##### Table of Contents

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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




Form 10-QSB





(Mark One)x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2002 ̈

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACTFor the transition period from
 to





Commission file number 000-27915





---




MOBILE PET SYSTEMS, INC.


A Delaware Corporation


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





DELAWARE

11-2787966(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification
No.)





2150 West Washington Street, Suite 110


San Diego, California 92110


(Address of principal executive offices)





(619) 226-6738


(Issuers telephone number)





---




Check whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.


Yes x No   ̈





There were 55,027,982 shares outstanding of the
issuers Common Stock as of November 8, 2002.





Transitional Small Business Disclosure Format (Check one):


Yes   ̈  No x





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##### Table of Contents

MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





For the quarterly period ended September 30, 2002





Table of Contents





Page No.PART I.     FINANCIAL INFORMATION

1Item 1.    Financial Statements (unaudited)

1Consolidated Balance Sheets as of September 30, 2002 and 2001

1Consolidated Statements of Operations for the three months ended September 30, 2002 and 2001

2Consolidated Statement of Changes in Shareholders Equity for the three months ended September 30, 2002 and 2001

3Consolidated Statements of Cash Flows for the three months ended September 30, 2002 and 2001

4Notes to Consolidated Financial Statements

5Item 2.     Managements Discussion and Analysis

12Item 3.     Controls and Procedures

19PART II.     OTHER INFORMATION

20Item 1.     Legal Proceedings

20Item 2.     Changes in Securities

20Signatures

21Certifications

22






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##### Table of Contents



MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





For the quarterly period ended September 30, 2002










PART 1.


FINANCIAL INFORMATION





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





---

9/30/2002


9/30/2001AssetsCurrent assets:Cash

$
489,268


$
19,018Accounts receivable, net of allowance for doubtful accounts of $116,000 at September 30, 2002 and 2001


3,124,232



2,341,267Prepaid expenses and other receivables


770,149



841,159Deposits and other assets


358,197



484,511Total current assets


4,741,846



3,685,955Property and equipment, net


13,295,036



17,038,255Other assets:Accrued interest receivable


10,573



10,573Due from London Radiosurgical Centre, Ltd


127,123



171,137Subordinated equity participation


200,000



200,000Restricted cash


353,804



347,544Total assets

$
18,728,382


$
21,453,464Liabilities and Shareholders EquityCurrent liabilities:Accounts payable

$
1,215,918


$
2,564,956Current portion of long term debt


26,726



18,576Accrued and other liabilities


331,464



896,394Notes payable


296,550



475,000Obligations under capital lease, current


5,258,022



4,067,837Total current liabilities


7,128,680



8,022,763Non-current liabilities:Obligations under capital lease, net


7,501,401



13,209,270Long-term debt, net


65,311



76,537Other liabilities






85,050Total liabilities


14,695,392



21,393,620Shareholders equityPreferred stock; 10,000,000 shares authorizedSeries A preferred stock; 0 and 34.5 shares issued and outstanding at September 30, 2002 and 2001,
respectively






2,033,318Series B preferred stock; 0 and 30 shares issued and outstanding at September 30, 2002 and 2001,
respectively






1,768,103Common stock; $0.0001 par value; 90,000,000 shares authorized; 55,027,982 and 36,624,338 shares issued and
outstanding at September 30, 2002 and 2001, respectively


5,503



3,263Additional paid in capital


27,429,074



16,012,283Accumulated deficit


(23,401,587
)


(19,424,114
)Foreign currency translation adjustment






(333,009
)Total shareholders equity


4,032,990



59,844Total liabilities and shareholders equity

$
18,728,382


$
21,453,464





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







1




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




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





---

For the Three Months Ended9/30/2002


9/30/2001Service revenues

$
4,552,329


$
3,398,905Cost of service revenues


3,059,278



2,042,553Gross profit


1,493,051



1,356,352ExpensesSelling and marketing


502,341



541,373General and administrative


1,482,227



1,285,505Total expenses


1,984,568



1,826,878Loss from operations


(491,517
)


(470,526
)Other income (expense)Interest income


1,526



2,601Other income (expense)


105,476



(584
)Interest expense


(437,459
)


(553,794
)Total other income (expense)


(330,457
)


(551,777
)Loss before provision for income taxes


(821,974
)


(1,022,303
)Provision for income taxes






1,600Loss from continuing operations


(821,974
)


(1,023,903
)Income (loss) from operations of discontinued subsidiaries (including a $2,219,300 gain on sale for the three months
ended September 30, 2002)


2,224,644



(32,414
)Net income (loss)


1,402,670



(1,056,317
)Preferred stock dividend


23,176



76,654Net income (loss)available to common shareholders

$
1,379,494


$
(1,132,971
)Loss per share from continuing operationsbasic

$
(0.02
)

$
(0.03
)Income (loss) per share from operations of discontinued operationsbasic

$
0.04


$
(0.00
)Net income (loss) per share available to common shareholdersbasic

$
0.03


$
(0.04
)Loss per share from continuing operationsdiluted

$
(0.01
)

$
(0.03
)Income (loss) per share from operations of discontinued operationsdiluted

$
0.03


$
(0.00
)Net income (loss) per share available to common shareholdersdiluted

$
0.02


$
(0.04
)





---










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




2




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




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


---

Preferred Stock


Common Stock


Additional Paid In Capital


Accumulated Deficit


Foreign Currency Translation Adjustment


Total Shareholders EquityShares


Amount


Shares


AmountBalance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 in private placement, net of offering costs








2,600,000



260



(260
)










Common stock subscribed, 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











43,000Noncash credit for stock options issued
















(75,604
)










(75,604
)Noncash charge for stock warrants issued
















19,667











19,667Common stock issued for services








325,967



33



125,218











125,251Net 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, as adjusted

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
)










Noncash credit for stock options issued
















(515,510
)










(515,510
)Noncash charge for stock warrants issued
















196,690











196,690Common stock issued for services








2,600,000



260



874,740











875,000Net lossJuly 1, 2001 to December 31, 2001




















(1,286,553
)






(1,286,553
)Foreign currency translation adjustment
























1,727



1,727BalanceDecember 31, 2001, as adjusted

62



3,683,547


38,235,951



3,824



17,805,776



(20,710,667
)


(331,282
)


451,198Common stock issued in private placement, net of offering costs








1,928,571



193



749,807











750,000Stock subscriptions paid
















500,000











500,000Common stock issued through conversion of preferred stock

(10
)


(564,414
)

1,521,876



152



564,262











Common stock issued for services








136,364



14



59,986











60,000Noncash charge for stock options issued
















95,554











95,554Net lossJanuary 1, 2002 to March 31, 2002




















(1,161,761
)






(1,161,761
)Foreign currency translation adjustment
























58,503



58,503BalanceMarch 31, 2002

53



3,119,133


41,822,762



4,183



19,775,385



(21,872,428
)


(272,779
)


753,494Common stock issued in private placement, net of offering costs








2,728,571



273



454,727











455,000Common stock issued through conversion of preferred stock

(3
)


(172,299
)

414,934



41



172,258











Noncash credit for stock options issued
















(295,581
)










(295,581
)Noncash charge for stock warrants issued
















79,263











79,263Net lossApril 1, 2002 to June 30, 2002




















(1,332,089
)






(1,332,089
)Foreign currency translation adjustment
























(39,882
)


(39,882
)BalanceJune 30, 2002

50



2,946,834


44,966,267



4,497



20,186,052



(23,204,517
)


(312,661
)


(379,796
)Common stock issued in private placement, net of offering costs








9,821,429



982



6,184,424











6,185,406Preferred stock redemption

(50
)


(2,946,834
)

(374,000
)


(37
)


(837,201
)










(3,784,072
)Preferred stock dividendbeneficial conversion feature realized
















1,599,740



(1,599,740
)






Common stock issued for services








614,286



61



284,939











285,000Noncash charge for stock options issued
















11,120











11,120Net incomeJuly 1, 2002 to September 30,2002




















1,402,670







1,402,670Foreign currency translation adjustment
























312,661



312,661BalanceSeptember 30, 2002




$



55,027,982


$
5,503


$
27,429,074


$
(23,401,587
)

$



$
4,032,990





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




3




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




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


---

For the Three Months Ended9/30/2002


9/30/2001Cash flows from operating activitiesNet income (loss)

$
1,402,670


$
(1,056,317
)Adjustments to reconcile net income (loss) to net cash used in operating activitiesDepreciation


696,689



774,267Common stock issued for compensation






43,000Common stock issued for services


60,000



125,251Noncash stock option and warrant (credit) charge


11,120



(55,937
)Gain on sale of discontinued subsidiaries


(2,219,300
)


(Increase) decrease in operating assetsAccounts receivable


120,728



(284,515
)Prepaid expenses and other receivables


32,032



1,320Deposits and other assets


173,847



(2,550
)Due from London Radiosurgical Centre, Ltd


2,194



67,429Restricted cash


(1,314
)


(2,674
)Cash of discontinued subsidiaries


(37,574
)


Increase (decrease) in operating liabilitiesAccounts payable


(2,701,698
)


61,447Accrued and other liabilities


(884,354
)


(223,402
)Net cash used in operating activities


(3,344,960
)


(552,681
)Cash flows from investing activitiesCapital expenditures


(88,831
)


(24,130
)Proceeds from sale of discontinued subsidiaries


1,884,917



Net cash provided by (used in) investing activities


1,796,086



(24,130
)Cash flows from financing activitiesPayments on loans


(220,487
)


(4,313
)Payments on obligations under capital leases


(1,049,509
)


(775,886
)Common stock issued


6,185,406



1,405,000Preferred stock redeemed


(3,284,072
)


Net cash provided by financing activities


1,631,338



624,801Effect of exchange rate changes in cash


312,661



(92,052
)Net increase (decrease) in cash


395,125



(44,062
)Cashbeginning of period


94,143



63,080Cashend of period

$
489,268


$
19,018Supplemental disclosuresInterest paid

$
437,459


$
588,939Income taxes paid

$



$
Noncash investing and financing activitiesPreferred stock dividendwarrants re-priced in redemption

$
23,176


$
Common stock issued under consulting contract

$
225,000


$






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




4




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




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







Note 1The Company





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





Note 2Summary of Significant Accounting Policies





Basis of Presentation





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





Unaudited Financial
Statements





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





Estimates





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





Revenue Recognition





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





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





Reclassifications





Reclassifications of revenues and expenses from operations of
discontinued subsidiaries in addition to certain other reclassifications have been made in the September 30, 2001 financial statements to conform to September 30, 2002 presentation.





Note 3Discontinued Operations





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





Sales from the operations of discontinued subsidiaries for the period July 1,
2002 to July 12, 2002 and for three months ended September 30, 2001 were $80,059 and $281,820, respectively and expenses for the period July 1, 2002 to July 12, 2002 and for three months ended September 30, 2001 were $74,715 and $314,234,
respectively.




5




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




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







Note 4Deposits and Other Assets





Deposits and assets consist of the following at September 30, 2002 and 2001:





2002

2001Equipment depositsMobile PET Units

$
132,500

$
388,130Other


225,697


96,381$
358,197

$
484,511





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





Note 5Capitalization





Preferred Stock





On January 20, 2000, the Company authorized for issuance ten million (10,000,000) shares of preferred stock having one hundredth of a cent ($0.0001) par value per share. On March 3, 2000 the Company
designated and issued sixty (60) shares 8% Cumulative Convertible Redeemable Preferred, Series A Stock (Series A) for cash in the amount of $2,700,000, net of acquisition fees. 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. 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 sixty (60) shares of Series A Stock provide an intrinsic value of beneficial conversion feature of approximately $1,206,000. The holders converted cumulative
preferred dividends in the amount of $66,274 and converted 37 shares of Series A into 3,459,361 shares of common stock.





On March 3, 2000, the Company entered into a Security Purchase Agreement, pursuant to which the Company issued 60 shares of 8% Cumulative Convertible Redeemable Preferred, Series A Stock. In addition, the buyer of the preferred stock
agreed to purchase shares of common stock of the Company in tranches, subject to certain limitations, 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. The Company has received an aggregate $1,075,000, net of offering costs, and issued 2,703,093 shares of common stock under this facility. This facility has
not been utilized subsequent to June 30, 2001.





On 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. 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 thirty (30) shares of Series B Stock issued
provide an intrinsic value of beneficial conversion feature of approximately $414,580.





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





Common Stock





The Company has authorized for issuance ninety million (90,000,000) shares of common stock, having one
hundredth of a cent ($0.0001) par value per share. On September 30, 2002 and 2001 the Company had 55,027,982 and 32,624,338 shares of common stock issued and outstanding, respectively.





During the three months ended September 30, 2002 the Company issued shares of common stock in cash transactions: 11,250,000 shares issued for cash in the amount of
$6,185,406, with 1,428,571 shares cancelled. The Company issued for services 614,286 shares of common stock in non-cash transactions. Also during the three months ended September 30, 2002 the Company cancelled 400,000 shares and issued 26,000
shares as an agreement in connection with the redemption of Preferred Series A and Series B, according to the terms of a May 31, 2001 Settlement Agreement and Conditional Release of a lawsuit.




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




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







Note 5Capitalization (Continued)





Stock Options





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





As of September 30,
2002, the Company has granted options to purchase 4,082,709 shares of common stock as follows:





Exercise Price

Number of Shares


Vested SharesOutstanding, June 30, 2000

$
1.00$4.63

5,988,000


2,662,000Granted

$
.45$3.25

1,282,250


1,504,170Exercised




(25,000
)

(25,000
)Cancelled

$
1.00$5.31

(2,364,000
)

(295,000
)Outstanding, June 30, 2001

$
.45$4.63

4,880,750


3,846,170Granted

$
.50$3.00

2,096,043


1,662,792Exercised







Cancelled

$
1.00$4.63

(2,894,084
)

(2,240,917
)Outstanding, June 30, 2002

$
.45$4.63

4,082,709


3,268,045Granted







94,166Exercised







Cancelled

$
0.56$3.25

(220,415
)

(153,916
)Outstanding, September 30, 2002

$
.45$4.63

3,862,294


3,208,295


---




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 three months ended September 30, 2002 and 2001 the Company recognized noncash charges (credits) of $11,120 and ($75,604), respectively.





Warrants





At September 30, 2002 warrants were outstanding to purchase 14,225,041 shares of common stock at exercise prices between $0.35 to $7.00 per share, including warrants to purchase 966,666 shares of common stock which are subject to
vesting through July 1, 2007 and the warrants re-priced in connection with the redemption of preferred stock. These warrants expire between December 31, 2002 and July 31, 2007.





Note 6Related Party Transactions





Subordinated
Equity Participation





During the year ended June 30, 2001, the Company entered into a Memorandum of Agreement
and retroactive to June 1, 1999 restructured an 8% interest in a subordinated equity participation in London Radiosurgical Centre Ltd (LRC), a foreign corporation with a common shareholder, officer and director. The market value of the
subordinated equity participation is not readily determinable, and is recorded at cost in the amount of $200,000, which management believes approximates fair value. The original




7




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




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







Note 6Related Party Transactions (Continued)





Subordinated Equity Participation (Continued)





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





The Memorandum of Agreement provides for a distribution to the Company of 8.42% of LRCs net distributable cash flow, until a total of $210,573 has been distributed
and then the distribution of 5.05% of net distributable cash flow, subject to future dilution. The Memorandum of Agreement stopped the accrual of interest at June 1, 1999. At the date of the Memorandum of Agreement, the Company canceled $47,447 of
accrued interest from the original investment and at September 30, 2002 and 2001 accrued interest on the investment was $10,573. The related shareholder, officer and director personally guarantee the investment.





Loans





On August 23, 2000, the Company received an eight percent (8%) bridge loan from a director and shareholder in the amount of $200,000, with an original due date of October 11, 2000. The loans due date has been extended several
times and the Company has agreed to make monthly payments of $10,000 per month beginning on January 8, 2002, until paid in full. At September 30, 2002 and 2001, the loan has a balance of $120,000 and $200,000, 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. At September 30, 2002 and 2001, the loan has a balance of $0 and $100,000, respectively.





On January 12, 2001, the Company received an eight percent (8%) bridge loan from an officer, director and
shareholder in the amount of $25,000, with an original due date of March 12, 2001, and extended to December 1, 2001. At September 30, 2002 and 2001, the loan has a balance of $0 and $25,000, respectively.





On January 17, 2001, the Company received an eight percent (8%) bridge loan from an officer, director and shareholder in the amount of
$150,000, with an original due date of March 12, 2001. The note has been extended several times and is now due on September 1, 2002. At September 30, 2002 and 2001, the loan has a balance of $91,500 and $150,000, respectively.





On October 12, 2001, the Company converted $253,050 due to an individual and director of the Company into a promissory note
without interest and payable in monthly installments of $14,000 per month beginning on October 15, 2001, until paid in full. At September 30, 2002, the individual is no longer a director and the loan has a balance of $85,050.





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





Note 7Long Term
Debt





Long term debt at September 30, 2002 and 2001 consists of the following:





2002


2001Promissory Note with no interest, due in monthly installments of $500, with first payment beginning on February 1,
2002

$
15,500


$
Promissory Note with interest at a rate of 11% per annum, due in monthly installments of $2,343, with the first payment
beginning on January 1, 2002, with a variable 5% to 1% prepayment penalty


76,537



95,113Less current portion


(26,726
)


(18,576
)Long term debt, net of current portion

$
65,311


$
76,537


---






8




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




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




Note 7Long Term Debt (Continued)





The maturities of long term debt for each
of the succeeding four years subsequent to September 30, 2002, are as follows:





September 30,2003

$
26,7262004


29,1102005


29,2992006


6,902$
92,037


---




Note 8Commitments





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





September 30,2002


2001Equipment

$
18,014,272


$
19,894,612Less accumulated amortization


(5,487,333
)


(3,415,225
)Net capital lease assets

$
12,526,939


$
16,479,387


---




The Company
leases office space and certain PET equipment under non-cancelable operating leases. The office lease expires in April 2005 and the equipment leases expire through May 2006.





Rent expense for the three months ended September 30, 2002 and 2001 was $39,583 and $309,192, respectively.





The Company leases certain other PET equipment under capital leases. The equipment leases expire through March 2006. The capital leases are secured by the Companys
assets. The chief executive officer of the Company has personally guaranteed certain leases. Certain leases contain covenants that restrict the use of cash and require the Company to maintain financial ratios. The Company has been advised of its
failure to maintain a debt service coverage ratio of not less than 1.25 to 1.00, placing three leases in default. Obligations under capital lease  current include $2,418,259 of lease obligations currently in default.





The following is a schedule by year of the future minimum lease payments at September 30, 2002:





September 30,

Capital Lease


Operating Leases2003

$
7,383,929


$
1,187,6882004


3,955,421



1,124,9822005


3,878,500



1,062,2762006


505,996



620,07815,723,846


$
3,995,024Less amount representing interest at 12.07%


(2,964,4213
)Present value of minimum lease payments (including current portion of $5,258,022)

$
12,759,423


---




Note 9Retirement Plan





On August 1, 2001 the Company established a defined contribution plan covering substantially all of its
employees. Participation is limited to all regular employees who meet specific age and service requirements. The Company made no contributions during the three months ended September 30, 2002.




9




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




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







Note 10Concentrations of Credit Risk





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





Note 11Earnings (Loss) Per Share





The computations of basic and diluted earnings per share from continuing operations for the three months ended September 30,
2002 and 2001 were as follows:





---

September 30,2002

2001Income (loss) per sharebasicNumerator:Net income (loss)available to Common shareholders

$
1,379,494

$
(1,132,971
)Denominator:Weighted-average shares


51,535,780


29,379,306Net income (loss) per sharebasic

$
0.03

$
(0.04
)Income (loss) per sharedilutedNumerator:Net income (loss)available to Common shareholders

$
1,379,494

$
(1,132,971
)Denominator:Weighted-average shares


68,726,222


29,379,306Net income (loss) per sharediluted

$
0.02

$
(0.04
)





---




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 three months ended September 30, 2001:





---

Cumulative convertible redeemable preferred stock common stock equivalent

760,285Employee stock options

5,163,576Warrants

3,709,070


---



10




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##### Table of Contents



PART 1.


FINANCIAL INFORMATION (continued)




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







Note 12Prior Period Adjustments





The financial statements for the three months ended September 30, 2001 have been restated to correct an error in recording additional accrued expenses and non-cash stock option expense. Certain other reclassifications from
selling and marketing to general and administrative expenses, as well as reclassifications to loss from operations from discontinued subsidiaries in connection with the sale of the London PET Centre, have also been made. The effect of the
restatements is as follows:





As of and for the three months Ended September 30, 2001

As Previously Reported


As RestatedConsolidated balance sheetTotal assets

$
21,453,464


$
21,453,464Total liabilities

$
21,303,281


$
21,393,620Total shareholders equity


150,183



59,844Total liabilities and shareholders equity

$
21,453,464


$
21,453,464Consolidated statements of operationsRevenue

$
3,680,725


$
3,398,905Cost of goods sold


(2,094,932
)


(2,042,553
)Selling and marketing


(942,984
)


(541,373
)General and administrative


(1,160,492
)


(1,285,505
)Other income (expense)


(592,315
)


(551,777
)Provision for income taxes


(2,256
)


(1,600
)Loss from operations of discontinued subsidiaries






(32,414
)Preferred stock dividend


(76,654
)


(76,654
)Net lossavailable to common shareholders

$
(1,188,908
)

$
(1,132,971
)Loss per share from continuing operationsbasic





$
(0.03
)Loss per share from operations of discontinued operationsbasicLoss per share available to common shareholdersbasic

$
(0.04
)

$
(0.04
)Loss per share from continuing operationsdiluted





$
(0.03
)Loss per share from operations of discontinued operationsdilutedLoss per share available to common shareholdersdiluted

$
(0.04
)

$
(0.04
)


---



11




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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. PET is a molecular imaging
procedure used to diagnose and stage cancer, heart disease and neurological deficits. Our medical service business enables hospitals and other healthcare professionals the ability to access this advanced diagnostic imaging patient service.





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





As of September 30, 2002 we were providing our services to over 75 accounts, which consisted of hospitals and health care providers in the
United States. We believe there are and will be significant opportunities to develop and operate additional mobile and stationary PET facilities.





We owned and operated the only private sector stationary PET facility in the United Kingdom (London PET Centre). We sold this facility in July 2002. The results of operations of the London PET Centre
for the three month periods ended September 30, 2001 and September 30, 2002 have been reclassified as income (loss) from operations of discontinued subsidiaries. We have also restated the financial statements for the three month period ended
September 30, 2001 to correct an error in recording additional accrued expenses, certain non-cash stock option expense and to reclassify for consistency certain amounts from selling and marketing expense to general and administrative expense.





Results of Operations





For the three months ended September 30, 2002, we had sixteen mobile units accepted and placed into service, generating revenues for the three months ended September 30, 2002 of $4,552,329, compared to
the three months ended September 30, 2001, in which we had fifteen mobile units accepted and placed into service, generating revenues of $3,398,905. Our costs of service for the three months ended September 30, 2002 were $3,059,278 compared to
$2,042,553 for the three months ended September 30, 2001. These results exclude the operations of the London PET Centre. This substantial difference in revenues is largely attributable to better utilization of each existing unit. As a result of
these activities, accounts receivables increased to $3,124,232 net of allowances for doubtful accounts, as of September 30, 2002, as compared to accounts receivables of $2,341,267, net of allowances for doubtful accounts, as of September 30, 2001.
The costs of service revenues represent salaries paid to technologists and drivers, system maintenance, transportation and insurance on our mobile PET systems. Gross profit decreased from 39.9% for the three months ended September 30, 2001 to 32.8%
for the three months ended September 30, 2002 primarily because of increased equipment rental, maintenance, repair and service contract costs.





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. We believe cash flow will be sufficient to cover our cost of services on a monthly basis if we continue our unit growth and achieve targeted unit revenues.
The majority of our costs are fixed, so increased revenues as a result of increased utilization may increase our income, while lower utilization may result in lower income.





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





Since our inception we have incurred significant
losses. Through September 30, 2002, we have an accumulated deficit of $23,401,587, which we have financed primarily through equity sales. For the three months ended September 30, 2002, we experienced a consolidated net loss from operations of
$491,517, compared to a consolidated net loss from operations of $470,526 for the three months ended September 30, 2001. We recognized a gain on the sale of the London PET Centre, Ltd. of $2,219,300, therefore showing net income available to common
shareholders, after accrued preferred stock dividend, of $1,379,494 for the three months ended September 30, 2002, compared to the net loss of $1,132,971 for the three months ended September 30, 2001.





We have implemented cost reductions by reducing administrative and travel expense and by negotiating higher discounts for new equipment,
service and radiotracers. Subject to obtaining additional financing, we are also seeking to deploy additional mobile units or stationary sites, which will reduce per unit operating costs. However, we can give no assurances that 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. Subsequent to September 30, 2002, we deployed two additional units,
bringing our total to eighteen mobile units.




12




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##### Table of Contents



PART I.     ITEM 2.


MANAGEMENTS DISCUSSION AND ANALYSIS (continued)







Selling and marketing expenses for the three months ended September
30, 2002, were $502,341 for the three months, as compared to $541,373 for the three months ended September 30, 2001. General and administrative expenses for the three months ended September 30, 2002 were $1,482,227 (including non-cash charges of
$221,120), as compared to $1,285,505 (including non-cash credits of $55,937) for the three months ended September 30, 2001.





Our interest income was $1,526 for the three months ended September 30, 2002, as compared to $2,601 for the three months ended September 30, 2001. Our interest expense was $437,459 for the three months ended September 30, 2002, as
compared to the interest expense of $553,794 for the three months ended September 30, 2001. Other income of $105,476 for the three months ended September 30, 2002 consists primarily of income resulting from the settlement of claims under a Preferred
Provider Radiopharmaceutical Supply Agreement with P.E.T. NET Pharmaceuticals, Inc.





Liquidity and Capital Resources





At September 30, 2002, our total assets were $18,728,382 compared to $21,453,464 at September 30, 2001. The reduction was
mainly caused by the sale of assets from the London PET Centre Ltd. Our current assets at September 30, 2002 totaled $4,741,846 and our current liabilities were $7,128,680, as compared to current assets of $3,685,955 and current liabilities of
$8,022,763 at September 30, 2001. Shareholders equity increased to $4,032,990 at September 30, 2002, due primarily to the gain on the sale of the London PET Centre of $2,219,300, private placements of $6,185,406, net of offering costs less the
redemption of the Series A and B Preferred Stock of $3,784,072 and the loss from continuing operations of $821,974.





Our net cash from investing activities for the three months ended September 30, 2002 was $1,796,086, as compared to ($24,130) for the three months ended September 30, 2001. This difference is primarily a result of the proceeds from
the sale of the London Pet Centre and our investment in computers and related equipment for our business.





The net
cash from our financing activities for the three months ended September 30, 2002 was $1,631,338, resulting mainly from the issuance of common stock of $6,185,406 less the redemption of the preferred stock of $3,284,072; payments on obligations under
capital leases of $1,049,509 and loan repayments of $220,487 during the three months ended September 30, 2002, compared to $624,801 for the three months ended September 30, 2001, where the issuance of common stock was $1,405,000 less the payments on
obligations under capital leases of $775,886 and loan repayments of $4,313.





Factors That May Affect Future Results





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





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





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







13




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##### Table of Contents



PART I.     ITEM 2.


MANAGEMENTS DISCUSSION AND ANALYSIS (continued)




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





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





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




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




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




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




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




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




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





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





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





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





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





If we do not remain 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. Our ability to experience profitability in the future will depend in part on our ability to successfully market and sell PET services on a wide scale.





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,




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##### Table of Contents



PART I.     ITEM 2.


MANAGEMENTS DISCUSSION AND ANALYSIS (continued)




or from an affiliate of the issuer, and fully paid, may sell limited quantities of the securities to the public without registration, provided certain public information with respect to the
issuer is available. Pursuant to Rule 144, securities held by non-affiliates for more than two years may generally be sold without reference to the current public information or broker transaction requirements, or the volume limitations. A
significant number of shares are currently available for resale pursuant to Rule 144 and more shares will become so in the future.





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





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





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





We purchase our PET systems from a limited group of qualified suppliers: CTI of Knoxville Tenn., Siemens Medical Systems, Inc. of Iselin N.J. and GE Medical Systems of Milwaukee, Wisc. While we believe that alternative suppliers
could be found for 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.





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





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





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





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





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





Upon expiration of our clients contracts, we are subject to the risk that clients will cease
using our PET systems and purchase or lease their own PET systems, use our competitors PET systems or rely on alternate imaging technologies. Approximately seven percent of our client contracts expire in 2002, twenty-two percent in 2003,
seventeen percent in 2004, thirty-eight percent in 2005, ten percent in 2006 and six percent in 2007. Moreover, one-third of our client contracts permit the client, upon typically 180 days notice, to terminate the contract without cause,
and two-thirds of our client contracts permit the client, upon typically 180 days notice, to terminate the contract if the client obtains a fixed site for a PET system. In addition, a portion of our contracts does not have minimum usage
requirements.




15




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##### Table of Contents



PART I.     ITEM 2.


MANAGEMENTS DISCUSSION AND ANALYSIS (continued)







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





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





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




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




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




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




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




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




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




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




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





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





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





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





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




16




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##### Table of Contents



PART I.     ITEM 2.


MANAGEMENTS DISCUSSION AND ANALYSIS (continued)




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





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





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





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





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





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





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





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




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##### Table of Contents



PART I.     ITEM 2.


MANAGEMENTS DISCUSSION AND ANALYSIS (continued)







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





Some states require a certificate of need or similar regulatory approval
prior to the acquisition of high-cost capital items, including diagnostic imaging systems, or provision of diagnostic imaging services by us or our clients. While currently only 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, first quarter
client and patient vacation schedules may affect revenues. Second quarter revenues may be affected by client and patient holiday and vacation schedules and inclement weather, the results of which may be fewer patients scans during the period. Third
quarter revenues may be affected by fewer calendar days and inclement weather, the results of which may be fewer patients scans during the period. We may not be able to reduce our expenses, including our debt service obligations, quickly enough to
respond to these declines in revenue, which would make our business difficult to operate and would harm our financial results. In addition, we may be unable to adjust our expenditures if revenues in a particular period fail to meet our expectations,
which would harm our operating results for that period.





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





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





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





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





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




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##### Table of Contents



PART I.     ITEM 2.


MANAGEMENTS DISCUSSION AND ANALYSIS (continued)




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





We have a limited operating history.





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





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





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





ITEM 3.    CONTROLS AND PROCEDURES





Within 90 days prior to the
filing date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the date of
that evaluation our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. It should be noted that the design of any systems of controls is based in part
upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.





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




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##### Table of Contents

PART II.    OTHER INFORMATION


ITEM 1.    LEGAL PROCEEDINGS





From time to time the Company becomes
involved in legal proceedings, either as a plaintiff or defendant. The Company is currently involved in several such proceedings to enforce the termination provisions or minimum number of procedure provisions of its service contracts. The Company
believes none of these proceedings, either alone or in the aggregate, are material.





Although there is currently
no pending legal proceeding, the Company has received notice, dated April 4, 2002, from Finova Capital Corporation of an Event of Default relating to certain violations of Debt Service Ratio covenants contained in Capital Equipment Leases with the
Company.





ITEM 2.    CHANGES IN SECURITIES





Changes in Securities.





As previously reported, on July 31, 2002, we sold 10,000,000 shares of common stock and warrants to purchase 3,000,000 Common Shares, all
for a price of $6,000,000, pursuant to a Securities Purchase Agreement dated July 12, 2002, by and between Mobile PET, Ivan Bradbury and Integrated Healthcare Management, S.A., a Luxembourg company. The warrants are exercisable at any time until
July 31, 2007 at a price of $0.448 per share (representing 80% of the average closing price of Common Shares for the five trading days before the closing date of July 31, 2002). Mr. Bradbury, as purchaser under the Securities Purchase Agreement,
assigned his rights to Dragon Nominees Limited (Dragon), a company organized under the laws of England and Wales. Registration rights for the common shares sold and issuable upon exercise of the warrant were also granted. This issuance
was in reliance on Section 4(2) of the Act.





Also as previously reported, on July 31, 2002, we sold 1,250,000
common shares and warrants to purchase 375,000 common shares. We received $750,000 in connection with this transaction, $500,000 of which had been previously advanced. That previous advance was restricted for use in connection with the redemption of
our preferred stock, and was required to be returned if not used, and this part of the transaction also resulted in modifying the terms of a previous sale of common shares and warrants for that portion of the consideration previously advanced. The
warrants sold in this transaction are exercisable at any time until July 31, 2007 at a price of $0.448 per share (representing 80% of the average closing price of Common Shares for the five trading days before the closing date of July 31, 2002).
Registration rights for the common shares sold and issuable upon exercise of the warrant were also granted.





Also
as previously reported, on July 31, 2002, we entered into and consummated a Redemption Agreement with York, LLC to redeem all of our outstanding Series A and Series B 8% Cumulative Convertible Redeemable Preferred Stock. We paid $3,784,071.97 to
York, LLC in connection with redemption ($500,000 of which had previously been advanced). As a result, we have no preferred stock outstanding. As a part of this transaction we agreed to re-price certain existing warrants held by York, LLC to
purchase 199,851 common shares. Before re-pricing, these warrants had exercise prices varying between $5.00 per share to $2.5125 per share and expire in February, September and November of 2005. After the re-pricing such warrants may be exercised
for $1.00 per share. No change was made in the expiration date of these warrants. This issuance was in reliance on Section 4(2) of the Act.





Also as previously reported, on July 1, 2002, we entered into an employment agreement with Thomas H. Insley pursuant to which he became our Chief Financial Officer. Pursuant to the terms of that
agreement, we granted Mr. Insley a warrant to purchase 1,000,000 common shares at a price of $0.60 per share. This warrant vests at a rate of 16,667 shares per month, commencing August 1, 2002. The warrant is exercisable until July 1, 2008. This
issuance was in reliance on Section 4(2) of the Act.





Also as previously reported, on September 9, 2002 we issued
114,286 common shares to Windsor Capital pursuant to the previously reported contractual arrangement with them for financial consulting services. This issuance was in reliance on Section 4(2) of the Act.




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##### Table of Contents




ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K





(a)    Exhibits





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





(b)    Current Reports Filed on Form 8-K





During the three month period ended September 30, 2002, we filed the following current reports on SEC Form 8-K:





| | 1. |  | A report filed on July 26, 2002, of the sale of the London PET Centre, and an Amendment No. 1 to the same, filed July 31, 2002.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------




| | 2. |  | A report filed August 6, 2002, of (i) the sale of 10,000,000 common shares and warrants to purchase 3,000,000 common shares, (ii) the sale of 1,250,000 common
shares and warrants to purchase 375,000 common shares, (iii) the redemption of all outstanding preferred stock, and (iv) a press release announcing the same.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




SIGNATURES





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





MOBILE PET SYSTEMS INC., a Delaware corporationBy:

/S/    THOMAS H.
INSLEYThomas H. Insley, Chief
Financial Officer and Secretary





Date:  November 13, 2002




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##### Table of Contents

CERTIFICATIONS





1.    Chief Executive Officer





I, Paul J. Crowe, certify that:





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




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




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




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




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




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




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




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




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




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




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




By:

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





Date: November 13, 2002







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##### Table of Contents

2.    Chief Financial Officer





I, Thomas H. Insley, certify that:





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




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




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




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




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




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




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




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




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




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




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




By:

/S/    THOMAS H. INSLEYThomas H. Insley, Chief
Financial Officer





Date: November 13, 2002




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