##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-QSB



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(Mark One)



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



For the quarterly period ended December 31, 2003



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



For the transition period from
 to



Commission file number 000-27915



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MOLECULAR IMAGING CORPORATION

A Delaware Corporation

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



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 11-2787966                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



2150 West
Washington Street, Suite 110

San Diego, California 92110

(Address of principal executive offices)



(619) 226-6738

(Issuers telephone number)



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



There were 55,865,801 shares outstanding of the issuers Common Stock as of February 5, 2004.



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



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##### Table of Contents

MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES



For the quarterly period ended December 31, 2003



Table of Contents



|               |  |                       |  |                                                            |  |         
|-------------- |  | --------------------- |  | ---------------------------------------------------------- |  | --------
|               |  |                       |  |                                                            |  | Page No.
|               |  |                      
|PART I.        |  | FINANCIAL INFORMATION |  |                                                           
|               |  |                       | 
|               |  | Item 1.               |  | Financial Statements (unaudited)                           |  |         
|               |  |                       | 
|               |  |                       |  | Consolidated Balance Sheets                                |  | 1       
|               |  |                       | 
|               |  |                       |  | Consolidated Statements of Operations                      |  | 2       
|               |  |                       | 
|               |  |                       |  | Consolidated Statements of Changes in Stockholders Equity |  | 3       
|               |  |                       | 
|               |  |                       |  | Consolidated Statements of Cash Flows                      |  | 4       
|               |  |                       | 
|               |  |                       |  | Notes to Consolidated Financial Statements                 |  | 5       
|               |  |                       | 
|               |  | Item 2.               |  | Managements Discussion and Analysis                       |  | 14      
|               |  |                       | 
|               |  | Item 3.               |  | Controls and Procedures                                    |  | 27      
|               |  |                      
|PART II.       |  | OTHER INFORMATION     |  |                                                           
|               |  |                       | 
|               |  | Item 1.               |  | Legal Proceedings                                          |  | 27      
|               |  |                       | 
|               |  | Item 2.               |  | Changes in Securities                                      |  | 28      
|               |  |                       | 
|               |  | Item 6.               |  | Exhibits and Reports on Form 8-K                           |  | 28      
|               | 
|SIGNATURES     |  | 29                   
|               | 
|CERTIFICATIONS |  |                      





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##### Table of Contents

PART I.

FINANCIAL
INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)



MOLECULAR IMAGING CORPORATION

Formerly MOBILE PET SYSTEMS, INC.

Consolidated Balance Sheets



|                                                                                                                                                                            |  |              |             |   |           |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----------- | - | --------- | - | ----------- | -
|                                                                                                                                                                            |  | December 31, |             |   | June 30,  |  
|                                                                                                                                                                            |  | 2003         |             |   | 2003      |  
|                                                                                                                                                                            |  | (Unaudited)  |             |   | (Audited) |  
|ASSETS                                                                                                                                                                      |  |              |             |   |           |   |             |  
|Current assets                                                                                                                                                              |  |              |             |   |           |   |             |  
|Cash                                                                                                                                                                        |  | $            | 288,025     |   |           | $ | 113,130     |  
|Accounts receivable, net of allowance for doubtful accounts of $300,000 and $100,000 respectively,                                                                          |  |              | 4,944,106   |   |           |   | 3,282,147   |  
|Prepaid expenses                                                                                                                                                            |  |              | 421,935     |   |           |   | 406,980     |  
|Deposits and other assets                                                                                                                                                   |  |              | 125,292     |   |           |   | 3,341       |  
|                                                                                                                                                                            |  |              |             |   |           |   |             |  
|Total current assets                                                                                                                                                        |  |              | 5,779,358   |   |           |   | 3,805,598   |  
|                                                                                                                                                                            |  |             
|Property and equipment, net                                                                                                                                                 |  |              | 20,345,456  |   |           |   | 15,944,388  |  
|                                                                                                                                                                            |  |             
|Other assets                                                                                                                                                                |  |              |             |   |           |   |             |  
|Accrued interest receivable                                                                                                                                                 |  |              | 10,573      |   |           |   | 10,573      |  
|Due from London Radiosurgical Centre, Ltd                                                                                                                                   |  |              | 127,123     |   |           |   | 127,123     |  
|Subordinated equity participation                                                                                                                                           |  |              | 200,000     |   |           |   | 200,000     |  
|Loan receivable                                                                                                                                                             |  |              |            |   |           |   | 500,000     |  
|Prepaid rent and financing costs                                                                                                                                            |  |              | 1,166,524   |   |           |   | 1,201,226   |  
|                                                                                                                                                                            |  |              |             |   |           |   |             |  
|Total assets                                                                                                                                                                |  | $            | 27,629,034  |   |           | $ | 21,788,908  |  
|                                                                                                                                                                            |  |              |             |   |           |   |             |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                        |  |              |             |   |           |   |             |  
|Current liabilities                                                                                                                                                         |  |              |             |   |           |   |             |  
|Accounts payable                                                                                                                                                            |  | $            | 3,466,345   |   |           | $ | 1,494,450   |  
|Asset backed financing facility                                                                                                                                             |  |              | 2,569,514   |   |           |   | 1,554,628   |  
|Current portion of note payable                                                                                                                                             |  |              | 23,976      |   |           |   | 28,481      |  
|Loan payable to related parties                                                                                                                                             |  |              | 82,828      |   |           |   | 122,692     |  
|Accrued and other liabilities                                                                                                                                               |  |              | 488,163     |   |           |   | 420,471     |  
|Obligations under capital lease  current                                                                                                                                   |  |              | 13,161,903  |   |           |   | 4,813,471   |  
|                                                                                                                                                                            |  |              |             |   |           |   |             |  
|Total current liabilities                                                                                                                                                   |  |              | 19,792,729  |   |           |   | 8,434,193   |  
|                                                                                                                                                                            |  |             
|Noncurrent liabilities                                                                                                                                                      |  |              |             |   |           |   |             |  
|Obligations under capital lease, net                                                                                                                                        |  |              | 5,530,586   |   |           |   | 9,561,258   |  
|Note payable, net                                                                                                                                                           |  |              | 29,950      |   |           |   | 43,713      |  
|Deferred gain                                                                                                                                                               |  |              | 93,421      |   |           |   |            |  
|                                                                                                                                                                            |  |              |             |   |           |   |             |  
|Total liabilities                                                                                                                                                           |  |              | 25,446,686  |   |           |   | 18,039,164  |  
|                                                                                                                                                                            |  |             
|Minority interest                                                                                                                                                           |  |              | 173,044     |   |           |   |            |  
|                                                                                                                                                                            |  |             
|Stockholders' equity                                                                                                                                                        |  |              |             |   |           |   |             |  
|Common stock; $0.0001 par value; 90,000,000 shares authorized; 55,806,430 and 55,531,272 shares issued and outstanding at December 31, 2003
and June 30, 2003, respectively |  |              | 5,582       |   |           |   | 5,554       |  
|Additional paid in capital                                                                                                                                                  |  |              | 29,609,885  |   |           |   | 29,511,164  |  
|Accumulated deficit                                                                                                                                                         |  |              | (27,606,163 | ) |           |   | (25,766,974 | )
|                                                                                                                                                                            |  |              |             |   |           |   |             |  
|Total stockholders' equity                                                                                                                                                  |  |              | 2,009,304   |   |           |   | 3,749,744   |  
|                                                                                                                                                                            |  |              |             |   |           |   |             |  
|Total liabilities and stockholders' equity                                                                                                                                  |  | $            | 27,629,034  |   |           | $ | 21,788,908  |  
|                                                                                                                                                                            |  |              |             |   |           |   |             |  



See accompanying notes.



1



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##### Table of Contents

PART I.

FINANCIAL
INFORMATION (continued)



MOLECULAR IMAGING CORPORATION

Formerly MOBILE PET SYSTEMS, INC.

Consolidated Statements of Operations

For the Three and Six Months Ended December 31, 2003 and 2002

(Unaudited)



|                                                                                        |  |                    |            |   |                  |   |           |      |  |   |            |   |  |   |            |  
|--------------------------------------------------------------------------------------- |  | ------------------ | ---------- | - | ---------------- | - | --------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                        |  | Three Months Ended |            |   | Six Months Ended |  
|                                                                                        |  | December 31,       |            |   | December 31,     |  
|                                                                                        |  | 2003               |            |   | 2002             |   |           | 2003 |  |   | 2002       |  
|Service revenues                                                                        |  | $                  | 5,590,815  |   |                  | $ | 5,059,366 |      |  | $ | 11,215,052 |   |  | $ | 9,611,695  |  
|Cost of service revenues                                                                |  |                    | 3,491,151  |   |                  |   | 3,062,309 |      |  |   | 6,963,169  |   |  |   | 6,121,587  |  
|                                                                                        |  |                    |            |   |                  |   |           |      |  |   |            |   |  |   |            |  
|Gross profit                                                                            |  |                    | 2,099,664  |   |                  |   | 1,997,057 |      |  |   | 4,251,883  |   |  |   | 3,490,108  |  
|                                                                                        |  |                    |            |  
|Expenses                                                                                |  |                    |            |   |                  |   |           |      |  |   |            |   |  |   |            |  
|Selling and marketing                                                                   |  |                    | 695,969    |   |                  |   | 465,692   |      |  |   | 1,078,363  |   |  |   | 968,033    |  
|General and administrative                                                              |  |                    | 2,002,238  |   |                  |   | 1,474,804 |      |  |   | 3,502,837  |   |  |   | 2,957,031  |  
|                                                                                        |  |                    |            |   |                  |   |           |      |  |   |            |   |  |   |            |  
|Total expenses                                                                          |  |                    | 2,698,207  |   |                  |   | 1,940,496 |      |  |   | 4,581,200  |   |  |   | 3,925,064  |  
|                                                                                        |  |                    |            |   |                  |   |           |      |  |   |            |   |  |   |            |  
|                                                                                        |  |                    |            |  
|Income (loss) from operations                                                           |  |                    | (598,543   | ) |                  |   | 56,561    |      |  |   | (329,317   | ) |  |   | (434,956   | )
|                                                                                        |  |                    |            |  
|Other income (expense)                                                                  |  |                    |            |   |                  |   |           |      |  |   |            |   |  |   |            |  
|Other income (expense)                                                                  |  |                    | (6,527     | ) |                  |   | (4,057    | )    |  |   | (15,305    | ) |  |   | 102,945    |  
|Interest expense                                                                        |  |                    | (890,142   | ) |                  |   | (434,788  | )    |  |   | (1,571,523 | ) |  |   | (872,247   | )
|                                                                                        |  |                    |            |   |                  |   |           |      |  |   |            |   |  |   |            |  
|Total other income (expense)                                                            |  |                    | (896,669   | ) |                  |   | (438,845  | )    |  |   | (1,586,828 | ) |  |   | (769,302   | )
|                                                                                        |  |                    |            |   |                  |   |           |      |  |   |            |   |  |   |            |  
|                                                                                        |  |                    |            |  
|Loss from continuing operations before provision for income taxes and minority interest |  |                    | (1,495,212 | ) |                  |   | (382,284  | )    |  |   | (1,916,145 | ) |  |   | (1,204,258 | )
|                                                                                        |  |                    |            |  
|Provision for income taxes                                                              |  |                    |           |   |                  |   |          |      |  |   |           |   |  |   |           |  
|                                                                                        |  |                    |            |  
|Minority interest                                                                       |  |                    | (64,072    | ) |                  |   |           |      |  |   | (76,956    | ) |  |   |            |  
|                                                                                        |  |                    |            |   |                  |   |           |      |  |   |            |   |  |   |            |  
|Loss from continuing operations                                                         |  |                    | (1,431,140 | ) |                  |   | (382,284  | )    |  |   | (1,839,189 | ) |  |   | (1,204,258 | )
|Income (loss) from discontinued operations                                              |  |                    |           |   |                  |   |          |      |  |   |           |   |  |   | 2,224,644  |  
|                                                                                        |  |                    |            |   |                  |   |           |      |  |   |            |   |  |   |            |  
|Net Income (loss)                                                                       |  |                    | (1,431,140 | ) |                  |   | (382,284  | )    |  |   | (1,839,189 | ) |  |   | 1,020,386  |  
|                                                                                        |  |                    |            |   |                  |   |           |      |  |   |            |   |  |   |            |  
|Preferred stock dividend                                                                |  |                    |           |   |                  |   |          |      |  |   |           |   |  |   | 320,538    |  
|                                                                                        |  |                    |            |   |                  |   |           |      |  |   |            |   |  |   |            |  
|Net income (loss)  available to common shareholders                                    |  | $                  | (1,431,140 | ) |                  | $ | (382,284  | )    |  | $ | (1,839,189 | ) |  | $ | 698,848    |  
|                                                                                        |  |                    |            |   |                  |   |           |      |  |   |            |   |  |   |            |  
|Loss per share from continuing operations  basic                                       |  | $                  | (0.02      | ) |                  | $ | (0.01     | )    |  | $ | (0.03      | ) |  | $ | (0.02      | )
|                                                                                        |  |                    |            |   |                  |   |           |      |  |   |            |   |  |   |            |  
|Income per share from discontinued operations  basic                                   |  |                    |            |   |                  |   |           |      |  |   |            |   |  | $ | 0.04       |  
|                                                                                        |  |                    |            |   |                  |   |           |      |  |   |            |   |  |   |            |  
|Net income (loss) per share available to common shareholders  basic                    |  | $                  | (0.02      | ) |                  | $ | (0.01     | )    |  | $ | (0.03      | ) |  | $ | 0.01       |  
|                                                                                        |  |                    |            |   |                  |   |           |      |  |   |            |   |  |   |            |  
|Loss per share from continuing operations  diluted                                     |  | $                  | (0.02      | ) |                  | $ | (0.01     | )    |  | $ | (0.03      | ) |  | $ | (0.02      | )
|                                                                                        |  |                    |            |   |                  |   |           |      |  |   |            |   |  |   |            |  
|Income per share from discontinued operations  diluted                                 |  |                    |            |   |                  |   |           |      |  |   |            |   |  | $ | 0.04       |  
|                                                                                        |  |                    |            |   |                  |   |           |      |  |   |            |   |  |   |            |  
|Net income (loss) per share available to common shareholders  diluted                  |  | $                  | (0.02      | ) |                  | $ | (0.01     | )    |  | $ | (0.03      | ) |  | $ | 0.01       |  
|                                                                                        |  |                    |            |   |                  |   |           |      |  |   |            |   |  |   |            |  



See accompanying notes.



2



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##### Table of Contents

PART I.

FINANCIAL
INFORMATION (continued)



MOLECULAR IMAGING CORPORATION

Formerly MOBILE PET SYSTEMS, INC.

Consolidated Statements of Changes in Stockholders' Equity

For the six months ended December 31, 2003
(Unaudited) and the year ended June 30, 2003 (Audited)



|                                                                |  |              |   |  |                          |       |   |                    |   |            |                                      |  |   |                          |   |  |   |          |   |  |   |            |  
|--------------------------------------------------------------- |  | ------------ | - |  | ------------------------ | ----- | - | ------------------ | - | ---------- | ------------------------------------ |  | - | ------------------------ | - |  | - | -------- | - |  | - | ---------- | -
|                                                                |  | Common Stock |   |  | AdditionalPaid InCapital |       |   | AccumulatedDeficit |   |            | ForeignCurrencyTranslationAdjustment |  |   | TotalStockholders'Equity |  
|                                                                |  | Shares       |   |  | Amount                   |       |   |                    |   |           
|Balance  June 30, 2002                                         |  | 44,966,267   |   |  | $                        | 4,497 |   |                    | $ | 22,852,226 |                                      |  | $ | (26,410,567              | ) |  | $ | (312,661 | ) |  | $ | (3,866,505 | )
|Common stock issued in private placement, net of offering costs |  | 9,821,429    |   |  |                          | 982   |   |                    |   | 6,184,424  |                                      |  |   |                          |   |  |   |          |   |  |   | 6,185,406  |  
|Preferred stock redemption  common stock surrendered           |  | (374,000     | ) |  |                          | (37   | ) |                    |   | 37         |                                      |  |   |                          |   |  |   |          |   |  |   |           |  
|Preferred stock redemption  dividend                           |  |              |   |  |                          |       |   |                    |   |            |                                      |  |   | (297,362                 | ) |  |   |          |   |  |   | (297,362   | )
|Repriced warrants                                               |  |              |   |  |                          |       |   |                    |   | 23,176     |                                      |  |   | (23,176                  | ) |  |   |          |   |  |   |           |  
|Common stock issued for services                                |  | 930,076      |   |  |                          | 93    |   |                    |   | 344,907    |                                      |  |   |                          |   |  |   |          |   |  |   | 345,000    |  
|Common stock issued through the exercise of options             |  | 187,500      |   |  |                          | 19    |   |                    |   | (19        | )                                    |  |   |                          |   |  |   |          |   |  |   |           |  
|Options and warrants issued as compensation and for services    |  |              |   |  |                          |       |   |                    |   | 106,413    |                                      |  |   |                          |   |  |   |          |   |  |   | 106,413    |  
|                                                                |  |              |   |  |                          |      
|Net income                                                      |  |              |   |  |                          |       |   |                    |   |            |                                      |  |   | 964,131                  |   |  |   |          |   |  |   | 964,131    |  
|Foreign currency translation adjustment                         |  |              |   |  |                          |       |   |                    |   |            |                                      |  |   |                          |   |  |   | 312,661  |   |  |   | 312,661    |  
|                                                                |  |              |   |  |                          |       |   |                    |   |            |                                      |  |   |                          |   |  |   |          |   |  |   |            |  
|Balance June 30, 2003                                           |  | 55,531,272   |   |  |                          | 5,554 |   |                    |   | 29,511,164 |                                      |  |   | (25,766,974              | ) |  |   |         |   |  |   | 3,749,744  |  
|Common stock issued through the exercise of warrants            |  | 224,999      |   |  |                          | 22    |   |                    |   | 78,727     |                                      |  |   |                          |   |  |   |          |   |  |   | 78,749     |  
|Common stock issued for services                                |  | 50,159       |   |  |                          | 6     |   |                    |   | 19,994     |                                      |  |   |                          |   |  |   |          |   |  |   | 20,000     |  
|Net loss                                                        |  |              |   |  |                          |       |   |                    |   |            |                                      |  |   | (1,839,189               | ) |  |   |          |   |  |   | (1,839,189 | )
|                                                                |  |              |   |  |                          |       |   |                    |   |            |                                      |  |   |                          |   |  |   |          |   |  |   |            |  
|Balance December 31, 2003                                       |  | 55,806,430   |   |  | $                        | 5,582 |   |                    | $ | 29,609,885 |                                      |  | $ | (27,606,163              | ) |  | $ |         |   |  | $ | 2,009,304  |  
|                                                                |  |              |   |  |                          |       |   |                    |   |            |                                      |  |   |                          |   |  |   |          |   |  |   |            |  



See accompanying notes.



3



---

##### Table of Contents

PART I.

FINANCIAL
INFORMATION (continued)



MOLECULAR IMAGING CORPORATION

Formerly MOBILE PET SYSTEMS, INC.

Consolidated Statements of Cash Flows

(Unaudited)



|                                                                                                  |  |                  |            |   |      |   |            |  
|------------------------------------------------------------------------------------------------- |  | ---------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                  |  | Six Months Ended |           
|                                                                                                  |  | December 31,     |           
|                                                                                                  |  | 2003             |            |   | 2002 |  
|Cash flows from operating activities                                                              |  |                  |            |   |      |   |            |  
|Net (loss) income                                                                                 |  | $                | (1,839,189 | ) |      | $ | 1,020,386  |  
|Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities |  |                  |            |   |      |   |            |  
|Depreciation and amortization                                                                     |  |                  | 2,171,219  |   |      |   | 1,414,619  |  
|Noncash stock options and warrants charge                                                         |  |                  |           |   |      |   | 18,730     |  
|Common stock issued for compensation                                                              |  |                  |           |   |      |   |           |  
|Common stock issued for services                                                                  |  |                  | 20,000     |   |      |   | 285,000    |  
|Gain on sale of discontinued subsidiaries                                                         |  |                  |           |   |      |   | (2,219,300 | )
|Gain on sale and lease back                                                                       |  |                  | 100,000    |   |      |   |            |  
|Minority interest in loss of subsidiary                                                           |  |                  | (76,956    | ) |      |   |           |  
|(Increase) decrease in operating assets                                                           |  |                  |            |   |      |   |            |  
|Accounts receivable                                                                               |  |                  | (1,661,959 | ) |      |   | 131,780    |  
|Due from London Radiosurgical Center, LTD                                                         |  |                  |           |   |      |   | 2,194      |  
|Prepaid expenses                                                                                  |  |                  | (14,955    | ) |      |   | (175,504   | )
|Prepaid rent and financing costs                                                                  |  |                  | 34,702     |   |      |   |            |  
|Deposits and other assets                                                                         |  |                  | (121,951   | ) |      |   | 135,529    |  
|Restricted cash                                                                                   |  |                  |           |   |      |   | 6,145      |  
|Cash of discontinued subsidiaries                                                                 |  |                  |           |   |      |   | (37,574    | )
|Increase (decrease) in operating liabilities                                                      |  |                  |            |   |      |   |            |  
|Accounts payable                                                                                  |  |                  | 2,005,550  |   |      |   | (2,328,102 | )
|Accrued and other liabilities                                                                     |  |                  | 67,692     |   |      |   | (257,659   | )
|Deferred revenue                                                                                  |  |                  | (6,579     | ) |      |   |           |  
|                                                                                                  |  |                  |            |   |      |   |            |  
|Net cash provided by (used in) operating activities                                               |  |                  | 677,574    |   |      |   | (2,003,756 | )
|                                                                                                  |  |                 
|Cash flows from investing activities                                                              |  |                  |            |   |      |   |            |  
|Capital expenditures                                                                              |  |                  | (1,249,429 | ) |      |   | (136,908   | )
|Proceeds from sale of capital assets                                                              |  |                  | 1,250,000  |   |      |   |           |  
|Loans made                                                                                        |  |                  |            |   |      |   | (250,000   | )
|Proceeds from sale of discontinued subsidiaries                                                   |  |                  |           |   |      |   | 1,884,917  |  
|                                                                                                  |  |                  |            |   |      |   |            |  
|Net cash provided by (used in) investing activities                                               |  |                  | 571        |   |      |   | 1,498,009  |  
|                                                                                                  |  |                 
|Cash flows from financing activities                                                              |  |                  |            |   |      |   |            |  
|Asset backed financing facility, net                                                              |  |                  | 1,014,886  |   |      |   |           |  
|Repayment of loan                                                                                 |  |                  | (91,737    | ) |      |   | (315,962   | )
|Payments on obligations under capital lease                                                       |  |                  | (1,755,098 | ) |      |   | (2,109,343 | )
|Preferred stock redeemed                                                                          |  |                  |           |   |      |   | (3,284,072 | )
|Common stock issued                                                                               |  |                  | 78,749     |   |      |   | 6,185,406  |  
|Investment in subsidiary                                                                          |  |                  | 250,000    |   |      |   |           |  
|                                                                                                  |  |                  |            |   |      |   |            |  
|Net cash provided by (used in) financing activities                                               |  |                  | (503,200   | ) |      |   | 476,029    |  
|                                                                                                  |  |                 
|Net increase (decrease) in cash                                                                   |  |                  | 174,895    |   |      |   | (29,718    | )
|Effect of exchange rate on changes in cash                                                        |  |                  |           |   |      |   | 312,661    |  
|Cash  beginning of period                                                                        |  |                  | 113,130    |   |      |   | 94,143     |  
|                                                                                                  |  |                  |            |   |      |   |            |  
|Cash  end of period                                                                              |  | $                | 288,075    |   |      | $ | 377,086    |  
|                                                                                                  |  |                  |            |   |      |   |            |  
|                                                                                                  |  |                 
|Supplemental disclosures                                                                          |  |                  |            |   |      |   |            |  
|Interest paid                                                                                     |  | $                | 1,375,421  |   |      | $ | 434,459    |  
|                                                                                                  |  |                  |            |   |      |   |            |  
|Noncash investing and financing activities                                                        |  |                  |            |   |      |   |            |  
|Equipment under capital lease                                                                     |  | $                | 6,195,179  |   |      | $ | 0          |  
|                                                                                                  |  |                  |            |   |      |   |            |  
|Common stock issued under consulting agreement                                                    |  | $                | 20,000     |   |      | $ | 225,000    |  
|                                                                                                  |  |                  |            |   |      |   |            |  
|Preferred stock dividend  warrants re-priced in redemption                                       |  | $                |           |   |      | $ | 325,138    |  
|                                                                                                  |  |                  |            |   |      |   |            |  
|Conversion of note receivable to capital expenditure                                              |  | $                | 500,000    |   |      |   |            |  
|                                                                                                  |  |                  |            |   |      |   |            |  
|Capitalized interest                                                                              |  | $                | 27,679     |   |      |   |            |  
|                                                                                                  |  |                  |            |   |      |   |            |  
|Obligations under capital lease                                                                   |  | $                | 6,195,179  |   |      | $ | 0          |  
|                                                                                                  |  |                  |            |   |      |   |            |  



See accompanying notes.



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##### Table of Contents

PART 1.

FINANCIAL
INFORMATION (continued)



Notes to Consolidated Financial Statements  Molecular Imaging Corporation and Subsidiaries



Note 1The Company



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



Note 2Summary of Significant Accounting Policies



Basis of Presentation



The consolidated financial statements include the accounts of the Company and its 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, 2003.



Estimates



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



Revenue Recognition



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



Service revenues from third party payors are reported at net realizable amounts. Revenue under third party payor agreements is subject to adjustment. Provisions for estimated third party payor settlements are provided in the period the
related services are rendered and are subject to adjustment based on final settlement history. Differences between estimated amounts and accrued and interim and final settlements are reported in operations in the period of settlement. Contractual
allowances are $300,000 at December 31, 2003 and June 30, 2003



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##### Table of Contents

NOTE 3  RECENT ACCOUNTING PRONOUNCEMENTS



In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (FIN 46). FIN 46 requires the consolidation of entities in which an enterprise absorbs a majority of the entitys expected losses, receives
a majority of the entitys expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. FIN 46 also requires disclosure about variable interest entities that a company is not required to
consolidate, but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003 and to special purpose entities in the fiscal year or interim
period ending after December 15, 2003 and for all other variable interest entities beginning in the first financial reporting period ending after March 15, 2004. Certain of the disclosure requirements apply to all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was established. Our adoption of FIN 46 did not have a material effect on our consolidated financial statements.



NOTE 4  ACCOUNTS RECEIVABLE



Accounts receivable consist of the following at December 31, 2003 and June
30, 2003:



|                                      |  |                   |           |   |               |   |           |  
|------------------------------------- |  | ----------------- | --------- | - | ------------- | - | --------- | -
|                                      |  | December 31, 2003 |           |   | June 30, 2003 |  
|Accounts receivable                   |  | $                 | 5,544,106 |   |               | $ | 3,682,147 |  
|Less: Allowance for doubtful accounts |  |                   | (300,000  | ) |               |   | (100,000  | )
|Contractual allowance                 |  |                   | (300,000  | ) |               |   | (300,000  | )
|                                      |  |                   |           |   |               |   |           |  
|Accounts receivable, net              |  | $                 | 4,944,106 |   |               | $ | 3,282,147 |  
|                                      |  |                   |           |   |               |   |           |  



NOTE 5 
PROPERTY AND EQUIPMENT



Property and equipment consist of the following at December 31, 2003 and June 30, 2003:



|                                               |  |                   |             |   |               |   |            |  
|---------------------------------------------- |  | ----------------- | ----------- | - | ------------- | - | ---------- | -
|                                               |  | December 31, 2003 |             |   | June 30, 2003 |  
|Computer equipment                             |  | $                 | 1,265,771   |   |               | $ | 1,014,253  |  
|Office furniture and fixtures                  |  |                   | 164,562     |   |               |   | 164,562    |  
|Office equipment                               |  |                   | 12,752      |   |               |   | 12,752     |  
|Leasehold improvements                         |  |                   | 128,782     |   |               |   | 7,071      |  
|MI and related equipment                       |  |                   | 29,215,702  |   |               |   | 23,023,223 |  
|                                               |  |                   |             |   |               |   |            |  
|                                               |  |                   | 30,787,569  |   |               |   | 24,221,861 |  
|Less accumulated depreciation and amortization |  |                   | (10,442,113 | ) |               |   | (8,277,473 | )
|                                               |  |                   |             |   |               |   |            |  
|                                               |  | $                 | 20,345,456  |   |               | $ | 15,944,388 |  
|                                               |  |                   |             |   |               |   |            |  



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##### Table of Contents

Depreciation and amortization expense was $1,179,818 and $2,171,219, respectively for the three months and six months
ended December 31, 2003, compared $483,129 and 1,414,619, respectively, for the three months and six months ended December 31, 2002.



NOTE 6 ASSET BASED FINANCING



In May 2003, the Company entered into a $3,200,000 asset-based financing arrangement with a financial institution, which expires on May 12,
2006. The amounts borrowed by the Company under this financing arrangement are used to pay its general operating expenses. Amounts available under the arrangement are limited to approximately 80% of qualified accounts receivable. The balance at
December 31, 2003 and June 30, 2003 was $2,569,514 and $1,554,628, respectively. The purchase fee percent is calculated at 0.032% per day.



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



Note 7  Purchase, Sale and Lease Back



On July 23, 2003, the Company entered into an Operating Agreement with two of its directors
for the formation and operation of Molecular Imaging Cyclotron LLC, a Delaware limited liability company (Cyclotron LLC). Under the terms of the Operating Agreement, the Company purchased 66 2/3 % of the equity of Cyclotron LLC through
the assignment of a loan receivable in the amount of $500,000, due from Vital Imaging LLC. The loan receivable carried interest at a rate of 9% per annum and was due on May 12, 2003. On August 15, 2003, Cyclotron LLC completed the purchase of a
cyclotron located in San Diego, California from Vital Imaging, Inc. for cash in the amount of $500,000 and the offset of the loan receivable in the amount of $500,000 for a total of $1,000,000 and the assumption of an equipment lease in the amount
of $2,123,800. The effective interest rate on this equipment lease is 7.79%.



On August 15, 2003, Cyclotron LLC entered into an Asset Purchase and Lease-Back Agreement (the UCSD Agreement) with The Regents of the University of California (the Regents) pursuant to which Cyclotron LLC agreed to
sell and leaseback the cyclotron and certain related assets to the Regents for a purchase price of $750,000 and the Regents assumption of the equipment lease in the amount of $2,123,800. The Company reclassified to property and equipment, a
deferred loss recorded on the consolidated balance sheet at September 30, 2003 in the amount of $250,000 representing certain equipment purchased from Vital Imaging, Inc. on July 23, 2003 which was not sold to the Regents under the UCSD Agreement.
This change had no impact on previously reported results of operations or stockholders equity.



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



On August 15, 2003 Molecular Imaging Sorrento Valley LLC (PET LLC), a Delaware limited liability company and a wholly owned subsidiary of the Company, purchased a PET
scanner from Vital Imaging, Inc. for cash in the amount of $400,000.



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



7



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##### Table of Contents

Note 8Prepaid Rent and Financing Costs



Prepaid rent and financing costs consist of the following at December 31, 2003 and June 30, 2003:



|                                 |  |                  |           |               |   |          
|-------------------------------- |  | ---------------- | --------- | ------------- | - | ---------
|                                 |  | December 31,2003 |           | June 30, 2003
|Prepaid equipment rent           |  | $                | 1,073,986 |               | $ | 1,073,986
|Prepaid financing costs          |  |                  | 92,538    |               |   | 127,240  
|                                 |  |                  |           |               |   |          
|Prepaid rent and financing costs |  | $                | 1,166,524 |               | $ | 1,201,226
|                                 |  |                  |           |               |   |          



Note 9Capitalization



Preferred Stock



On January 20, 2000, the Company authorized for issuance ten million (10,000,000) shares of
preferred stock having one hundredth of a cent ($0.0001) par value per share. There are no preferred shares issued and outstanding at December 31, 2003.



Common Stock



The Company has authorized for issuance ninety million (90,000,000) shares of common stock, having one hundredth of a cent ($0.0001) par value per share. On December 31, 2003 and June 30, 2003 the Company had
55,806,430 and 55,531,272 shares of common stock issued and outstanding, respectively.



During the six months ended December 31, 2003 the Company issued 224,999 shares of common through the exercise of warrants for cash in the amount of $78,749 and issued 50,159 shares of common stock for payment of services.



Stock Options



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



As of December 31, 2003, the Company has
granted options to purchase 3,672,989 shares of common stock, including options granted outside of the 1999 Stock Option Plan to purchase 200,000 shares of common stock, as follows:



|                    |  |                                    |              |                 |                                   |   |                |   |                 |  |            |  
|------------------- |  | ---------------------------------- | ------------ | --------------- | --------------------------------- | - | -------------- | - | --------------- |  | ---------- | -
|                    |  | Six Months Ended December 31, 2003 |              |                 | Twelve Months Ended June 30, 2003 |  
|                    |  | Exercise Price                     |              | Number ofShares |                                   |   | Exercise Price |   | Number ofShares | 
|Beginning of period |  | $                                  | 0.17 - $4.63 |                 | 4,319,157                         |   |                | $ | 0.45 - $4.63    |  | 4,082,719  |  
|Granted             |  | $                                  | 0.34         |                 | 200,000                           |   |                | $ | 0.17 - $0.74    |  | 2,343,490  |  
|Exercised           |  |                                    |             |                 |                                  |   |                | $ | 0.01            |  | (187,500   | )
|Cancelled           |  | $                                  | 0.17 - $4.63 |                 | (846,168                          | ) |                | $ | 0.43 - $3.42    |  | (1,919,542 | )
|                    |  |                                    |              |                 |                                   |   |                |   |                 |  |            |  
|End of period       |  | $                                  | 0.17 - $3.25 |                 | 3,672,989                         |   |                | $ | 0.17 - $4.63    |  | 4,319,157  |  
|                    |  |                                    |              |                 |                                   |   |                |   |                 |  |            |  
|Vested              |  |                                    |              |                 | 2,475,316                         |   |                |   |                 |  | 2,556,329  |  
|                    |  |                                    |              |                 |                                   |   |                |   |                 |  |            |  



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##### Table of Contents

The Company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, under which no compensation cost for stock options issued to employees is recognized for the stock option awards granted at or above fair market value. Compensation expense
is recognized for stock option awards granted below fair market value with credits recorded from previously recognized expense for grants cancelled by termination of employment. However, during the six months ended December 31, 2003 and 2002 the
Company recognized no compensation expense.



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



|                                                               |  |                                 |            |   |                              |   |            |      |  |   |            |   |  |   |           
|-------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ---------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ----------
|                                                               |  | Three Months Ended December 31, |            |   | Six Month Ended December 31,
|                                                               |  | 2003                            |            |   | 2002                         |   |            | 2003 |  |   | 2002      
|Net (loss) income per share - available to common stockholders |  |                                 |            |   |                              |   |            |      |  |   |            |   |  |   |           
|As reported                                                    |  | $                               | (1,431,140 | ) |                              | $ | (382,284   | )    |  | $ | (1,839,189 | ) |  | $ | 699,848   
|Proforma                                                       |  | $                               | (1,493,889 | ) |                              | $ | (451,314   | )    |  | $ | (1,963,565 | ) |  | $ | 534,119   
|Earnings per share - basic                                     |  |                                 |            |   |                              |   |            |      |  |   |            |   |  |   |           
|As reported                                                    |  | $                               | (0.03      | ) |                              | $ | (0.01      | )    |  | $ | (0.03      | ) |  | $ | 0.01      
|Proforma                                                       |  | $                               | (0.03      | ) |                              | $ | (0.01      | )    |  | $ | (0.04      | ) |  | $ | 0.01      
|Earnings per share - diluted                                   |  |                                 |            |   |                              |   |            |      |  |   |            |   |  |   |           
|As reported                                                    |  | $                               | (0.03      | ) |                              | $ | (0.01      | )    |  | $ | (0.03      | ) |  | $ | 0.01      
|Proforma                                                       |  | $                               | (0.03      | ) |                              | $ | (0.01      | )    |  | $ | (0.04      | ) |  | $ | 0.01      
|                                                               |  |                                 |            |  
|Weighted Average No. of Shares Outstanding                     |  |                                 |            |   |                              |   |            |      |  |   |            |   |  |   |           
|Basic                                                          |  |                                 | 55,800,249 |   |                              |   | 53,281,881 |      |  |   | 55,734,309 |   |  |   | 53,281,881
|Diluted                                                        |  |                                 | 55,800,249 |   |                              |   | 53,281,881 |      |  |   | 55,734,309 |   |  |   | 73,290,615



|                        |  |                                 |            |                               |   |       |  |      |            |  |   |      
|----------------------- |  | ------------------------------- | ---------- | ----------------------------- | - | ----- |  | ---- | ---------- |  | - | -----
|                        |  | Three Months Ended December 31, |            | Six Months Ended December 31,
|                        |  | 2003                            |            | 2002                          |   | 2003  |  | 2002
|Risk free interest rate |  |                                 | 1.98%      |                               |   | 3.10% |  |      | 1.98%      |  |   | 3.10%
|Expected life           |  |                                 | 2.56 years |                               |   |       |  |      | 2.56 years |  |   |      
|Expected volatility     |  |                                 | 1.69%      |                               |   | 1.45% |  |      | 1.69%      |  |   | 1.45%
|Expected dividend yield |  | $                               |           |                               | $ |      |  | $    |           |  | $ |     



Warrants



At December 31, 2003 warrants were outstanding to purchase 8,749,328 shares of common stock
at exercise prices between $0.20 to $7.00 per share, including warrants to purchase 340,006 shares of common stock which are subject to vesting through December 1, 2007 and the warrants re-priced in connection with the redemption of preferred stock.
These warrants expire between October 5, 2003 and December 1, 2008.



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##### Table of Contents

Note 10Related Party Transactions



Subordinated Equity Participation



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



The Memorandum of
Agreement provides for a distribution to the Company of 8.42% of LRCs net distributable cash flow, until a total of $210,573 has been distributed and then the distribution of 5.05% of net distributable cash flow, subject to future dilution.
The Memorandum of Agreement stopped the accrual of interest at June 1, 1999. At the date of the Memorandum of Agreement, the Company canceled $47,447 of accrued interest from the original investment and at December 31, 2003 and 2002 accrued interest
on the investment was $10,573. The related shareholder, officer and director personally guarantee the investment.



Loans



On August 23, 2000, the Company received an eight percent (8%) bridge loan from a director and shareholder in the amount of $200,000, with an original due date of October 11, 2000. The loans due date has been
extended several times and the Company has agreed to make monthly payments of $10,000 per month beginning on January 8, 2002, until paid in full. At December 31, 2003, and June 30, 2003, the loan has a balance of $82,828 and $122,692, respectively



Molecular Imaging Cyclotron LLC



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



Note 11Long Term Debt



Long-term debt at December 31, 2003 and June 30, 2003 consist of the following:



|                                                                                                                                                                                                  |  |                  |         |   |              |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                                                                  |  | December 31,2003 |         |   | June 30,2003 |  
|Promissory Note with no interest, due in monthly installments of $500, with first payment beginning on February 1, 2002                                                                           |  | $                | 8,000   |   |              | $ | 11,000  |  
|Promissory Note with interest at a rate of 11% per annum, due in monthly installments of $2,343, with the First payment beginning on January
1, 2002, with a variable 5% to 1% prepayment penalty |  |                  | 45,926  |   |              |   | 61,194  |  
|                                                                                                                                                                                                  |  |                  |         |   |              |   |         |  
|                                                                                                                                                                                                  |  |                  | 53,926  |   |              |   | 72,194  |  
|Less current portion                                                                                                                                                                              |  |                  | (23,976 | ) |              |   | (28,481 | )
|                                                                                                                                                                                                  |  |                  |         |   |              |   |         |  
|Long-term debt, net of current portion                                                                                                                                                            |  | $                | 29,950  |   |              | $ | 43,713  |  
|                                                                                                                                                                                                  |  |                  |         |   |              |   |         |  



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



|             |  |   |       
|------------ |  | - | ------
|December 31, |  |   |       
|2004         |  | $ | 23,976
|2005         |  |   | 27,799
|2006         |  |   | 2,151 
|             |  |   |       
|             |  |   | 53,926
|             |  |   |       



Note 12Commitments



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



|                                  |  |                  |            |   |              |   |            |  
|--------------------------------- |  | ---------------- | ---------- | - | ------------ | - | ---------- | -
|                                  |  | December 31,2003 |            |   | June 30,2003 |  
|MI scanners and related equipment |  | $                | 27,091,902 |   |              | $ | 23,023,223 |  
|Cyclotron equipment               |  |                  | 2,151,479  |   |              |   |           |  
|                                  |  |                  |            |   |              |   |            |  
|Less accumulated amortization     |  |                  | (9,799,475 | ) |              |   | (8,648,494 | )
|                                  |  |                  |            |   |              |   |            |  
|Net capital lease assets          |  | $                | 19,443,906 |   |              | $ | 14,374,729 |  
|                                  |  |                  |            |   |              |   |            |  



The Company leases office space and
certain MI equipment under non-cancelable operating leases. The corporate office lease expires in March 2004, the San Diego operating site and cyclotron facility expires in August 2008 and the equipment leases expire through August 2006. Rent
expense under these operating leases was $488,354 and $955,294, respectively for the three months and six months ended December 31, 2003, compared to $518,921 and $1,119,129 for the three months and six months ended December 31, 2002.



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



On January 13, 2004, the Company received a Default Letter from Siemens Financial Service, Inc. (SFS) and on January 16, 2004, a Final Demand for Payment from
GE Healthcare Financial Services (GE) for nonpayment of certain obligations under capital lease. As a consequence, long-term obligations under capital lease in the amount of $6,857,497 have been classified as current liabilities. The
Company received a waiver of the default from SFS until February 27, 2004 in exchange for an agreement to negotiate a mutually agreeable refinance arrangement. In addition, the Company received a retraction of the final demand for payment from GE on
February 10, 2004.



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##### Table of Contents

NOTE 13  RETIREMENT PLAN



On August 1, 2001, the Company established a defined contribution plan covering
substantially all of its employees. Participation is limited to all regular employees who meet specific age and service requirements. The Company made no contributions during the three months and six months ended December 31, 2003.



NOTE 14  CONCENTRATIONS OF
CREDIT RISK



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



NOTE 15  SEGMENT
INFORMATION



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



In August of 2003, a subsidiary of the Company acquired a cyclotron facility located in San Diego, California. A cyclotron is used to produce radiopharmaceuticals such as
Fluorine-18, Nitrogen-13, Oxygen-15 and Flurodeoxyglucose (FDG), which are some of the radiopharmaceuticals used for MI procedures. FDG is the primary radiopharmaceutical that is injected into a patient before a MI procedure. There were
no sales of radiopharmaceuticals to third parties during the three months and six months ended December 31, 2003.



NOTE 16  GOING CONCERN



The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Companys continued existence is dependent
upon its ability to resolve its liquidity problems, principally by obtaining additional equity capital and by refinancing existing obligations under capital lease. While pursuing additional equity and refinancing existing obligations, the Company
must continue to operate on limited cash flows generated internally. The Company experienced a net loss for the six months ended December 31, 2003 of $1,839,189 (unaudited) compared to a net loss from continuing operations for the six months ended
December 31, 2002 of $1,204,258 (unaudited) and has an accumulated deficit of $27,606,163 (unaudited) that raise substantial doubt about its ability to continue as a going concern.



We have an immediate need to raise additional capital to sustain our operations. In addition, we will be required to raise additional
capital to add or acquire additional mobile units or stationary sites. We are actively exploring various financing alternatives. Management has recently met with and had discussions with numerous financing sources and investment banking companies
that have expressed an interest in investing in, or raising money for, the Company. The Company has received several non-binding term sheets as a result of these discussions, and has executed a non-binding term sheet with a third party investment
bank for the sale of $3 million of preferred stock of the Company. Pursuant to the terms of the financing documents entered into between the Company and Dragon Nominees Limited (Dragon) in July of 2002, Dragon has notified the
Company that it intends to purchase all of the securities described in the term sheet. The Company has provided the required financing documents to Dragon. Dragon has notified the Company that it does not consider itself to be contractually bound to
purchase the securities. The Company believes Dragon is contractually bound to purchase the securities and the Company is evaluating its alternatives under the July 2002 financing documents with Dragon. While we will continue to work towards
completing a financing with Dragon, and pursue other financing alternatives, there can be no assurance as to whether, when, or upon what terms Dragon will close this financing, or as to whether, when, or upon what terms any additional debt or equity
financing will be available to the Company.



During the second quarter the
Company had an increase in operating expenses and in increase in the amount of outstanding accounts receivable. As a result, the Company has less cash to pay its operating expenses. The amount of trade payables increased over the second quarter and
the Company has become overdue on payments to some of its critical suppliers of equipment and radio-pharmeceuticals (FDG). In January of 2004, Siemens Financial Services, Inc. (Siemens) notified the Company that is was
in default under its leasing contracts (the Siemens Leases) with Siemens as a result of overdue payments in the amount of $1,193,452. The Siemens Leases cover nine molecular imaging scanners and related equipment operated by the
Company. Also in January of 2004, GE Healthcare Financial Services, Inc. (GE) provided a final demand for payment to the Company for overdue payments in the amount of $839,691 under the leasing contracts (the GE
Leases) between GE and the Company. The GE Leases cover six molecular imaging scanners and related equipment operated by the Company.



The Company has had separate ongoing discussions with both Siemens and GE to attempt to restructure the payment schedules and permit the Company to meet its obligations.
As a result of these discussions with Siemens and GE, and the Companys execution of a term sheet for a financing, Siemens agreed to lift the default status on the Siemens Leases and GE withdrew its final demand for payment. In lifting the
default status, Siemens has also agreed to negotiate with the Company to reach a mutually agreeable refinancing arrangement by not later than February 27, 2004 that, if consummated, would include some cash payments to Siemens for overdue amounts. GE
has also agreed to have discussions with the Company to enter into negotiations to reach a mutually agreeable refinancing arrangement to allow the Company to meet its obligations. The Company believes it will be able to restructure the Siemens
Leases and GE Leases to resolve the overdue amounts and allow the Company to meet its obligations going forward. However, there can be no assurance that the Company will be able to restructure the Siemens Leases or the GE Leases. Should the Company
be unable to restructure the Siemens Leases or GE Leases, the Company would likely become in default under such leases. In the event of such a default, Siemens and GE would have the right to terminate the Siemens Leases and GE Leases,
respectively; repossess the molecular imaging equipment operated by the Company under the leases; and demand payment for all costs and expenses related to repossessing and reselling the equipment. A default under the Siemens Leases and GE Leases
would also result in a default under the three molecular imaging equipment leases assigned to Ascendant PET Partners-I, LLC (PET Partners) in May of 2003. In the event of such a default, PET Partners would also be entitled to repossess
the equipment and demand payment for costs and expenses. The Company generates substantially all of its revenue from the operation of the molecular imaging equipment under these leases. The repossession of all or a portion of this molecular imaging
equipment would result in the Companys inability to generate further revenues and, therefore, would have a material adverse affect on the Companys operations and its ability to continue as a going concern.



NOTE 17  SUBSEQUENT EVENTS



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In October 2003 the Company entered into a definitive agreement with at third party to purchase an MI scanner and related
assets located in Houston, Texas. The total purchase price of the assets was $200,000 and an equity ownership interest in the subsidiary of the Company that has been established to operated the MI scanner. Under the terms of the definitive
agreement, the Company paid the third party $50,000 of the purchase price, and agreed to pay the remaining $150,000 of the purchase price upon the first to occur of the accomplishment of certain events relating to the purchase or February 7, 2004.
In January 2003 the third party declared bankruptcy and became unable to perform under the definitive agreement. In February 2004, the Company terminated the definitive agreement and demanded repayment of the $50,000 paid towards the purchase price.
The Company wrote off the $50,000 deposit in the quarter ended December 31, 2003 as a result.



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PART I.



|Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS
|------- | ------------------------------------



Overview



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



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



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



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



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



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



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



Critical Accounting Policies



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



Revenue Recognition



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



Recent Accounting Pronouncements



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



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



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compensation using the fair value method of SFAS 123 or the intrinsic value method of APBO 25. The Company has adopted the disclosure requirements of SFAS
148 and will continue to use the intrinsic value method described in ABPO 25 in accounting for the fair value of stock awards issued to employees.



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



Results of Operations



Three Months Ended December 31, 2003



Service revenues for the three months ended December 31, 2003 were $5,590,815, compared to service revenues for the three months ended December 31, 2002 of $5,059,366.
Our cost of service revenues for the three months ended December 31, 2003 were $3,491,151, compared to $3,062,309 for the three months ended December 31, 2002. The difference in service revenues is largely attributable to eighteen mobile units and
two stationary facilities being deployed during the three months ended December 31, 2003, as compared to only eighteen mobile units being deployed during the three months ended December 31, 2002. This difference in service revenues is also
attributable to the addition of our MI/CT system, and better utilization of each existing unit. The cost of service revenues represents salaries paid to technologists and drivers, system maintenance, transportation and insurance on our mobile MI
systems.



The gross profit percentage decreased from 39.5% for the three months
ended December 31, 2002, to 37.6% for the three months ended December 31, 2003, primarily for the following reasons:



|                                                                     |  |      |  
|-------------------------------------------------------------------- |  | ---- | -
|Gross profit percentage for the three months ended December 31, 2002 |  | 39.5 | %
|Personnel costs                                                      |  | 1.5  |  
|Depreciation expense                                                 |  | (4.9 | )
|Capital equipment rental                                             |  | 2.1  |  
|Capital equipment service contracts and repairs                      |  | 3.2  |  
|FDG (glucose injection)                                              |  | (4.2 | )
|Other                                                                |  | .4   |  
|Gross profit percentage for the three months ended December 31, 2003 |  | 37.6 |  



Our personnel costs decreased as we
better managed this resource. Depreciation expense increased in the three months ended December 31 2003, mainly due to the addition of the MI/CT unit, plus the two stationary facilities. Equipment rental costs decreased mainly due to the transfer of
one rental unit to a leased vehicle in January 2003. Our cost of capital equipment service contracts and repairs decreased during the three months ended December 31, 2003 over the three months ended December 31, 2002 due to the termination of
certain maintenance contracts that were replaced with time and materials service. Our FGD (glucose injections) costs increased as we opened more IDTF sites and fixed sites.



Selling and marketing expenses increased by 49.4% from $465,692 for the three months ended December 31, 2002, to $695,969 for the three
months ended December 31, 2003. This increase was due mainly to a reduction in co-op marketing credits made available from equipment manufacturers based on our equipment purchases last year.



General and administrative expenses increased by 39.6% from $1,474,804 for the three months
ended December 31, 2002, to $2,000,238 for the three months ended December 31, 2003. This increase was due mainly to costs associated with the cyclotron facility purchased last quarter that were classified as general and administrative expenses
until the cyclotron is put into full production; an increase associated with the addition of our fixed sites; an increase in the allowance for doubtful accounts; the write off of a deposit made on the Houston facility after the seller declared
bankruptcy and the asset purchase agreement was terminated; and the increased costs of insurance. These increases were partially offset by savings in accounting and administrative salaries.



Our net income from operations decreased from $56,561 for the three months ended December
31,2002, to a loss of $598,543 for the three months ended December 31, 2003. This decrease was mainly due to the increased costs described in the sales marketing, general and administration section above.



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Interest expense increased from $434,788 for the three months ended December 31, 2003, to $890,142 for the three months
ended December 31, 2003. This increase was a result of increased equipment under capital leases and the additional borrowing on our line of credit with Meridian.



Six Months Ended December 31, 2003



Service revenues for the six months ended December 31, 2003 were $11,215,052, compared to service revenues for the six months ended December 31, 2002 of $9,611,695. Our
cost of service revenues for the six months ended December 31, 2003 were $6,963,169, compared to $6,121,587 for the three months ended December 31, 2002. The difference in service revenues is largely attributable to eighteen mobile units and two
stationary facilities being deployed during the three months ended December 31, 2003, as compared to only eighteen mobile units being deployed during the three months ended December 31, 2002. This difference in service revenues is also attributable
to the addition of our MI/CT system, and better utilization of each existing unit. The cost of service revenues represents salaries paid to technologists and drivers, system maintenance, transportation and insurance on our mobile MI systems.



The gross profit percentage increased from 36.3% for the six months ended
December 31, 2002 to 37.9% for the six months ended December 31, 2003 primarily for the following reasons:



|                                                                     |  |      |  
|-------------------------------------------------------------------- |  | ---- | -
|Gross profit percentage for the three months ended December 31, 2002 |  | 36.3 | %
|Personnel costs                                                      |  | 1.1  |  
|Depreciation expense                                                 |  | (4.1 | )
|Capital equipment rental                                             |  | 3.5  |  
|Capital equipment service contracts and repairs                      |  | 3.1  |  
|FDG (glucose injections)                                             |  | (2.7 | )
|Other                                                                |  | .7   |  
|Gross profit percentage for the three months ended December 31, 2003 |  | 37.9 | %



Our personnel costs decreased as we
better managed this resource. Depreciation expense increased in the six months ended December 31, 2003, mainly due to the addition of the MI/CT unit, plus the two stationary facilities. Equipment rental costs decreased mainly due to the transfer of
one rental unit to a leased vehicle in January 2003. Our cost of capital equipment service contracts and repairs decreased during the six months ended December 31, 2003 over the six months ended December 31, 2002 due to the termination of certain
maintenance contracts that were replaced with time and materials service. Our FGD (glucose injections) costs increased as we opened more IDTF sites and fixed sites.



Selling and marketing expenses increased by 11.4% from $968,033 for the six months ended December 31, 2002, to $1,078,363 for the six months
ended December 31, 2003. This increase was due mainly to a reduction in co-op marketing credits made available from equipment manufacturers based on our equipment purchases last year and an increase travel costs.



General and administrative expenses increased by 18.3% from $2,957,031 for the six months
ended December 31, 2002, to $3,502,837 for the six months ended December 31, 2003. This increase was due mainly to costs associated with the cyclotron facility purchased last quarter that were classified as general and administrative expenses until
the cyclotron is put into full production; an increase associated with the addition of our fixed sites; an increase in the allowance for doubtful accounts; the write off of a deposit made on the Houston facility after the seller declared bankruptcy
and the asset purchase agreement was terminated; and the increased costs of insurance. These increases were partially offset by savings in accounting and administrative salaries.



Our net loss from operations decreased from $434,956 for the six months ended December 31, 2002 to a loss of $329,317 for the six months
ended December 31, 2003. This decrease was due mainly to the



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increased revenue and improvement in the gross margin percentage. Sales marketing, general and administration expense
remained constant as a percentage of sales despite spending increases described above.



Interest expense increased from $872,247 for the six months ended December 31, 2003 to $1,571,523 for the six months ended December 31, 2003 as a result of increased equipment under capital leases and the additional borrowing on our line of
credit with Meridian.



Net cash provided by (used in) operating activities for
the six months ended December 31, 2003 increased to a positive $671,001 from a negative ($2,003,756) for the six months ended December 31, 2003, 2002. This change was mainly attributable to the increase in accounts payable and borrowing under our
receivables borrowing facility offset by an increase in accounts receivable.



Expanding Our Business



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



One measure that management uses to evaluate our progress is average revenues per weekday for all units. We calculate average revenues per weekday for all units by
dividing total weekday revenues by the number of weekdays in the relevant period, excluding holidays. We exclude Saturdays from this calculation since not all of our units are scheduled for Saturday service, and we exclude Sundays from this
calculation since none of our units are scheduled for Sunday service. For reasons described above, for the six months ended December 31, 2003, our average revenues per weekday for all units increased by 15% to approximately $87,618, from average
revenues per weekday for all units of approximately $76,283 for the six months ended December 31, 2002. Our future revenues will principally be a function of the number of operating units in service, the volume of patient procedures and the fees
earned per procedure.



We generate substantially all our revenues from our
service agreements with hospitals and other health care providers. We have historically had a satisfactory record of account collections. However, there can be no assurance that this trend will continue, and our outstanding accounts receivable
increased over the second quarter. Accordingly, we have increased our allowance for un-collectable accounts receivable. Lower reimbursement by public and private insurers may also impact the revenues we can generate from our operations. There can be
no assurance that we will be able to maintain or increase the number of patient procedures or that our allowances for doubtful accounts receivable will be sufficient.



Since our inception we have incurred significant losses. Through December 31, 2003, we have an accumulated deficit of ($27,606,163), which
we have financed primarily through equity sales. For the six months ended December 31, 2003, we recognized a loss from continuing operations of ($1,839,189), compared to losses from continuing operations of ($1,204,258) for the six months ended
December 31, 2002. The loss from continuing operations of ($1,839,189) for the six months ended December 31, 2003 includes the following increased costs which were not incurred by the Company during the six months ended December 31, 2002; the amount
of $216,398 of increased interest expense relating to our borrowing facility, $274,945 of increased expenses relating to the additional capital equipment lease for our new MI/CT unit added in July of 2003, and $251,310 of costs associated with the
cyclotron system, which will allow us to produce FDG in the future



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



Liquidity and Capital Resources



At December 31, 2003, our total assets were $27,629,034, compared to $21,788,908 at June 30,
2003. The increase was primarily the result of adding one mobile unit, transferring one mobile unit to a stationary facility and adding another stationary facility and the cyclotron, offset by the sale of assets from the London PET Centre Ltd in
July 2002. Our current assets at December 31, 2003 totaled $5,779,358, and our current liabilities were $12,957,182, compared to current assets of $3,805,598 and current liabilities of $8,434,193 at June 30, 2003. Our current liabilities exceed
current assets because, under Generally Accepted Accounting Principles, we are required to record as a current liability our capital lease obligations due within the next twelve months. As discussed in Note 12Commitments, several of our units
are also financed under non-cancelable operating leases that are not recorded as liabilities until the monthly payment is due. Our current assets, on the other hand, include only those accounts receivable that are outstanding from service revenues
recognized and typically represent 30 to 60 days of service revenues.



Shareholders equity decreased to $2,009,304 at December 31, 2003, from $3,749,744 at June 30, 2003, due primarily to the net loss of ($1,839,189).



We have an immediate need to raise additional capital to sustain our operations. In addition, we will be required to raise additional
capital to add or acquire additional mobile units or stationary sites. We are actively exploring various financing alternatives. Management has recently met with and had discussions with numerous financing sources and investment banking companies
that have expressed an interest in investing in, or raising money for, the Company. The Company has received several non-binding term sheets as a result of these discussions, and has executed a non-binding term sheet with a third party investment
bank for the sale of $3 million of preferred stock of the Company. Pursuant to the terms of the financing documents entered into between the Company and Dragon Nominees Limited (Dragon) in July of 2002, Dragon has notified the
Company that it intends to purchase all of the securities described in the term sheet. The Company has provided the required financing documents to Dragon. Dragon has notified the Company that it does not consider itself to be contractually bound to
purchase the securities. The Company believes Dragon is contractually bound to purchase the securities and the Company is evaluating its alternatives under the July 2002 financing documents with Dragon. While we will continue to work towards
completing a financing with Dragon, and pursue other financing alternatives, there can be no assurance as to whether, when, or upon what terms Dragon will close this financing, or as to whether, when, or upon what terms any additional debt or equity
financing will be available to the Company.



During the second quarter the
Company had an increase in operating expenses and in increase in the amount of outstanding accounts receivable. As a result, the Company has less cash to pay its operating expenses. The amount of trade payables increased over the second quarter and
the Company has become overdue on payments to some of its critical suppliers of equipment and radio-pharmeceuticals (FDG). In January of 2004, Siemens Financial Services, Inc. (Siemens) notified the Company that is was
in default under its leasing contracts (the Siemens Leases) with Siemens as a result of overdue payments in the amount of $1,193,452. The Siemens Leases cover nine molecular imaging scanners and related equipment operated by the
Company. Also in January of 2004, GE Healthcare Financial Services, Inc. (GE) provided a final demand for payment to the Company for overdue payments in the amount of $839,691 under the leasing contracts (the GE
Leases) between GE and the Company. The GE Leases cover six molecular imaging scanners and related equipment operated by the Company.





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The Company has had separate ongoing discussions with both Siemens and GE to attempt to restructure the payment schedules
and permit the Company to meet its obligations. As a result of these discussions with Siemens and GE, and the Companys execution of a term sheet for a financing, Siemens agreed to lift the default status on the Siemens Leases and GE withdrew
its final demand for payment. In lifting the default status, Siemens has also agreed to negotiate with the Company to reach a mutually agreeable refinancing arrangement by not later than February 27, 2004 that, if consummated, would include some
cash payments to Siemens for overdue amounts. GE has also agreed to have discussions with the Company to enter into negotiations to reach a mutually agreeable refinancing arrangement to allow the Company to meet its obligations. The Company believes
it will be able to restructure the Siemens Leases and GE Leases to resolve the overdue amounts and allow the Company to meet its obligations going forward. However, there can be no assurance that the Company will be able to restructure the Siemens
Leases or the GE Leases. Should the Company be unable to restructure the Siemens Leases or GE Leases, the Company would likely become in default under such leases. In the event of such a default, Siemens and GE would have the right to
terminate the Siemens Leases and GE Leases, respectively; repossess the molecular imaging equipment operated by the Company under the leases; and demand payment for all costs and expenses related to repossessing and reselling the equipment. A
default under the Siemens Leases and GE Leases would also result in a default under the three molecular imaging equipment leases assigned to Ascendant PET Partners-I, LLC (PET Partners) in May of 2003. In the event of such a default, PET
Partners would also be entitled to repossess the equipment and demand payment for costs and expenses. The Company generates substantially all of its revenue from the operation of the molecular imaging equipment under these Leases. The repossession
of all or a portion of this molecular imaging equipment would result in the Companys inability to generate further revenues and, therefore, would have a material adverse affect on the Companys operations and its ability to continue as a
going concern.



Risks Related to Our Business



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



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



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



We have a relatively limited operating history.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Our capital requirements associated with our operations have been and will continue to be substantial. We may require additional financing to execute our business plan. No assurance can be given that we will be able to obtain additional
financing when needed, or that, if available, such financing will be on terms acceptable to us. In any such financing, the interests of our existing security holders could be substantially diluted. If adequate funds were either not available or not
available on acceptable terms, our business, revenues, financial condition and results of operations would suffer. If we raise additional funds through the issuance of equity or convertible securities, the percentage ownership of our stockholders
will be reduced. Moreover, these securities may have powers, preferences and rights that are senior to those of the rights of our common stock. Also, our ability to raise additional funds through the issuance of equity or convertible securities is
restricted by our number of authorized shares and certain covenants contained in the June 2002 private placement agreements.



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



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



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



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



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 would adversely affect our business.



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



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



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



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



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



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



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



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



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



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



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



The success of our IDTF model will also depend on our ability to select quality partners who can assist in the development and operation of those imaging centers and our
ability to execute and implement agreements with such third parties that will protect our rights with respect to the management and operation of these imaging centers. While we will use our experience to select quality business partners, there can
be no assurance that such partners will act in our best interest, or that our agreements with such partners will adequately protect our rights in the event of a dispute with such partners. The federal and state laws and regulations described above
also impact our ability to partner with third parties for the development and operation of IDTF imaging centers, and any changes in such laws, or changes in the interpretations of such



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laws, could restrict our ability to enter into such partnerships. Also, the failure by such partners to comply with the applicable state and federal laws and
regulations described above could result in penalties, damages, fines or a curtailment in our operations which could adversely affect our ability to operate our business.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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payers for use of the MI system will be available or, if available, that reimbursement will not be limited. If third-party reimbursement of these procedures
is not available, it will be more difficult for us to offer our services on a profitable basis.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



|ITEM 3. | CONTROLS AND PROCEDURES
|------- | -----------------------



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



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



PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------



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



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period from January 30, 2003 to July 30, 2003, the period for which CTI is demanding payment. The Company has filed an answer and counterclaim to CTIs
complaint. The Company intends to defend the case vigorously.



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



|ITEM 2. | CHANGES IN SECURITIES
|------- | ---------------------



Changes in Securities.



On July 28, 2003, the Company entered into a Business Advisory and Financial Consulting Services Agreement (the Agreement) with Ascendiant Capital Group, LLC (Ascendiant) pursuant to which
Ascendiant agreed to provide certain financial advisory and consulting services to the Company. The services provided by Ascendiant under the Agreement were concluded in December of 2003 and the Agreement was terminated. Pursuant to the terms of the
Agreement, the Company agreed to compensate Ascendiant for each month of service provided by Ascendiant in shares of the Companys common stock (the Engagement Shares). The number of Engagement Shares issued to Ascendiant for each
month of service was determined by dividing $10,000.00 by the average closing price of our common stock over the period of such month; provided, however, in no event was the number of Engagement Shares to exceed 35,000 shares per month. In January
2004 the Company issued a total of 59,371 shares of its common stock to Ascendiant under the terms of the Agreement for the months of October, November and December of 2003. The Company has no further obligations to Ascendiant under the Agreement.
The Engagement Shares were issued in reliance upon Section 4(2) of the Securities Act of 1933, as amended (the Act).



|ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K
|------- | --------------------------------



(a) Exhibits



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



Exhibit 31.2Certification of Dennis M. Mulroy, Chief Financial Officer



Exhibit 32Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



Exhibit 10.59Notice from Dragon Nominees Limited Regarding Its Election To Purchase Securities



(b) Reports on Form 8-K



Form 8-K was filed with the SEC on October 6, 2003 regarding a press release dated October 2, 2003 announcing the unaudited revenues of the
Company for the first quarter ended September 30, 2003.



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SIGNATURES



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



MOLECULAR IMAGING CORPORATION a Delaware corporationBy:

/s/ DENNIS M. MULROYDennis M. Mulroy, Chief Financial Officer




Date: February 17, 2004



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