##### Table of Contents

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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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AMENDMENT NO. 1 TO


FORM 10-QSB





(Mark One)


|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
|- |  | ---------------------------------------------------

| |  | THE SECURITIES EXCHANGE ACT OF 1934
| |  | -----------------------------------




For the quarterly period ended December 31, 2001





| ̈ |  | 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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MOBILE PET SYSTEMS, INC.,


A Delaware Corporation


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





DELAWARE (State or other
jurisdiction of incorporation or organization)

11-2787966 (IRS
Employer Identification No.)





2150 West Washington Street, Suite 110


San Diego, California 92110


(Address of principal executive offices)





(619) 226-6738


(Issuers telephone number)





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





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





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##### Table of Contents

EXPLANATORY NOTE





This Amendment No. 1 to Form 10-QSB for the three month period ended December 31, 2001 is being filed to restate the financial statements as of December 31, 2001 and the three and six month periods
then ended. This restatement (i) corrects the reported value of certain stock based compensation, (ii) records a noncash credit for options forfeited, and (iii) re-classifies certain expenses between selling and marketing expense, and general and
administrative expense. The Company is amending this filing to allow for period-by-period comparisons using consistently applied accounting classifications.







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##### Table of Contents




MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





For the quarterly period ended December 31, 2001





Table of Contents





Page No.PART I.    FINANCIAL INFORMATION

1Item 1.    Financial Statements (unaudited)

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

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

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

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

4Notes to Financial Statements

5Item 2.    Managements Discussion and Analysis

17PART II.    OTHER INFORMATION

28Item 1.    Legal Proceedings

28Item 2.    Changes in Securities

28Item 6.    Exhibits and Reports on Form 8-K

29Signatures

30




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##### Table of Contents




PART 1.   FINANCIAL INFORMATION





MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES (UNAUDITED)





CONSOLIDATED BALANCE SHEETS


December 31, 2001 and 2000





2001


2000ASSETSCurrent assets:Cash

$
66,913


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


2,465,271



808,127Prepaid expenses and other receivables


973,008



60,417Deposits and other assets


503,411



819,608Total current assets


4,008,603



1,690,851Property and equipment, net


16,364,018



18,548,867Other assets:Accrued interest receivable


10,573



10,573Related party receivables


128,037



315,701Subordinated equity participation


200,000



200,000Restricted cash


349,560



337,723Total assets

$
21,060,791


$
21,103,715LIABILITIES AND SHAREHOLDERS EQUITY(DEFICIT)Current liabilities:Accounts payable

$
2,681,663


$
1,910,975Loans payable


621,050



300,000Current portion of long-term debt


19,091



18,101Accrued and other liabilities


857,133



255,886Obligations under capital leasecurrent


5,649,258



3,352,729Total current liabilities


9,828,195



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


71,561



90,652Obligations under capital lease


10,709,837



15,286,726Total liabilities


20,609,593



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


1,915,437



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


1,768,110



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


3,824



1,574Additional paid in capital


17,805,776



10,139,245Accumulated deficit


(20,710,667
)


(13,938,446
)Foreign currency translation adjustment


(331,282
)


61,273Total shareholders equity (deficit)


451,198



(111,354
)Total liabilities and shareholders equity (deficit)

$
21,060,791


$
21,103,715





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




1




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##### Table of Contents




PART 1.    FINANCIAL INFORMATION (continued)





MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES (UNAUDITED)





CONSOLIDATED STATEMENTS OF OPERATIONS


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





Three Months Ended December 31,


Six Months Ended December
31,2001


2000


2001


2000Service revenues

$
4,147,776


$
1,118,687


$
7,828,501


$
1,959,668Cost of service revenues


2,521,033



1,156,349



4,619,541



1,745,256Gross profit (loss)


1,626,743



(37,662
)


3,208,960



214,412ExpensesSelling and marketing


229,545



828,107



770,918



1,762,620General and administrative


2,162,829



1,650,305



3,665,419



2,982,183Total expenses


2,392,374



2,478,412



4,436,337



4,744,803Loss from operations


(765,631
)


(2,516,074
)


(1,227,377
)


(4,530,391
)Other income (expense)Interest income


2,525



11,712



5,126



24,989Other income (expense)


(11,614
)


888



(12,198
)


(6,364
)Interest expense


(511,833
)


(689,900
)


(1,106,821
)


(944,635
)Total other income (expense)


(520,922
)


(677,300
)


(1,113,893
)


(926,010
)Loss before provision for income taxes


(1,286,553
)


(3,193,374
)


(2,341,270
)


(5,456,401
)Provision for income taxes










1,600



Net loss


(1,286,553
)


(3,193,374
)


(2,342,870
)


(5,456,401
)Preferred stock dividend


76,033



375,094



152,687



651,481Net lossavailable to common shareholders

$
(1,362,586
)

$
(3,568,468
)

$
(2,495,557
)

$
(6,107,882
)Net lossavailable to common shareholdersbasic

$
(0.04
)

$
(0.25
)

$
(0.08
)

$
(0.43
)Net lossavailable to common shareholdersdiluted

$
(0.04
)

$
(0.25
)

$
(0.08
)

$
(0.43
)











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




2




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##### Table of Contents

PART 1.    FINANCIAL INFORMATION (continued)





MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES (UNAUDITED)





CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY


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





Preferred Stock


Common Stock

Additional Paid In Capital


Accumulated Deficit


Foreign Currency Translation Adjustment


Total Shareholders EquityShares


Amount


Shares

AmountBalanceJune 30, 2000

60


$
3,000,000


14,944,658

$
1,495

$
8,580,888


$
(8,415,771
)

$
(42,938
)

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

20



1,000,000








(115,000
)










885,000Stock subscribed, net of offering costs














547,500











547,500Noncash charge for stock options issued














92,331











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


















(2,263,027
)






(2,263,027
)Foreign currency translation adjustment






















73,143



73,143BalanceSeptember 30, 2000

80



4,000,000


14,944,658


1,495


9,105,719



(10,678,798
)


30,205



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

10



500,000








(500,000
)










Common stock issued through conversion of preferred stock

(18
)


(875,000
)

692,158


68


874,932











Common stock issued through conversion of preferred stock dividend








75,356


8


66,266



(66,274
)






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








25,000


3


(3
)










Noncash charge for stock options issued














92,331











92,331Common stock subscribed, net of offering costs














500,000











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


















(3,193,374
)






(3,193,374
)Foreign currency translation adjustment






















31,068



31,068BalanceDecember 31, 2000

72



3,625,000


15,737,172


1,574


10,139,245



(13,938,446
)


61,273



(111,354
)Recapitalization of preferred stock





621,456








(347,500
)


(273,956
)






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








3,738,162


375


1,320,775











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

(8
)


(445,035
)

996,421


99


444,936











Common stock issued through conversion of debt








1,875,000


188


749,812











750,000Common stock issued through settlement agreement








2,733,981


273


749,727











750,000Common stock subscribed, net of offering costs














1,000,000











1,000,000Common stock issued for services








403,350


40


201,635











201,675Noncash charge for stock options issued














229,253











229,253Convertible debt intrinsic beneficial conversion feature














7,800











7,800Net lossJanuary 1, 2001 to June 30, 2001


















(4,155,395
)






(4,155,395
)Foreign currency translation adjustment






















(381,630
)


(381,630
)BalanceJune 30, 2001

64



3,801,421


25,484,086


2,549


14,495,683



(18,367,797
)


(320,357
)


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








2,600,000


260


(260
)










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








4,014,285


401


1,404,599











1,405,000Common stock issued as finders fee








100,000


10


(10
)










Common stock issued for compensation








100,000


10


42,990











43,000Common stock issued for services








325,967


33


125,218











125,251Noncash credit for stock options issued














(75,604
)










(75,604
)Noncash charge for stock warrants issued














19,667











19,667Net lossJuly 1, 2001 to September 30, 2001


















(1,056,317
)






(1,056,317
)Foreign currency translation adjustment






















(12,652
)


(12,652
)BalanceSeptember 30, 2001

64



3,801,421


32,624,338


3,263


16,012,283



(19,424,114
)


(333,009
)


59,844Common stock issued in private placement, net of offering costs








2,728,571


273


1,119,727











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

(2
)


(117,874
)

221,328


22


117,852











Common stock issued as finders fee








61,714


6


(6
)










Common stock issued for services








2,600,000


260


874,740











875,000Noncash credit for stock options issued














(515,510
)










(515,510
)Noncash charge for stock warrants issued














196,690











196,690Net lossOctober 1, 2001 to December 31, 2001


















(1,286,553
)






(1,286,553
)Foreign currency translation adjustment






















1,727



1,727BalanceDecember 31, 2001

62


$
3,683,547


38,235,951

$
3,824

$
17,805,776


$
(20,710,667
)

$
(331,282
)

$
451,198


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




3




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##### Table of Contents

PART 1.     FINANCIAL INFORMATION (continued)





MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES (UNAUDITED)





CONSOLIDATED STATEMENTS OF CASH FLOWS


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





Three Months Ended December 31,


Six Months Ended December 31,2001


2000


2001


2000Cash flows from operating activitiesNet loss

$
(1,286,553
)

$
(3,193,374
)

$
(2,342,870
)

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


740,086



562,424



1,514,353



841,522Interest






47,508







47,508Noncash stock option and warrant (credit) charge


(318,820
)


92,331



(374,757
)


184,662Common stock issued for compensation










43,000



Common stock issued for services


875,000







1,000,251



(Increase) decrease in operating assets:Accounts receivable


(124,004
)


(240,592
)


(408,519
)


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


43,100



106,082



110,529



119,399Prepaid expenses and other receivables


(131,849
)


103,291



(130,529
)


474,384Deposits and other assets


(18,900
)


525,070



(21,450
)


497,356Restricted cash


(2,016
)


(4,147
)


(4,690
)


(8,243
)Increase (decrease) in operating liabilities:Accounts payable


116,707



1,163,944



178,154



1,606,913Accrued and other liabilities


110,739



(243,042
)


(112,663
)


(236,565
)Net cash provided by (used in) operating activities


3,490



(1,080,505
)


(549,191
)


(2,264,859
)Cash flows from investing activitiesCapital expenditures


(108,480
)


(62,390
)


(132,610
)


(162,966
)Net cash used in investing activities


(108,480
)


(62,390
)


(132,610
)


(162,966
)Cash flows from financing activitiesCash Overdraft






24,934







24,934Proceeds from loan






208,753







408,753Repayment of loan


(93,461
)






(97,774
)


Payments on obligations under capital lease


(918,012
)


(344,689
)


(1,693,898
)


(560,907
)Preferred stock issued






500,000







1,385,000Common Stock Issued


1,120,000



547,500



2,525,000



547,500Net cash provided by financing activities


108,527



936,498



733,328



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


44,358



31,068



(47,694
)


104,211Net increase (decrease) in cash


47,895



(175,329
)


3,833



(518,334
)Cashbeginning of period


19,018



178,028



63,080



521,033Cashend of period

$
66,913


$
2,699


$
66,913


$
2,699Supplemental DisclosuresInterest paid

$
505,784


$
190,709


$
1,108,735


$
104,640Income taxes paid

$
11,758


$



$
14,014


$
1,600Non Cash Investing ActivitiesEquipment under capital lease

$



$
11,737,082


$



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

$



$
138,193


$



$
Cumulative preferred dividend

$



$
236,901


$



$
Obligations under capital lease

$



$
11,737,082


$



$
1,433,863





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




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##### Table of Contents




PART 1.    FINANCIAL INFORMATION (continued)





MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO FINANCIAL STATEMENTS





Note 1The Company





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





Note 2Summary of Significant Accounting Policies





Basis of Presentation





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





Unaudited Financial
Statements





The accompanying unaudited consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Article S-X. Accordingly, they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for complete financial statements.





Cash and Cash Equivalents





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





Property and Equipment





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





Foreign Currency Translation





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





Estimates





The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and
liabilities at the date of the financial




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##### Table of Contents



PART 1.    FINANCIAL INFORMATION (continued)





MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO FINANCIAL STATEMENTS(Continued)




Note 2Summary of Significant Accounting Policies (Continued)





statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.





Advertising





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





Income Taxes





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





Stock Option Plans





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





Reclassifications





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





Note 3Acquisitions





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





On December 10,
1999, the Company incorporated a wholly owned subsidiary, The London PET Centre Limited, a United Kingdom private limited company. On December 17, 1999 the Company incorporated two




6




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##### Table of Contents



PART 1.    FINANCIAL INFORMATION (continued)





MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO FINANCIAL STATEMENTS(Continued)




Note 3Acquisitions (Continued)





wholly owned subsidiaries, Mobile PET Leasing Limited, a United Kingdom private limited company and Mobile PET Systems (UK) Limited, a United Kingdom private limited company. Mobile PET Systems (UK) Limited is currently
inactive.





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





Note 4Prepaid Expenses





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





2001

2000Investor relations

$
227,783

$
Prepaid equipment rent


547,990


Other


197,235


60,417$
973,008

$
60,417





Note 5Property and Equipment





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





December 31,2001


2000Leasehold improvements

$
7,071


$
30,389Computer equipment


608,624



483,590Office furniture and fixtures


185,007



30,623Office equipment


44,366



9,443Equipment under capital lease


19,862,939



19,307,88220,708,007



19,861,927Less accumulated depreciation


(4,343,989
)


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


$
18,548,867





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





Note 6Deposits and Other Assets





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





2001

2000Equipment depositsMobile PET Units

$
388,130

$
719,838Equipment rental depositsother





49,000Lease deposits


115,281


Other





50,770$
503,411

$
819,608




7




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##### Table of Contents



PART 1.    FINANCIAL INFORMATION (continued)





MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO FINANCIAL STATEMENTS(Continued)




Note 6Deposits and Other Assets (Continued)





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





Note 7Capitalization





Preferred Stock





On January 20, 2000, the Company authorized for issuance ten million
(10,000,000) shares of preferred stock having one hundredth of a cent ($0.0001) par value per share. On March 3, 2000 the Company designated and issued sixty (60) shares 8% Cumulative Convertible Redeemable Preferred, Series A Stock (Series
A) for cash in the amount of $2,700,000, net of acquisition fees. In addition, under this Securities Purchase Agreement the Company issued 120,000 warrants to purchase shares of common stock at an exercise price of $5 per share, which expire
in March 2003. The shares of Series A Stock have no voting rights, have an original liquidation value of $50,000 per share, and accrue dividends at a rate of eight percent (8%) per annum per share on the liquidation value payable upon conversion. On
May 30, 2001 the liquidation value was increased to $58,937 when the Company entered into a Settlement Agreement and Conditional Release of a lawsuit surrounding the Securities Purchase Agreement. The total liquidation value of the shares
outstanding at December 31, 2001 and 2000 in the amount of $1,915,437 and $2,125,000, respectively is classified on the Companys balance sheet as preferred stock. Cumulative preferred dividends are payable upon conversion and at December 31,
2001 there are cumulative preferred dividends in arrears in the amount of $70,362 or $2,234 per share. In the event of any liquidation, dissolution or winding up of the affairs of the Company, holders of the Series A Stock shall be paid the
liquidation value plus all accrued dividends at that date before any payment to other shareholders. At the option of the holders, the Series A Stock and the cumulative preferred dividends in arrears are convertible into shares of common stock
determined by dividing $58,937 by the conversion price of the lesser of $5 or 75% of the average of the closing bid price of common stock during the five (5) trading days immediately prior to the conversion date. If the Company fails to convert or
is unable to issue shares of common stock, the holder may redeem the Series A Stock for cash in an amount equal to the fair value of the shares of common stock that would have been converted. The sixty (60) shares of Series A Stock provide an
intrinsic value of beneficial conversion feature of approximately $1,206,000. During the year ended June 30, 2001, the holders converted twenty-five and one half (251⁄2) shares of Series A into 1,688,579 shares of common stock. During the six
months ended December 31, 2001, the holders converted two shares of Series A into 221,328 shares of common stock.





On September 21, 2000, the Company designated and subsequently issued thirty (30) shares 8% Cumulative Convertible Redeemable Preferred, Series B Stock (Series B) for cash in the amount of $1,385,000, net of acquisition
fees. In addition, under this Securities Purchase Agreement the Company issued 50,000 warrants to purchase shares of common stock at an exercise price of $3 per share and 29,851 warrants to purchase shares of common stock at an exercise price of
$2.5125 per share. The warrants expire on September 30, 2005. The shares of Series B Stock have no voting rights, have an original liquidation value of $50,000 per share, and accrue dividends at a rate of eight percent (8%) per annum per share on
the liquidation value payable upon conversion. On May 30, 2001 the liquidation value was increased to $58,937 when the Company entered into a Settlement Agreement and Conditional Release of a lawsuit surrounding the Securities Purchase Agreement.
The total liquidation value of the shares outstanding at December 31, 2001 and 2000 in the amount of $1,768,110 and $1,500,000, respectively is classified on the Companys balance sheet as preferred stock. Cumulative preferred dividends are
payable upon conversion and at December 31, 2001 there are cumulative preferred dividends in arrears in the amount of $70,685 or $2,356 per share. In the event of any liquidation, dissolution or winding up of




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##### Table of Contents



PART 1.    FINANCIAL INFORMATION (continued)





MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO FINANCIAL STATEMENTS(Continued)




Note 7Capitalization (Continued)





the affairs of the Company, holders of the Series B Stock shall be paid, pari passuwith holders of the Series A Stock, the liquidation value plus all accrued dividends at the date of
liquidation, dissolution or winding up of the affairs before any payment to other shareholders. At the option of the holders, the Series B Stock and the cumulative preferred dividends in arrears are convertible into shares of common stock determined
by dividing $58,937 by the conversion price of the lesser of $3 or 75% of the average of the closing bid price of common stock during the five (5) trading days immediately prior to the conversion date. If the Company fails to convert or is unable to
issue shares of common stock, the holder may redeem the Series B Stock for cash in an amount equal to the fair value of the shares of common stock that would have been converted. The thirty (30) shares of Series B Stock issued provide an intrinsic
value of beneficial conversion feature of approximately $414,580.





Common Stock





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





During the year ended June 30, 2001 the Company
issued shares of common stock in cash transactions: 3,763,162 shares for cash in the amount of $1,868,650; and 2,733,981 shares for cash in the amount of $750,000 according to the terms of a settlement agreement between the Company and holders of
the Series A and Series B Stock. Also during the year ended June 30, 2001 the Company issued shares of common stock in non-cash transactions: 1,688,579 shares through the conversion of Series A Stock valued at $1,320,035; 75,356 shares through the
conversion of Series A Stock dividends in arrears valued at $66,274; 1,875,000 shares through the conversion of debt valued at $750,000; and 403,350 shares for legal services valued at $201,675. During the six months ended December 31, 2001 the
Company issued shares of common stock in cash transactions: 2,600,000 shares from paid subscriptions at June 30, 2001 in the amount of $1,000,000; 4,014,285 shares for cash in the amount of $1,405,000; and 2,728,571 shares for cash in the amount of
$1,120,000. Also during the six months ended December 31, 2001 the Company issued shares of common stock in non-cash transactions: 221,328 shares through the conversion of Series A Stock valued at $117,874; 161,714 shares as a finders fee; 100,000
shares as compensation valued at $43,000; and 2,925,967 shares for services valued at $1,971,251.





Stock
Options





The Companys Board of Directors and shareholders adopted the 1999 Stock Option Plan pursuant to
which incentive stock options or nonstatutory stock options to purchase up to 8,000,000 shares of common stock may be granted to employees, directors and consultants. Stock options generally expire on June 30, 2002, with some options extending to
2005 and vesting over service periods that range from zero to four years.




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##### Table of Contents



PART 1.    FINANCIAL INFORMATION (continued)





MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO FINANCIAL STATEMENTS(Continued)







Note 7Capitalization (Continued)





As of December 31, 2001, the Company has granted options to purchase 5,296,126 shares of common stock as follows:





Exercise Price

Number of Shares


Vested SharesOutstanding, June 30, 2000

$
1.00-$4.63

5,988,000


2,644,500Granted

$
2.00-$3.75

483,750


Exercised


$1.90

(25,000
)

(25,000
)Cancelled







Outstanding, September 30, 2000

$
1.00-$4.63

6,446,750


2,619,500Granted

$
1.26-$3.42

534,500


585,000Exercised







Cancelled

$
1.70-$3.75

(330,000
)

(120,000
)Outstanding, December 31, 2000

$
1.00-$4.63

6,651,250


3,084,500Granted

$
.45-$2.76

264,000


732,502Exercised







Cancelled

$
1.26-$3.77

(2,034,500
)

(393,332
)Outstanding, June 30, 2001

$
.45-$4.63

4,880,750


3,423,670Granted

$
.43-$2.00

1,621,876


1,173,707Exercised







Cancelled

$
.56-$3.13

(550,833
)

(355,834
)Outstanding, September 30, 2001

$
.43-$3.75

5,951,793


4,241,543Granted

$
.52-$1.00

229,167


336,000Exercised







Cancelled

$
.56-$3.13

(884,834
)

(853,667
)Outstanding, December 31, 2001

$
.43-$3.75

5,296,126


3,723,876





The Company accounts for stock-based compensation using
the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, under which no compensation cost for stock options is recognized for the stock option awards granted at or
above fair market value. However, during the six months ended December 31, 2001 and 2000 the Company recognized a noncash (credit) charge using the intrinsic value method of $(591,114) and $184,662, respectively.





Warrants





At December 31, 2001 warrants were outstanding to purchase 7,468,278 common stock at exercise prices between $0.35 to $7.00 per share, and at the average of the last reported sale price of the common stock for the five
trading days preceding the issue date. These warrants expire between April 2002 and May 2006.




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##### Table of Contents



PART 1.    FINANCIAL INFORMATION (continued)





MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO FINANCIAL STATEMENTS(Continued)







Note 8Related Party Transactions





Subordinated Equity Participation





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





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





Due from
London Radiosurgical Centre, Ltd





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





Loans





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





On October 24, 2000, the Company received an eight percent (8%) bridge loan from an officer, director and
shareholder in the amount of $100,000, which was due on or before November 30, 2000. The loan was extended to June 1, 2001. In October 2000, an eight percent (8%) promissory note was issued in the amount of $100,000 in exchange for the loan.
Principal, plus accrued interest is payable in installments: $20,000, plus accrued interest on October 8, 2001 and $10,000 plus accrued interest on the first day of each successive month, until paid in full. At December 31, 2001 and 2000, the loan
has a balance of $60,000 and $100,000, respectively, plus accrued interest of $7,474 and $1,490, respectively.




11




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##### Table of Contents



PART 1.    FINANCIAL INFORMATION (continued)





MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO FINANCIAL STATEMENTS(Continued)




Note 8Related Party Transactions (Continued)





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





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





On October 12, 2001, the
Company converted $253,050 due to a director into a promissory note without interest and payable in monthly installments of $14,000 per month beginning on October 15, 2001, until paid in full. At December 31, 2001, the loan has a balance of
$211,050.





Note 9Securities Purchase Agreement





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





Note 10Consulting Agreement





Effective September 21, 2001 the Company entered into a Consulting Agreement for investor relation services. On October 9, 2001 the Company issued 2,500,000 shares of
common stock, restricted during the term of the Agreement, valued at $804,000 in payment for the services. In addition, the Company issued options to purchase 200,000 shares of common stock at a price of $1.00 per share. The options expire on
September 21, 2002. The cost of the services is recorded in prepaid expenses and is being amortized over the estimated period benefited.





Note 11Employment Agreements





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




12




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##### Table of Contents



PART 1.    FINANCIAL INFORMATION (continued)





MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO FINANCIAL STATEMENTS(Continued)







Note 12Long Term Debt





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





2001


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

$
90,652


$
108,753Less current portion


(19,091
)


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

$
71,561


$
90,652





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





December 31,2002

$
19,0912003


21,3002004


23,7492005


26,512$
90,652





Note 13Commitments





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





December 31,2001


2000Equipment

$
19,862,940


$
18,985,457Less accumulated amortization


(4,126,397
)


(1,190,510
)Net capital lease assets

$
15,736,543


$
17,794,947





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




13




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##### Table of Contents



PART 1.    FINANCIAL INFORMATION (continued)





MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO FINANCIAL STATEMENTS(Continued)




Note 13Commitments (Continued)





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





Capital Lease


Operating LeasesDecember 31,2002

$
5,649,258


$
125,4182003


5,649,258



130,1192004


5,458,324



48,4622005


3,846,855



2006


365,935



2007


162,135



21,131,764


$
303,999Less amount representing interest at 12.07%


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

$
16,359,095








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





Note 14Concentration of Credit Risk





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





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




14




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##### Table of Contents



PART 1.    FINANCIAL INFORMATION (continued)





MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO FINANCIAL STATEMENTS(Continued)







Note 15Earnings (Loss) Per Share





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





December 31,2001


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

$
(2,495,557
)

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


32,823,714



14,319,644Loss per sharebasic

$
(.08
)

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

$
(2,495,557
)

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


32,823,714



14,319,644Loss per sharediluted

$
(.08
)

$
(.43
)





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





December 31,2001

2000Cumulative convertible redeemable preferred stock common stock equivalent

642,391

900,000Stock options

5,740,560

4,465,310Warrants

6,822,362

1,309,437




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##### Table of Contents



PART 1.    FINANCIAL INFORMATION (continued)





MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO FINANCIAL STATEMENTS(Continued)







Note 16Prior Period Adjustment





The financial statements as of December 31, 2001 and for the three and six months then ended have been restated. This restatement (i)
corrects the reported value of certain stock based compensation, (ii) records a noncash credit for options forfeited, and (iii) re-classifies certain expenses between selling and marketing expense, and general and administrative expense. The effect
of the restatements are as follows:





December 31, 2001As Previously Reported


As RestatedBalance sheet:Assets

$
22,031,791


$
21,060,791Liabilities


20,609,593



20,609,593Shareholders equity


1,422,198



451,198Liabilities and shareholders equity

$
22,031,791


$
21,060,791Three Months Ended December 31, 2001


Six Months Ended December 31, 2001As Previously Reported


As Restated


As Previously Reported


As RestatedStatement of operations:Service revenues

$
4,147,776


$
4,147,776


$
7,828,500


$
7,828,501Cost of services revenues


(2,521,035
)


(2,521,033
)


(4,615,967
)


(4,619,541
)Selling and marketing


(820,632
)


(229,545
)


(1,763,616
)


(770,918
)General and administrative


(1,890,560
)


(2,162,829
)


(3,051,051
)


(3,665,419
)Other income (expense)


(509,164
)


(520,922
)


(1,101,479
)


(1,113,893
)Provision for income taxes


(11,758
)






(14,014
)


(1,600
)Preferred stock dividend


(76,033
)


(76,033
)


(152,687
)


(152,687
)Net lossavailable to common shareholders

$
(1,681,406
)

$
(1,362,586
)

$
(2,870,314
)

$
(2,495,557
)Net lossavailable to common shareholdersbasic

$
(0.05
)

$
(0.04
)

$
(0.09
)

$
(0.08
)Net lossavailable to common shareholdersdiluted

$
(0.05
)

$
(0.04
)

$
(0.09
)

$
(0.08
)





Note 17Subsequent Events





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




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##### Table of Contents

PART I.





ITEM 2.    MANAGEMENTS DISCUSSION AND ANALYSIS





Overview





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





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





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





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





Results of Operations





For the three and six months ended December 31, 2001, we had fifteen mobile units and one fixed site accepted and placed into service,
generating revenues for the three and six months ending December 31, 2001 of $4,147,776 and $7,828,501 compared to the three and six months ending December 31, 2000, in which we had revenues of $1,118,687 and $1,959,668, respectively. Our costs of
service for the three and six months ending December 31, 2001 were $2,521,033 and $4,619,541 compared to $1,156,349 and $1,745,256 for the three and six months ending December 31, 2000. This substantial difference in revenues and costs is largely
attributable to the number of units, which were in service during the applicable periods. As a result of these activities, accounts receivables increased to $2,465,271 net of allowances for doubtful accounts, as of December 31, 2001, as compared to
accounts receivables of $808,127, net of allowances for doubtful accounts, as of December 31, 2000. The costs of service revenues represent salaries paid to technologists and drivers, system maintenance, transportation and insurance on our mobile
PET systems. We have transitioned from a development stage company and are now seeking to grow. Prior to this transition, our efforts have been principally focused on capitalization, organizational and business development activities.





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




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##### Table of Contents



PART I.





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







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





Since our inception we have incurred significant losses. Through December 31, 2001, we have incurred a net deficit of $20,710,667 which we have financed primarily through
equity sales. For the three and six months ended December 31, 2001, we experienced a consolidated loss from operations of $765,631 and $1,227,377 compared to a consolidated loss from operations of $2,516,074 for the three months, and $4,530,391 for
the six months ended December 31, 2000. Our net loss available to common shareholders, after preferred stock dividend, was $1,362,586 for the three months and $2,495,557 for the six months ended December 31, 2001, compared to $3,568,468 for the
three months and $6,107,882 for the six months ended December 31, 2000. We anticipate that our operating losses during the third quarter of fiscal year 2002 should decrease from current levels as we decrease per unit operating costs by
deploying additional mobile units or stationary sites, realize higher utilization of our services and subsequent growth in revenues. We have implemented cost reductions by reducing administrative and travel expense and by negotiating higher
discounts for new equipment, service and radiotracers. However, we can give no assurances that our efforts will have the desired effects. As a result, in order to achieve and maintain profitability, we will need to continue to increase revenues and
effectively manage our operating overhead.





Selling expenses for the three months and six months ended
December 31, 2001 were $229,545 for the three months and $770,918 for the six months ended December 31, 2001, as compared to $828,107 for the three months and $1,762,620 for the six months ended December 31, 2000. The decrease resulted from a
substantial reduction in our sales force. General and Administrative expenses for the three months and six months ended December 31, 2001 were $2,162,829 for the three months and $3,665,419 for the six months ended December 31 2001, as compared to
$1,650,305 for the three months and $2,982,183 for the six months ended December 31, 2000. The primary reason for the increase was charges related to common stock issued for services. The principal components of our operating costs consist of
equipment leasing, equipment service and maintenance, salaries and benefits, legal and accounting fees, insurance and transportation costs. Because the majority of these costs are fixed, increased revenues as a result of increased patient procedures
may provide higher profitability, while lower patient procedures may result in lower profitability.





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





Our interest
income was $2,525 and $5,126 for the three months and six months ended December 31 2001, respectively as compared to $11,712 and $24,989 for the three and twelve months ended December 31, 2000 respectively. Our interest expense of $511,833 and
$1,106,821 for the three and six months ended December 31, 2001, as compared to the interest expense of $689,900 and $944,635 for the three and six months ended December 31, 2000, was principally due to the capitalization of our equipment leases of
image scanners, coaches and computer equipment.




18




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##### Table of Contents



PART I.





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







Liquidity and Capital Resources





At December 31, 2001, our total assets were $21,060,791, compared to $21,103,715 at December 31, 2000. Our current assets at December 31, 2001 totaled $4,008,603
and our current liabilities were $9,828,195, as compared to December 31, 2000, that reflected current assets of $1,690,851 and current liabilities of $5,837,691. Shareholders equity at December 31, 2001 increased from ($111,354) to $451,198.





Our foreign currency translation adjustment in shareholders equity amounted to $(331,282) at
December 31, 2001 compared to $61,273 at December 31, 2000. We have reflected the transaction gains and losses in the cash flow as the effect of exchange rate changes on cash of $44,358 for the three months and $(47,694) for the six months
ended December 31, 2001, compared to $31,068 for the three months and $104,211 for the six months ended December 31, 2000.





Our net cash used in investing activities for the three and six months ended December 31, 2001 was $108,480 and $132,610, respectively, as compared to $62,390 and $162,966 in the three and six months ended December 31, 2000
respectively. This difference is primarily a result of our investment in computers and related equipment for our business and personnel growth.





The net cash provided by our financing activities for the three and six months ended December 31, 2001 was $108,527, and $733,328, respectively, resulting mainly from the issuance of common stock of
$1,120,000 during the three months and $2,525,000 during the six months ended December 31, 2001, compared to $500,000 of preferred stock and $547,500 of common stock issued for the three months and $1,385,000 of preferred stock and $547,500 of
common stock issued for the six months ended December 31, 2000, respectively; less the payments on obligations under capital lease totaling $918,012 for the three months and $1,693,898 for the twelve months ended December 31, 2001, respectively
compared to $344,689 for the three months and $560,907 for the twelve months ended December 31, 2000, respectively.





During the three and six months ended December 31, 2001, we have raised $1,120,000 for the three months and $2,525,000 for the six months ended December 31, 2001 of new equity capital through private placements of common stock and
warrants to purchase common stock, compared to $1,047,500 for the three months and $1,932,500 for the six months ended December 31, 2000 of new equity capital through private placements of common and preferred stock and warrants to purchase common
stock.





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





Factors That May Affect Future Results





The discussion and
analysis of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes. This Quarterly Report on Form 10-QSB contains




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




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





We have lost money since inception, expect future losses and
may never become profitable.





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





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





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





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




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




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




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




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




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




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





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





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





The acceptance of PET technology may be adversely affected by its high cost, concerns by patients and physicians relating to its safety and efficacy, and the substantial market acceptance of other diagnostic tools such




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




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





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





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





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





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





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





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





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





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




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




affiliates for more than two years may generally be sold without reference to the current public information or broker transaction requirements, or the volume limitations. A significant number of
shares are currently available for resale pursuant to Rule 144 and more shares will become so in the future.





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





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





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





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





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





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





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





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





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





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





The markets in which our PET services compete are subject to rapid technological change as well as the potential development of alternative diagnostic imaging techniques or
products. These changes could render the PET system technologically or economically obsolete, or cause a reduction in the value of, or reduce the need




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




for, PET systems. Should such change occur, there could be no assurance that we will be able to acquire the new or improved systems, which may be required to service our customers.





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





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





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





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





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;
| | - |  | ---------------------------------------



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







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




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




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





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





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





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





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





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





The provision of mobile PET shared services involves the inherent risk of
professional and product liability claims against us. We currently maintain commercial general liability insurance coverage in the amount of $2 million per incident and medical professional liability insurance in the amount of $2 million per
incident, but this insurance is expensive, subject to various coverage exclusions and may not be obtainable in the future on terms acceptable to us. We do not know whether claims against us arising from our use of the PET system will be




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




successfully defended or that our insurance will be sufficient to cover liabilities arising from these claims. A successful claim against us in excess of our insurance coverage could materially
harm our business.





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





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





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





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





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





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





Recently promulgated federal regulations affect the ability of a Medicare provider such as a hospital to
include a service or facility as provider-based for purposes of Medicare reimbursement. Historically, provider-based status has allowed a provider to obtain more favorable Medicare reimbursement for services like the ones




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




we provide. While the Medicare, Medicaid and SCHIP Benefits and Improvement Act of 2000 offers some relief for facilities recognized as provider-based on October 1, 2000, under these new
regulations, some of our clients may have difficulty qualifying our services for provider-based status. If a client cannot obtain provider-based status for our services, then the provider might decide not to contract or to continue to contract with
us or might acquire a fixed base PET system.





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





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





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





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





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





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





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




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




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




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







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





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





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





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





We have a limited operating history.





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





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





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




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PART II    OTHER INFORMATION





ITEM 1.    LEGAL PROCEEDINGS





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





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





ITEM 2.     CHANGES IN SECURITIES





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





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





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





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





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




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





ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K





(a)  
Exhibits





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





(b)  Reports on Form 8-K





None.




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SIGNATURES





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





MOBILE PET SYSTEMS INC.By:

/s/    THOMAS H. INSLEYThomas H. Insley Chief
Financial Officer and Secretary





Date:   November 26, 2002







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CERTIFICATIONS





1.    Chief Executive Officer





I, Paul J. Crowe, certify that:





| | 1. |  | I have reviewed this Amendment No. 1 to quarterly report on Form 10-QSB of Mobile PET Systems, Inc.;
| | -- |  | ----------------------------------------------------------------------------------------------------




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




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




Dated: November 26, 2002



/s/    PAUL J.
CROWEPaul J. Crowe Chief Executive Officer





2.    Chief Financial Officer





I, Thomas H. Insley, certify that:





| | 1. |  | I have reviewed this Amendment No. 1 to quarterly report on Form 10-QSB of Mobile PET Systems, Inc.;
| | -- |  | ----------------------------------------------------------------------------------------------------




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




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




Dated: November 26, 2002



/s/    THOMAS H.
INSLEYThomas H. Insley Chief Financial Officer




31