents

PART I. ITEM 2.



MANAGEMENTS DISCUSSION AND ANALYSIS



Overview



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



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



As of December 31, 2002, we had eighteen mobile units deployed providing our services to approximately 76 healthcare facilities in 22
states. We believe there are and will be significant opportunities to develop and operate additional mobile and stationary PET facilities.



We owned and operated the only private sector stationary PET facility in the United Kingdom (London PET Centre). We sold this facility in July 2002. The results of
operations of the London PET Centre for the three and six month periods ended December 31, 2002 and 2001 have been reclassified as income (loss) from operations of discontinued operations.



Critical Accounting Policies



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



Revenue Recognition



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



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



Results of Operations



Three Months Ended December 31, 2002



Service revenues for the three months ended December 31, 2002 were $5,059,366, compared to service revenues for the three months ended December 31, 2001 of $3,870,809. Our cost of service revenues, for the three months ended December 31,
2002, were $3,062,309, compared to $2,402,270, for the three months ended December 31, 2001. These results exclude the operations of the London PET Centre. The substantial difference in service revenues is largely attributable to eighteen units
being deployed during the three months ended December 31, 2002 as compared to fifteen units being deployed during the three months ended December 31, 2001, as well as better utilization of each existing unit. The cost of service revenues represents
salaries paid to technologists and drivers, system maintenance, transportation and insurance on our mobile PET systems.



The gross profit percentage increased from 37.9% for the three months ended December 30, 2001 to 39.5% for the three months ended December 31, 2002 primarily for the
following reasons:



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##### Table of Contents

PART I. ITEM 2.



MANAGEMENTS DISCUSSION AND ANALYSIS (Continued)



|Gross profit percentage for the three months ended December 30, 2001 |  | 37.9 | %
|-------------------------------------------------------------------- |  | ---- | -
|Transportation services                                              |  | 3.0  |  
|Depreciation expense                                                 |  | 4.9  |  
|Equipment rental                                                     |  | 0.1  |  
|Service contracts and repairs                                        |  | (5.4 | )
|Medical supplies                                                     |  | 0.3  |  
|Other                                                                |  | (1.3 | )
|Gross profit percentage for the three months ended December 31, 2002 |  | 39.5 | %



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 December 31, 2002. While our depreciation expense increased in absolute dollars in the three months ended December 31, 2002,
it decreased as a percentage of service revenues because of the substantial increase in service revenues. Equipment rental increased in terms of absolute dollars, but remained relatively constant as a percentage of service revenues since a greater
portion of our service revenues are generated from units that we are purchasing as opposed to renting. Our cost of service contracts and repairs increased over the three months ended December 31, 2001 since more of our units are no longer covered by
warranty and require maintenance contracts or the use of other repair sources. Our cost of medical supplies increased in absolute dollars but only increased slightly as a percent of service revenues as less of our customers now provide their own
medical supplies.



Equipment rental increased as a percentage of service
revenues since a greater portion of our service revenues as we added another rental unit and the remaining three units were now rented for the full period. Our cost of service contracts and repairs increased in the six months ended December 30, 2002
from the six months ended December 31, 2001 as more units came off warranty and now have monthly service contracts. We would expect that our service contracts and repairs costs will increase as a percentage of service revenues as we add maintenance
contracts to cover all of our units in the third quarter of fiscal year 2003.



Selling and marketing expenses decreased from $504,751 for the three months ended December 31, 2001 to $465,692 for the three months ended December 31, 2002 primarily because of additional advertising rebates. General and administrative
expenses decreased from $2,159,964 for the three months ended December 31, 2001 to $1,474,804 for the three months ended December 31, 2002 primarily because of a decrease in interest, investor relations, legal fees and insurance expense during the
three months ended December 31, 2002.



We had a net loss from continuing
operations for the three months ended December 31, 2002 of $382,284, as compared to a net loss of $1,817,246 for the three months ended December 31, 2001. The quarterly net income was the result of increased service revenues, higher gross profit
margins and decreased general and administrative expenses, as discussed above.



Six Months Ended December 31, 2002



Service revenues for the
six months ended December 31, 2002 were $9,611,695 as compared to service revenues for the six months ended December 31, 2001 of $7,269,714. The substantial difference in service revenues is largely attributable to the deployment of three new units
during the six months ended December 31, 2002, as well as better utilization of each existing unit. Our cost of service revenues for the six months ended December 31, 2002 were $6,121,587 as compared to cost of service revenues for the six months
ended December 31, 2001 of $4,444,823.



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##### Table of Contents

PART I. ITEM 2.



MANAGEMENTS DISCUSSION AND ANALYSIS (Continued)



The gross profit percentage decreased from 38.9% for the six months ended December 31, 2001 to 36.3% for the six months ended December 31, 2002 primarily for the
following reasons:



|Gross profit percentage for the six months ended December 31, 2001 |  | 38.9 | %
|------------------------------------------------------------------ |  | ---- | -
|Transportation services                                            |  | 1.9  |  
|Depreciation expense                                               |  | 5.1  |  
|Equipment rental                                                   |  | (1.9 | )
|Service contracts and repairs                                      |  | (6.4 | )
|Other                                                              |  | (1.3 | )
|Gross profit percentage for the six months ended December 31, 2002 |  | 36.3 | %



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 December 31, 2002. While our depreciation expense decreased marginally in absolute dollars in the three months ended December
31, 2002, it decreased much more as a percentage of service revenues because of the substantial increase in service revenues. Equipment rental increased as we added an additional rented unit and the remaining three rentals were rented for the entire
quarter. Our cost of service contracts and repairs increased over the three months ended December 31, 2001 since more of our units are no longer covered by warranty and require maintenance contracts or the use of other repair sources. Our cost of
medical supplies increased in absolute dollars but only increased slightly as a percent of service revenues as less of our customers now provide their own medical supplies.



Selling and marketing expenses decreased from $1,046,180 for the six months ended December 31, 2001 to $968,033 for the six months ended
December 31, 2002 primarily because of higher sales salaries and commissions. General and administrative expenses decreased from $3,532,337 for the six months ended December 31, 2001 to $2,957,031 for the six months ended December 31, 2002 primarily
because of reduced investor relations, insurance, and legal fees during the six months ended December 31, 2002.



Other income (expenses) for the six months ended December 31, 2002 consists primarily of income resulting from the settlement of claims under a Preferred Provider
Radiopharmaceutical Agreement with P.E.T. Net Pharmaceuticals, Inc.



Expanding Our Business



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



One measure that management uses to evaluate our progress is average revenues per weekday for
all units. We calculate average revenues per weekday for all units by dividing total weekday revenues by the number of weekdays in the relevant period, excluding holidays. We exclude Saturdays from this calculation since not all of our units are
scheduled for Saturday service. For reasons described above, for the three and six months ended December 31, 2002, our average revenues per weekday for all units increased to approximately $80,307 and $76,283, respectively, from average revenues per
weekday for all units of approximately $61,441 and $57,696 for the three and six months ended December 31, 2001, respectively. Our future revenues will principally be a function of the number of operating units in service, the volume of patient
procedures and the fees earned per procedure. We generate substantially all our revenues from our service agreements with hospitals and other health care providers. We have a satisfactory record of account collections, however there can be no
assurance that this trend will continue and, accordingly, we have established an allowance for uncollectable accounts receivable. Lower reimbursement by public and private insurers may also impact the revenues we can generate from our operations.
There can be no assurance that we will be able to maintain or increase the number of patient procedures or that our allowances for doubtful accounts receivable will be sufficient.



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##### Table of Contents

PART I. ITEM 2.



MANAGEMENTS DISCUSSION AND ANALYSIS (Continued)



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



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



Since our inception we have incurred significant losses. Through
December 31, 2002, we have an accumulated deficit of $25,710,719, which we have financed primarily through equity sales. For the three and six months ended December 31, 2002, we had a loss from continuing operations of $382,284 and $1,204,258,
respectively, compared to losses from continuing operations of $1,673,056 and $2,783,889 for the three and six months ended December 31, 2001, respectively. Due to the sale of the London PET Centre, there was net income available to common
shareholders of $699,848 for the six months ended December 31, 2002, compared to a net loss available to common shareholders of $2,960,493 for the six months ended December 31, 2001.



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



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##### Table of Contents

PART I. ITEM 2.



MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



Liquidity and Capital Resources



At December 31, 2002, our total assets were $19,530,375, compared to $20,876,584 at June 30, 2002. The decrease was primarily the result of the sale of assets from the
London PET Centre Ltd. Our current assets at December 31, 2002 totaled $4,614,467, and our current liabilities were $8,030,473, as compared to current assets of $5,037,607 and current liabilities of $12,581,697 at June 30, 2002. Our current
liabilities exceed current assets because, under Generally Accepted Accounting Principles, we are required to record as a current liability our capital lease obligations due within the next twelve months. As discussed in Note 9Commitments,
several of our units are also financed under non-cancelable operating leases that are not recorded as liabilities until the monthly payment is due. Our current assets, on the other hand, include only those accounts receivable that are outstanding
from service revenues recognized and typically represent 30 to 60 days of service revenues. Shareholders equity increased to $3,658,316 at December 31, 2002, from ($3,866,505) at June 30, 2002, due primarily to the gain on the sale of the
London PET Centre of $2,219,300 and private placements of common stock of $6,185,406, net of offering costs less the loss from continuing operations of $1,204,258. We used the net proceeds from these transactions to make payments of accounts payable
and certain other obligations.



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



Seasonality



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



Factors That May Affect
Future Results



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



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



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



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##### Table of Contents

PART I. ITEM 2.



MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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PART I. ITEM 2.



MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



Virtually all of the Companys outstanding stock was issued and sold pursuant to exemptions from registration with the Securities and Exchange Commission and
state securities agencies. These shares and shares held by our affiliates are considered restricted securities and may be resold pursuant to an effective registration statement or in compliance with SEC Rule 144. Rule 144 generally
provides that a person holding restricted securities for one year from the date the securities were purchased from the issuer, or from an affiliate of the issuer, and fully paid, may sell limited quantities of the securities to the public without
registration, provided certain public information with respect to the issuer is available. Pursuant to Rule 144, securities held by non-affiliates for more than two years may generally be sold without reference to the current public information or
broker transaction requirements, or the volume limitations. A significant number of shares are currently available for resale pursuant to Rule 144 and more shares will become so in the future.



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



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



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



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



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



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



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



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



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



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



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



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



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PART I. ITEM 2.



MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



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



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



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



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



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



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



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



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



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



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



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



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



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PART I. ITEM 2.



MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



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



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



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



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



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



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



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



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



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



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PART I. ITEM 2.



MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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PART I. ITEM 2.



MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



We have a limited operating history.



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



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



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



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##### Table of Contents

SIGNATURES



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



|MOBILE PET SYSTEMS,
INC.  a Delaware
corporation
|------------------------------------------------
|                                                
|By:                                             
|                                                



Date: July 10, 2003



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##### Table of Contents

CERTIFICATIONS



1. Chief Executive Officer



I, Paul J. Crowe, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-QSB of Mobile PET Systems, Inc.;
|-- |  | ---------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14
and 15d-14) for the registrant and have:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|By: |  | /s/    PAUL J.
CROWE                 
|--- |  | -------------------------------------
|    |  | Paul J. Crowe Chief Executive Officer



Date: July 10, 2003



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2. Senior Vice President, Finance



I, Anthony R. Turnbull, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-QSB of Mobile PET Systems, Inc.;
|-- |  | ---------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14
and 15d-14) for the registrant and have:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|By: |  | /s/    ANTHONY R.
TURNBULL                         
|--- |  | ---------------------------------------------------
|    |  | Anthony R. Turnbull, Senior Vice President, Finance



Date: July 10, 2003



27