---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



Amendment No.1 to

Form 10-QSB



(Mark One)

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

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



| |  | For the quarterly period ended March 31, 2003
| |  | ---------------------------------------------



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

| |  | SECURITIES EXCHANGE ACT
| |  | -----------------------



| |  | For the transition period from  to
| |  | ----------------------------------



Commission file number 000-27915



---



MOLECULAR IMAGING CORPORATION

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)



Former Name: Mobile PET Systems, Inc.

(Former name, former address and former fiscal year, if
changed since last report)



---



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 55,531,272 shares outstanding of the issuers Common Stock as of May 5, 2003.



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



MOLECULAR IMAGING CORPORATION AND SUBSIDIARIES



---





---

Table of Contents



|        |  | Page No.             
|------- |  | ---------------------
|PART I. |  | FINANCIAL INFORMATION

| |  |         | 
| |  | ------- | 
| |  | Item 1. | 
| |  |         | 
| |  |         | 
| |  |         | 
| |  |         | 
| |  |         | 
| |  |         | 
| |  |         | 
| |  |         | 
| |  |         | 
| |  |         | 
| |  |         | 
| |  | Item 2. | 

|               |  | 
|-------------- |  | 
|PART II.       |  | 
|               |  | 
|SIGNATURES     |  | 
|               |  | 
|CERTIFICATIONS |  | 



---

PART I.

FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS (Unaudited)



|MOLECULAR IMAGING CORPORATION CONSOLIDATED BALANCE SHEETS March 31, 2003 (Unaudited) and June 30, 2002                                                                  | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                                                                                                                                                                        | 
|ASSETS                                                                                                                                                                  | 
|Current assets                                                                                                                                                          | 
|Cash                                                                                                                                                                    | 
|Accounts receivable, net of allowance for doubtful accounts of $110,000 and $116,000 at March 31, 2003 and June 30, 2002,
respectively                                  | 
|Prepaid expenses                                                                                                                                                        | 
|Deposits and other assets                                                                                                                                               | 
|                                                                                                                                                                        | 
|Total current assets                                                                                                                                                    | 
|Property and equipment, net                                                                                                                                             | 
|Other assets                                                                                                                                                            | 
|Accrued interest receivable                                                                                                                                             | 
|Due from London Radiosurgical Centre, Ltd                                                                                                                               | 
|Subordinated equity participation                                                                                                                                       | 
|Restricted cash                                                                                                                                                         | 
|                                                                                                                                                                        | 
|Total assets                                                                                                                                                            | 
|                                                                                                                                                                        | 
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                                                                          | 
|Current liabilities                                                                                                                                                     | 
|Accounts Payable                                                                                                                                                        | 
|Current portion of long-term debt                                                                                                                                       | 
|Loans payable to related parties                                                                                                                                        | 
|Accrued and other liabilities                                                                                                                                           | 
|Other liabilities                                                                                                                                                       | 
|Obligations under capital leasecurrent                                                                                                                                 | 
|                                                                                                                                                                        | 
|Total Current Liabilities                                                                                                                                               | 
|Noncurrent Liabilities                                                                                                                                                  | 
|Obligations under capital lease                                                                                                                                         | 
|Other liabilities                                                                                                                                                       | 
|Long-term debt                                                                                                                                                          | 
|                                                                                                                                                                        | 
|Total liabilities                                                                                                                                                       | 
|Mandatorily redeemable preferred stock;                                                                                                                                 | 
|10,000,000 shares authorized                                                                                                                                            | 
|Preferred stock series A; 0 and 23 shares issued and outstanding at March 31, 2003 and June 30, 2002, respectively                                                      | 
|Preferred stock series B; 0 and 27 shares issued and outstanding at March 31, 2003 and June 30, 2002, respectively                                                      | 
|Shareholders equity                                                                                                                                                    | 
|Common stock; $0.0001 par value; 90,000,000 shares authorized;55,215,482 and 44,966,267 shares issued and outstanding at March
31, 2003 and June 30, 2002, respectively | 
|Additional paid in capital                                                                                                                                              | 
|Accumulated deficit                                                                                                                                                     | 
|Foreign currency translation adjustment                                                                                                                                 | 
|                                                                                                                                                                        | 
|Total shareholders equity                                                                                                                                              | 
|                                                                                                                                                                        | 
|Total liabilities and shareholders equity                                                                                                                              | 
|                                                                                                                                                                        | 



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



---

PART I.

FINANCIAL
INFORMATION (continued)



|MOLECULAR IMAGING CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONSFor the Three and Nine Months Ended March 31, 2003 and 2002 | 
|----------------------------------------------------------------------------------------------------------------------------- | 
|                                                                                                                              | 
|                                                                                                                              | 
|Service revenues                                                                                                              | 
|Cost of service revenues                                                                                                      | 
|                                                                                                                              | 
|                                                                                                                              | 
|Gross profit                                                                                                                  | 
|Expenses                                                                                                                      | 
|Selling and marketing                                                                                                         | 
|General and administrative                                                                                                    | 
|                                                                                                                              | 
|                                                                                                                              | 
|Total expenses                                                                                                                | 
|                                                                                                                              | 
|                                                                                                                              | 
|Profit (loss) from operations                                                                                                 | 
|                                                                                                                              | 
|Other income (expense)                                                                                                        | 
|Interest income                                                                                                               | 
|Other income (expense)                                                                                                        | 
|Interest expense                                                                                                              | 
|                                                                                                                              | 
|Total Other Income (expense)                                                                                                  | 
|                                                                                                                              | 
|Income (loss) from continuing operations before provision for income tax                                                      | 
|Provision for income taxes                                                                                                    | 
|                                                                                                                              | 
|                                                                                                                              | 
|Income (loss) from continuing operations                                                                                      | 
|Income (loss) from discontinued operations (including a $2,219,300 gain on sale for the nine months ended March 31,
2003)     | 
|                                                                                                                              | 
|                                                                                                                              | 
|Net income (loss)                                                                                                             | 
|Preferred stock dividend                                                                                                      | 
|                                                                                                                              | 
|Net income (loss)available to common shareholders                                                                            | 
|                                                                                                                              | 
|Loss per share from continuing operationsbasic                                                                               | 
|Income (loss) per share from discontinued operationsbasic                                                                    | 
|Net income (loss) per share available to common shareholdersbasic                                                            | 
|Loss per share from continuing operationsdiluted                                                                             | 
|Income (loss) per share from discontinued operationsdiluted                                                                  | 
|Net income (loss) per share available to common shareholdersdiluted                                                          | 



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



2



---

PART 1.

FINANCIAL
INFORMATION (continued)



MOLECULAR IMAGING CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY (UNAUDITED)

For the Nine months Ended March
31, 2003 (Unaudited)



|                                                                |  | Common Stock  |   |  | Additional |       |   | Accumulated     |   |            | Foreign Exchange |  |   |             |  
|--------------------------------------------------------------- |  | ------------- | - |  | ---------- | ----- | - | --------------- | - | ---------- | ---------------- |  | - | ----------- | -
|                                                                |  | No. of Shares |   |  | Amount     |       |   | Paid in Capital |   |            | Deficit          |  |   | Adjustment  |  
|Balance as previously reportedJune 30, 2002                    |  | 44,966,267    |   |  | $          | 4,497 |   |                 | $ | 20,186,052 |                  |  | $ | (23,204,517 | )
|Prior period adjustmentreverse service credits                 |  |               |   |  |            |       |   |                 |   | 1,585,470  |                  |  |   | (1,585,470  | )
|Reclassify mandatorily redeemable preferred stock liability     |  |               |   |  |            |       |   |                 |   | (539,876   | )                |  |   |             |  
|Preferred stock dividendbeneficial conversion feature          |  |               |   |  |            |       |   |                 |   | 1,620,580  |                  |  |   | (1,620,580  | )
|                                                                |  |               |   |  |            |       |   |                 |   |            |                  |  |   |             |  
|Balance as restatedJune 30, 2002                               |  | 44,966,267    |   |  |            | 4,497 |   |                 |   | 22,852,226 |                  |  |   | (26,410,567 | )
|Common stock issued in private placement, net of offering costs |  | 9,821,429     |   |  |            | 982   |   |                 |   | 6,184,424  |                  |  |   |             |  
|Preferred stock redemptioncommon stock surrendered             |  | (374,000      | ) |  |            | (37   | ) |                 |   | 37         |                  |  |   |             |  
|Preferred stock redemptiondividend                             |  |               |   |  |            |       |   |                 |   |            |                  |  |   | (297,362    | )
|Preferred stock redemptionrepriced warrant                     |  |               |   |  |            |       |   |                 |   | 23,176     |                  |  |   | (23,176     | )
|Common stock issued for services                                |  | 801,786       |   |  |            | 80    |   |                 |   | 344,920    |                  |  |   |             |  
|Options and warrants issued as compensation and for services    |  |               |   |  |            |       |   |                 |   | 28,368     |                  |  |   |             |  
|Net income                                                      |  |               |   |  |            |       |   |                 |   |            |                  |  |   | 1,082,307   |  
|Foreign currency translation adjustment                         |  |               |   |  |            |       |   |                 |   |            |                  |  |   |             |  
|                                                                |  |               |   |  |            |       |   |                 |   |            |                  |  |   |             |  
|BalanceMarch 31, 2003                                          |  | 55,215,482    |   |  | $          | 5,522 |   |                 | $ | 29,433,151 |                  |  | $ | (25,648,798 | )
|                                                                |  |               |   |  |            |       |   |                 |   |            |                  |  |   |             |  



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





3



---

PART I.

FINANCIAL
INFORMATION (continued)



MOLECULAR IMAGING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine months Ended March 31, 2003 (Unaudited)



|                                                                                    |  | 2003 |            |   | 2002 |  
|----------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -
|Cash flows from operating activities                                                |  |      |            |   |      |  
|Net income (loss)                                                                   |  | $    | 1,082,307  |   |      | $
|Adjustments to reconcile net income (loss) to net cash used in operating activities |  |      |            |   |      |  
|Depreciation and amortization                                                       |  |      | 2,260,975  |   |      |  
|Noncash stock option and warrant charges                                            |  |      | 28,368     |   |      |  
|Common stock issued for compensation                                                |  |      |           |   |      |  
|Common stock issued for services                                                    |  |      | 345,000    |   |      |  
|Gain on sale of discontinued operations                                             |  |      | (2,219,300 | ) |      |  
|(Increase) decrease in operating assets                                             |  |      |            |   |      |  
|Accounts receivable                                                                 |  |      | (349,820   | ) |      |  
|Due from London Radiosurgical Centre, Ltd                                           |  |      | 2,194      |   |      |  
|Prepaid expenses                                                                    |  |      | (210,049   | ) |      |  
|Deposits and other assets                                                           |  |      | 154,002    |   |      |  
|Restricted cash                                                                     |  |      | 5,392      |   |      |  
|Cash from discontinued operations                                                   |  |      | (37,574    | ) |      |  
|Increase (decrease) in operating liabilities                                        |  |      |            |   |      |  
|Accounts payable                                                                    |  |      | (1,561,199 | ) |      |  
|Accrued and other liabilities                                                       |  |      | (491,884   | ) |      |  
|                                                                                    |  |      |            |   |      |  
|Net cash (used in) provided by operating activities                                 |  |      | (991,588   | ) |      |  
|                                                                                    |  |      |            |   |      |  
|Cash flows from investing activities                                                |  |      |            |   |      |  
|Capital expenditures                                                                |  |      | (160,538   | ) |      |  
|Loan made                                                                           |  |      | (250,000   | ) |      |  
|Proceeds from sale of discontinued operations                                       |  |      | 1,884,917  |   |      |  
|                                                                                    |  |      |            |   |      |  
|Net cash provided by (used in) investing activities                                 |  |      | 1,474,379  |   |      |  
|                                                                                    |  |      |            |   |      |  
|Cash flows from financing activities                                                |  |      |            |   |      |  
|Repayment of loans                                                                  |  |      | (402,284   | ) |      |  
|Payments on obligations under capital lease                                         |  |      | (3,261,464 | ) |      |  
|Common stock issued                                                                 |  |      | 6,185,406  |   |      |  
|Preferred stock redeemed                                                            |  |      | (3,284,072 | ) |      |  
|                                                                                    |  |      |            |   |      |  
|Net cash used in financing activities                                               |  |      | (762,414   | ) |      |  
|                                                                                    |  |      |            |   |      |  
|Net (decrease) increase in cash                                                     |  |      | (279,623   | ) |      |  
|Effect of exchange rate on changes in cash                                          |  |      | 312,661    |   |      |  
|Cashbeginning of period                                                            |  |      | 94,143     |   |      |  
|                                                                                    |  |      |            |   |      |  
|Cashend of period                                                                  |  | $    | 127,181    |   |      | $
|                                                                                    |  |      |            |   |      |  
|SUPLEMENTAL DISCLOSURES                                                             |  |      |            |   |      |  
|Interest paid                                                                       |  | $    | 1,378,898  |   |      | $
|Income taxes paid                                                                   |  |      |            |   |      | $
|NONCASH INVESTING AND FINANCING ACTIVITIES                                          |  |      |            |   |      |  
|Equipment under capital lease                                                       |  | $    | 4,057,414  |   |      | $
|Common stock issued under consulting agreement                                      |  | $    | 345,000    |   |      | $
|Preferred stock dividend-warrants re-priced in redemption                           |  | $    | 320,538    |   |      | $
|Obligations under capital lease                                                     |  | $    | 4,057,414  |   |      | $



The accompanying notes
are an integral part of these financial statements



4



---

PART 1.

FINANCIAL
INFORMATION (continued)



Notes to Consolidated Financial Statements  Molecular Imaging Corporation and Subsidiaries



Note 1The Company



Molecular Imaging Corporation (formerly Mobile PET Systems, Inc.) and subsidiaries (the Company) were organized to provide Positron Emission Tomography (PET) patient imaging services to
hospitals and other health care providers on a fixed or 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 and are subject to adjustment based on final settlement history. Differences between estimated amounts and accrued and interim and final settlements are reported in operations in the period of settlement.



Reclassifications



Reclassifications of revenues and expenses from operations of discontinued subsidiaries in addition to certain other reclassifications have
been made in the March 31, 2002 financial statements to conform to the March 31, 2003 presentation.



Note 3Recent Accounting Pronouncements



In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees, including indemnifications that an entity has issued and a roll forward of the entitys
product warranty liabilities. The disclosure provisions of FIN 45 were effective for financial statements of interim periods or annual periods ending after December 15, 2002. The Company adopted the recognition provisions of FIN 45 effective January
1, 2003. The adoption of FIN 45 did not have a material impact on the Companys financial position, results of operations or cash flows.



5



---

PART 1.

FINANCIAL
INFORMATION (continued)



Notes to Consolidated Financial Statements
 Molecular Imaging Corporation and Subsidiaries



Note
3Recent Accounting Pronouncements (continued)



In January 2003, the
FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, which clarifies the application of Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements, relating to the
consolidation of certain variable interest entities (VIEs). FIN 46 is effective for all new Vies created or acquired after January 31, 2003. FIN 46 also sets forth certain disclosures regarding interests in Vies that are deemed significant, even if
consolidation is not required. The Company is currently evaluating the effect that the adoption of FIN 46 will have on its financial position, results of operations and cash flows.



Note 4Discontinued Operations



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



Revenues and expenses from the operations of discontinued operations for the period July 1, 2002 to July 12, 2002 were $80,059 and $74,715, respectively. Revenues from
the operations of discontinued operations for the three and nine months ended March 31, 2002 were $349,633 and $908,420, respectively. Expenses from the operations of discontinued operations for the three and nine months ended March 31, 2002 were
$475,437 and $1,210,828, respectively.



Note 5Deposits and Other
Assets



Deposits and assets consist of the following at March 31, 2003 and
June 30, 2002:



|                                    |  | March 31,2003 |         | June 30,2002
|----------------------------------- |  | ------------- | ------- | ------------
|Equipment depositsMobile PET Units |  | $             | 25,000  |             
|Other                               |  |               | 16,487  |             
|Loan receivable                     |  |               | 250,000 |             
|Preferred stock redemption deposit  |  |               |        |             
|                                    |  | $             | 291,487 |             



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



Note
6Capitalization



Preferred Stock



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



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



6



---

MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 5CAPITALIZATION (Continued)



Preferred Stock (Continued)



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



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



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



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



7



---

PART 1.

FINANCIAL
INFORMATION (continued)



Notes to Consolidated Financial Statements
 Molecular Imaging Corporation and Subsidiaries



Note
6Capitalization (Continued)



Stock Options



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



As of December 31, 2002, the Company has granted options to purchase 3,676,501 shares of common stock, including options granted outside of the 1999 Stock Option Plan to purchase 200,000 shares of common stock, as
follows:



|                                |  | Exercise Price |            | Number ofShares |            |   | VestedShares |           
|------------------------------- |  | -------------- | ---------- | --------------- | ---------- | - | ------------ | ----------
|Outstanding, June 30, 2000      |  | $              | 1.00-$4.63 |                 | 5,988,000  |   |              | 2,662,000 
|Granted                         |  | $              | .45-$3.25  |                 | 1,282,250  |   |              | 1,504,170 
|Exercised                       |  |                |            |                 | (25,000    | ) |              | (25,000   
|Cancelled                       |  | $              | 1.00-$5.31 |                 | (2,364,500 | ) |              | (295,000  
|Outstanding, June 30, 2001      |  | $              | .45-$4.63  |                 | 4,880,750  |   |              | 3,846,170 
|Granted                         |  | $              | .50-$3.00  |                 | 2,096,043  |   |              | 1,662,792 
|Exercised                       |  |                |            |                 |           |   |              |          
|Cancelled                       |  | $              | 1.00-$4.63 |                 | (2,894,084 | ) |              | (2,240,917
|Outstanding, June 30, 2002      |  | $              | .45-$4.63  |                 | 4,082,709  |   |              | 3,268,045 
|Granted                         |  |                |            |                 |           |   |              | 94,166    
|Exercised                       |  |                |            |                 |           |   |              |          
|Cancelled                       |  | $              | .56-$3.25  |                 | (220,415   | ) |              | (153,916  
|Outstanding, September 30, 2002 |  | $              | .45-$4.63  |                 | 3,862,294  |   |              | 3,208,295 
|Granted                         |  | $              | .31-$.74   |                 | 700,000    |   |              | 269,444   
|Exercised                       |  |                |            |                 |           |   |              |          
|Cancelled                       |  | $              | .43-$3.25  |                 | (735,794   | ) |              | (559,126  
|Outstanding, December 31, 2002  |  |                |            |                 | 3,826,500  |   |              | 2,918,613 
|Granted                         |  | $              | .18-$0.62  |                 | 400,000    |   |              | 162,501   
|Exercised                       |  |                |            |                 |            |   |              |           
|Cancelled                       |  | $              | .56-$2.63  |                 | (399,999   | ) |              | (179,444  
|Outstanding, March 31, 2003     |  |                |            |                 | 3,826,501  |   |              | 2,901,670 



The Company accounts for stock-based
compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, under which no compensation cost for stock options issued to employees is recognized for
the stock option awards granted at or above fair market value. Compensation expense is recognized for stock option awards granted below fair market value with credits recorded from previously recognized expense for grants cancelled by termination of
employment. The Company recognized compensation expense of $9,638 and $28,368 for the three and nine months ended March 31, 2003, respectively, and $143,873 and $170,382 for the three and nine months ended March 31, 2002, respectively.



Had compensation expense for options and warrants issued to employees and directors been
determined upon fair values at the grant dates in accordance with SFAS Nos. 123 and 148, the Companys net income and net income per share would have been decreased, and net loss and net lose per share would have been increased, to the pro
forma amounts indicated below.



|                                                                   |  | Three MonthsEnded March 31, 2003 |        | Three MonthsEnded March 31, 2002 |   |            | Nine MonthsEnded March 31, 2003 |  |   | Nine MonthsEnded March 31, 2002 |  
|------------------------------------------------------------------ |  | -------------------------------- | ------ | -------------------------------- | - | ---------- | ------------------------------- |  | - | ------------------------------- | -
|Income (loss) from continuing operations                           |  |                                  |        |                                  |   |            |                                 |  |   |                                 |  
|As reported                                                        |  | $                                | 61,921 |                                  | $ | (1,084,276 | )                               |  | $ | (1,142,337                      | )
|Pro forma                                                          |  | $                                | 37,363 |                                  | $ | (1,084,276 | )                               |  | $ | (1,264,633                      | )
|Net income (loss) available to common shareholders                 |  |                                  |        |                                  |   |            |                                 |  |   |                                 |  
|As reported                                                        |  | $                                | 61,921 |                                  | $ | (1,210,080 | )                               |  | $ | 761,769                         |  
|Pro forma                                                          |  | $                                | 37,363 |                                  | $ | (1,210,080 | )                               |  | $ | 639,473                         |  
|Net income (loss) per share available to common shareholdersBasic |  |                                  |        |                                  |   |            |                                 |  |   |                                 |  
|As reported                                                        |  | $                                |       |                                  | $ | (0.04      | )                               |  | $ | 0.01                            |  
|Pro forma                                                          |  | $                                |       |                                  | $ | (0.04      | )                               |  | $ | 0.01                            |  



8



---

PART 1.

FINANCIAL
INFORMATION (continued)



Notes to Consolidated Financial Statements
 Molecular Imaging Corporation and Subsidiaries



Note
6Capitalization (Continued)



Warrants



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



Note 7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



9



---

PART 1.

FINANCIAL
INFORMATION (continued)



Notes to Consolidated Financial Statements
 Molecular Imaging Corporation and Subsidiaries



Note
7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 March 31, 2003 and 2002 accrued interest on the investment was $10,573. The related shareholder, officer and director personally guarantee the investment.



Loans



On August 23, 2000, the Company received an eight percent (8%) bridge loan from a director and shareholder in the amount of $200,000, with
an original due date of October 11, 2000. The loans due date has been extended several times and the Company has agreed to make monthly payments of $10,000 per month beginning on January 8, 2002, until paid in full. At March 31, 2003 and June
30, 2002, the loan has a balance of $110,000 and $160,000, respectively.



On
January 17, 2001, the Company received an eight percent (8%) bridge loan from an officer, director and shareholder in the amount of $150,000, with an original due date of March 12, 2001. The note has been extended several times and was due on
October 1, 2002. At March 31, 2003 and June 30, 2002, the loan has a balance of $12,000 and $150,000, respectively.



On October 12, 2001, the Company converted $253,050 due to an individual and director of the Company into a promissory note without interest and payable in monthly
installments of $14,000 per month beginning on October 15, 2001, until paid in full. At March 31, 2003, and June 30, 2002, the individual is no longer a director and the loan has a balance of $0 and $127,050, respectively.



On June 6, 2002, the Company received an eight percent (8%) bridge loan from an officer,
director and shareholder in the amount of $77,600, due on demand. At March 31, 2003 and June 30, 2002, the loan has a balance of $0 and $67,600, respectively, with accrued interest of $0 and $371, respectively.



Note 8Long Term Debt



|                                                                                                                                                                                                  |  | March 31,2003 |         |   | June 30,2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ------------ | -
|Long-term debt at March 31, 2003 and June 30, 2002 consists of the following:                                                                                                                     |  |               |         |   |              |  
|Promissory Note with no interest, due in monthly installments of $500, with first payment beginning on February 1, 2002                                                                           |  | $             | 12,500  |   |              | $
|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 |  |               | 67,790  |   |              |  
|                                                                                                                                                                                                  |  |               | 80,290  |   |              |  
|Less current portion                                                                                                                                                                              |  |               | (27,868 | ) |              |  
|Long term debt, net of current portion                                                                                                                                                            |  | $             | 52,422  |   |              | $



10



---

PART 1.

FINANCIAL
INFORMATION (continued)



Notes to Consolidated Financial Statements
 Molecular Imaging Corporation and Subsidiaries



Note 8Long
Term Debt (Continued)



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



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



Note 9Commitments



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



|                              |  | March 31, 2002 |            |   | June 30, 2002 |  
|----------------------------- |  | -------------- | ---------- | - | ------------- | -
|Equipment                     |  | $              | 22,071,686 |   |               | $
|Less accumulated amortization |  |                | (6,939,800 | ) |               |  
|Net capital lease assets      |  | $              | 15,131,886 |   |               | $



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 August 2006. Rent expense under these operating leases was $405,486 and $1,472,297, respectively for the
three and nine months ended March 31, 2003, compared to $433,181 and $1,174,042, respectively, for the three and nine months ended March 31, 2002.



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



The following is a schedule by year of the future minimum lease
payments at March 31, 2003:



|March 31,                                                                         |  | Capital Lease |            |   | Operating Leases
|--------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ----------------
|2004                                                                              |  | $             | 6,863,083  |   |                 
|2005                                                                              |  |               | 6,215,182  |   |                 
|2006                                                                              |  |               | 3,548,731  |   |                 
|2007                                                                              |  |               | 1,153,212  |   |                 
|2008                                                                              |  |               | 736,291    |   |                 
|                                                                                  |  |               | 18,516,499 |   |                 
|Less amount representing interest at 12.0%                                        |  |               | (3,942,814 | ) |                 
|Present value of minimum lease payments (including current portion of $5,023,397) |  | $             | 14,573,685 |   |                 



11



---

PART 1.

FINANCIAL
INFORMATION (continued)



Notes to Consolidated Financial Statements



Note 10Retirement Plan



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



Note 11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 12Earnings (Loss) Per Share



Computations of basic and diluted earnings per share for the three and nine months ended
March 31, 2003 and 2002 were as follows:



|                                                                     |  | Three monthsEnded March 31, 2003 |            | Three monthsEnded March 31, 2002 |   |            | Nine monthsEnded March 31, 2003 |  | Nine monthsEnded March 31, 2002 |           
|-------------------------------------------------------------------- |  | -------------------------------- | ---------- | -------------------------------- | - | ---------- | ------------------------------- |  | ------------------------------- | ----------
|Net income (loss) per share available to common shareholdersbasic   |  |                                  |            |                                  |   |            |                                 |  |                                 |           
|Numerator:                                                           |  |                                  |            |                                  |   |            |                                 |  |                                 |           
|Net income (loss)available to common shareholders                   |  | $                                | 61,921     |                                  | $ | (1,210,080 | )                               |  | $                               | 761,769   
|Denominator:                                                         |  |                                  |            |                                  |   |            |                                 |  |                                 |           
|Weighted-average shares                                              |  |                                  | 54,138,199 |                                  |   | 32,823,114 |                                 |  |                                 | 53,891,686
|Net income (loss) per share available to common shareholdersbasic   |  | $                                |           |                                  | $ | (0.04      | )                               |  | $                               | 0.01      
|Net income (loss) per share available to common shareholdersdiluted |  |                                  |            |                                  |   |            |                                 |  |                                 |           
|Numerator:                                                           |  |                                  |            |                                  |   |            |                                 |  |                                 |           
|Net income (loss)available to common shareholders                   |  | $                                | 61,921     |                                  | $ | (1,210,080 | )                               |  | $                               | 761,769   
|Denominator:                                                         |  |                                  |            |                                  |   |            |                                 |  |                                 |           
|Weighted-average shares                                              |  |                                  | 73,636,220 |                                  |   | 32,823,114 |                                 |  |                                 | 71,968,209
|Net income (loss) per share available to common shareholdersdiluted |  | $                                |           |                                  |   | (0.04      | )                               |  |                                 | 0.01      



Note 13 RESTATEMENT OF
PREVIOUSLY ISSUED FINANCIAL STATEMENTS



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



12



---

PART 1.

FINANCIAL
INFORMATION (continued)



Notes to Consolidated Financial Statements



|                                       |  | March 31, 2003         |            | June 30, 2002 |  
|-------------------------------------- |  | ---------------------- | ---------- | ------------- | -
|                                       |  | As Originally Reported |            | As Restated   |  
|Assets                                 |  | $                      | 21,375,702 |               | $
|Liabilities                            |  | $                      | 17,585,827 |               | $
|Mandatorily redeemable preferred stock |  | $                      |           |               | $
|Shareholders Equity                   |  | $                      | 3,789,875  |               | $



|                                                           |  | Three Months Ended March 31, 2003 |           | Three Months Ended March 31, 2002 |  
|---------------------------------------------------------- |  | --------------------------------- | --------- | --------------------------------- | -
|                                                           |  | As Originally Reported            |           | As Restated                       |  
|Revenues                                                   |  | $                                 | 5,650,896 |                                   | $
|Expenses                                                   |  | $                                 | 5,588,975 |                                   | $
|Income (loss) from operations                              |  | $                                 | 61,921    |                                   | $
|Preferred stock dividend                                   |  | $                                 |          |                                   | $
|Net income (loss)available to common shareholders         |  | $                                 | 61,921    |                                   | $
|Net income (loss)available to common shareholders-basic   |  | $                                 | 0.00      |                                   | $
|Net income (loss)available to common shareholders-diluted |  | $                                 | 0.00      |                                   | $



13



---

PART 1.

FINANCIAL
INFORMATION (continued)



Notes to Consolidated Financial Statements



|                                                           |  | Nine Months ended March 31, 2003 |            | Nine Months ended March 31, 2002 |  
|---------------------------------------------------------- |  | -------------------------------- | ---------- | -------------------------------- | -
|                                                           |  | As Originally Reported           |            | As Restated                      |  
|Revenues                                                   |  | $                                | 15,262,591 |                                  | $
|Expenses                                                   |  | $                                | 14,180,284 |                                  | $
|Income (loss) from operations                              |  | $                                | 1,082,307  |                                  | $
|Preferred stock dividend                                   |  | $                                | 23,176     |                                  | $
|Net income (loss)available to common shareholders         |  | $                                | 1,059,131  |                                  | $
|Net income (loss)available to common shareholders-basic   |  | $                                | 0.02       |                                  | $
|Net income (loss)available to common shareholders-diluted |  | $                                | 0.01       |                                  | $



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



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



Note 14Subsequent Events



In April 2003, the Company
granted to eligible employees and directors, under the 1999 Stock Option Plan, options to purchase 1,214,000 shares of common stock at exercise prices equal to the fair market value of the common stock at the date of grant.



In April 2003, the Company committed to enter into definitive agreements with a public
university to establish two limited liability companies. The limited liability companies will then enter into a facility sharing and sublease agreement with a non-affiliated entity for the purpose of offering several imaging modalities at an
existing fixed site location. In the event the definitive agreements with the public university are not executed by June 3, 2003, the Company has agreed to pay $400,000 to the nonaffiliated entity and commence operations at the fixed site location
as the sole owner of the limited liability corporations until such time as the definitive agreements with the public university are executed.



14



---

PART 1.

FINANCIAL
INFORMATION (continued)



Notes to Consolidated Financial Statements



In May 2003, certain leases, which previously had restricted the use of
cash and accounts receivable, contained financial ratio covenants and required the personal guarantee of the chief executive officer, were assigned to a nonaffiliated party and the lease provisions were modified. These leases had previously been in
default because of the Companys failure to meet a required debt service coverage ratio. As a result of the default, obligations under capital leasecurrent previously included the full amount of these lease obligations. The modified
provisions of the leases contain no restrictions on the use of cash, do not contain any financial ratio covenants and do not require any personal guarantee. As a result, the default on these leases has been released and the amount of lease
obligations previously included in obligations under capital leasecurrent that extend beyond one year has been reclassified to noncurrent liabilities. In connection with this transaction, the Company also issued to the nonaffiliated party
warrants to purchase 100,000 shares of common stock at an exercise price of $0.20 per share, expiring in three years.



In addition, in May 2003, the Company entered into a $3,200,000 asset based financing arrangement with a financial institution. Amounts available under the financing
arrangement, with expires in May 2006, are limited to approximately 80% of qualified accounts receivable, which will be less than the balance of accounts receivable as reflected on our balance sheet. In connection with this transaction, the Company
also issued to the financial institution warrants to purchase 10,000 shares of common stock at an exercise price of $0.20 per share, expiring in three years.



In May 2003, the Company entered into an agreement to establish a limited liability company for the purpose of owning and operating a fixed site PET facility in Houston,
Texas. The Company estimates that the limited liability company will require approximately $500,000 of working capital, which will be contributed by the Company or other investors in the limited liability company.



On May 12, 2003, the Company entered into an agreement with a nonaffiliated third party to
purchase certain assets used for the manufacture of the radiopharmaceutical used in our business, at an existing site. The purchase price for the assets is $1,000,000, of which a refundable deposit of $500,000 has been paid. The refundable deposit
includes $250,000 recorded under deposits and other assets as of March 31, 2003. If the transaction is not consummated by May 26, 2003, in lieu of repayment of the refundable deposit to the Company, the seller has the option to negotiate with the
Company for the establishment of a joint venture between the seller and the Company to operate the facility.



15



---

PART I. Item 2.

MANAGEMENTS DISCUSSION AND ANALYSIS



Overview



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



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



As of March 31, 2003, we had eighteen mobile units deployed providing our services to approximately 76 healthcare facilities in 22 states.
We believe there are and will be significant opportunities to develop and operate additional mobile and stationary PET facilities.



We owned and operated the only private sector stationary PET facility in the United Kingdom (London PET Centre). We sold this facility in July 2002. The results of
operations of the London PET Centre for the three and nine month periods ended March 31, 2002 and 2003 have been reclassified as income (loss) from operations of discontinued operations.



Critical Accounting Policies



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



Revenue Recognition



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



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



16



---

PART I. Item 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (Continued)



Results of Operations



Three Months Ended March 31, 2003



Service revenues for the three months ended March 31, 2003 were
$5,650,896, compared to service revenues for the three months ended March 31, 2002 of $4,249,770. Our cost of service revenues for the three months ended March 31, 2003 were $3,141,296, compared to $2,727,400 for the three months ended March 31,
2002. These results exclude the operations of the London PET Centre. The substantial difference in service revenues is largely attributable to eighteen units being deployed during the three months ended March 31, 2003 as compared to fifteen units
being deployed during the three months ended March 31, 2002, as well as better utilization of each existing unit. The cost of service revenues represents salaries paid to technologists and drivers, system maintenance, transportation and insurance on
our mobile PET systems.



The gross profit percentage increased from 35.8% for
the three months ended March 31, 2002 to 44.4% for the three months ended March 31, 2003 primarily for the following reasons:



|Gross profit percentage for the three months ended March 31, 2002 |  | 35.8 %
|----------------------------------------------------------------- |  | ------
|Transportation services                                           |  | 3.0   
|Depreciation expense                                              |  | 2.1   
|Equipment rental                                                  |  | 2.3   
|Service contracts and repairs                                     |  | (1.1) 
|Medical supplies                                                  |  | 2.0   
|Other                                                             |  | .3    
|Gross profit percentage for the three months ended March 31, 2003 |  | 44.4 %



Our cost of transportation services
decreased because we hired more of our own drivers and used fewer outside transportation services in the three months ended March 31, 2003. While our depreciation expense increased in absolute dollars in the three months ended March 31, 2003, it
decreased as a percentage of service revenues because of the substantial increase in service revenues. Equipment rental remained relatively constant in terms of absolute dollars, but decreased as a percentage of service revenues since a greater
portion of our service revenues are generated from units that we are purchasing as opposed to renting. Our cost of service contracts and repairs increased over the three months ended March 31, 2002 since more of our units are no longer covered by
warranty and require maintenance contracts or the use of other repair sources. Our cost of medical supplies decreased as a percent of service revenues since more of our customers now provide their own medical supplies.



Nine Months Ended March 31, 2003



Service revenues for the nine months ended March 31, 2003 were $15,262,591 as compared to
service revenues for the nine months ended March 31, 2002 of $11,519,484. The substantial difference in service revenues is largely attributable to the deployment of three new units during the nine months ended March 31, 2003 (including two new
units at the end of calendar year 2002), as well as better utilization of each existing unit. Our cost of service revenues for the nine months ended March 31, 2003 were $9,262,883 as compared to cost of service revenues for the nine months ended
March 31, 2002 of $7,172,223.



17



---

PART I. Item 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (Continued)



The
gross profit percentage increased from 37.7% for the nine months ended March 31, 2002 to 39.3% for the nine months ended March 31, 2003 primarily for the following reasons:



|Gross profit percentage for the nine months ended March 31, 2002 |  | 37.7 %
|---------------------------------------------------------------- |  | ------
|Transportation services                                          |  | 2.3   
|Depreciation expense                                             |  | 4.0   
|Service contracts and repairs                                    |  | (4.1) 
|Other                                                            |  | (.6)  
|Gross profit percentage for the nine months ended March 31, 2003 |  | 39.3 %



Our cost of transportation services
decreased because we hired more of our own drivers and used fewer outside transportation services in the nine months ended March 31, 2003. Our depreciation expense remained relatively constant in terms of absolute dollars in the nine months ended
March 31, 2003, but decreased as a percentage of service revenues because of the substantial increase in service revenues. Our cost of service contracts and repairs increased over the nine months ended March 31, 2002 since more of our units are no
longer covered by warranty and require maintenance contracts or the use of other repair sources.



Selling and marketing expenses decreased from $1,410,378 for the nine months ended March 31, 2002 to $1,354,014 for the nine months ended March 31, 2003 primarily because of reduced trade show costs, and reduced
travel expenses. General and administrative expenses decreased from $5,283,248 for the nine months ended March 31, 2002 to $4,491,913 for the nine months ended March 31, 2003 primarily because of common stock issued for services during the nine
months ended March 31, 2002.



Other income (expenses) for the nine months ended
March 31, 2003 consists primarily of income resulting from the settlement of claims under a Preferred Provider Radiopharmaceutical Agreement with P.E.T. Net Pharmaceuticals, Inc.



Expanding Our Business



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



One measure
that management uses to evaluate our progress is average revenues per weekday for all units. We calculate average revenues per weekday for all units by dividing total weekday revenues by the number of weekdays in the relevant period, excluding
holidays. We exclude Saturdays from this calculation since not all of our units are scheduled for Saturday service. For reasons described above, for the three and nine months ended March 31, 2003, our average revenues per weekday for all units
increased to approximately $84,141 and $75,427, respectively, from average revenues per weekday for all units of approximately $63,658 and $58,975 for the three and nine months ended March 31, 2002, respectively. Our future revenues will principally
be a function of the number of operating units in service, the volume of patient procedures and the fees earned per procedure. We generate substantially all our revenues from our service agreements with hospitals and other health care providers. We
have a satisfactory record of account collections, however there can be no assurance that this trend will continue and, accordingly, we have established an allowance for uncollectable accounts receivable. Lower reimbursement by public and private
insurers may also impact the revenues we can generate from our operations. There can be no assurance that we will be able to maintain or increase the number of patient procedures or that our allowances for doubtful accounts receivable will be
sufficient.



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



18



---

PART I. Item 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (Continued)



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



Since our inception we have incurred significant losses. Through March 31, 2003, we have an accumulated deficit of $25,648,798, which we have financed primarily through equity sales. For the three and nine months ended March 31, 2003, we
recognized income (loss) from continuing operations of $61,921 and $(1,142,337), respectively, compared to losses from continuing operations of $(1,084,276) and $(3,868,165) for the three and nine months ended March 31, 2002, respectively. Because
of the sale of the London PET Centre, there was net income available to common shareholders of $761,769 for the nine months ended March 31, 2003, compared to a net loss available to common shareholders of $(4,170,573) for the nine months ended March
31, 2002.



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



19



---

PART I. ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



Liquidity and Capital Resources



At March 31, 2003, our total
assets were $21,375,702, compared to $20,876,584 at June 30, 2002. The increase was primarily the result of new mobile units being added as fixed assets, offset by the sale of assets from the London PET Centre Ltd. Our current assets at March 31,
2003 totaled $4,862,234, and our current liabilities were $7,983,117, as compared to current assets of $5,037,607 and current liabilities of $12,581,697 at June 30, 2002. Our current liabilities exceed current assets because, under Generally
Accepted Accounting Principles, we are required to record as a current liability our capital lease obligations due within the next twelve months. As discussed in Note 9Commitments, several of our units are also financed under non-cancelable
operating leases that are not recorded as liabilities until the monthly payment is due. Our current assets, on the other hand, include only those accounts receivable that are outstanding from service revenues recognized and typically represent 30 to
60 days of service revenues. Shareholders equity increased to $3,789,875 at March 31, 2003, from ($3,866,505) at June 30, 2002, due primarily to the gain on the sale of the London PET Centre of $2,219,300 and private placements of common stock
of $6,185,406, net of offering costs less the loss from continuing operations of $1,084,276. We used the net proceeds from these transactions to make payments of accounts payable and certain other obligations.



While we believe that our available cash, short-term assets, and other resources will be
sufficient to fund our operations and capital expenditures through the current fiscal year, our results of operations will have an impact on our cash needs beyond that time. We are currently pursuing several financing opportunities as well as
working to achieve sustained profitability from operations. In May 2003, certain leases, which previously had restricted the use of cash and accounts receivable, contained financial ratio covenants and required the personal guarantee of the chief
executive officer, were assigned to a non-affiliated party and the lease provisions were modified. These leases had previously been in default because of our failure to meet a required debt service coverage ratio. As a result of the default,
obligations under capital leasecurrent previously included the full amount of these lease obligations. The modified provisions of the leases contain no restrictions on the use of cash, do not contain any financial ratio covenants and do not
require any personal guarantee. As a result, the default on these leases has been released and the amount of lease obligations previously included in obligations under capital leasecurrent that extend beyond one year has been reclassified to
non-current liabilities. In addition, in May 2003, we entered into a $3,200,000 asset based financing arrangement with a financial institution. Amounts available for borrowing under the financing arrangement, which expires in May 2006, are limited
to approximately 80% of qualified accounts receivable, which will be less than the balance of accounts receivable as reflected on our balance sheet. The ability to borrow against these assets will provide us greater flexibility with our cash needs.
If we are unable to generate sufficient service revenues to fund continuing operations or achieve sustained profitability, or if we are unable to successfully complete any of the proposed financing activities, our operations will need to be
significantly reduced or will otherwise suffer. In addition, we may be required to raise additional capital to add or acquire additional mobile units or stationary sites, or for other operating purposes. We are continually exploring various
financing alternatives, but there can be no assurance that any additional debt or equity financing will be available on commercially reasonable terms or at all.



Seasonality



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



Factors That May Affect Future Results



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



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



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



20



---

PART I. ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



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



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



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



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



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



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



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



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



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



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



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



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



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



21



---

PART I. ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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.



22



---

PART I. ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



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



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



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



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



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



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



We have limited experience with widespread deployment of our products and services to a diverse customer base, and there can be no assurance that we will have adequate
personnel to provide the level of support that our customers may require during initial service implementation 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, prevent us from gaining new customers, and adversely affect our business, financial condition or results of operations.



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



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



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



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



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



Upon expiration of our clients contracts, we are subject to the risk that clients will
cease using our services and purchase or lease their own PET systems, use our competitors services or rely on alternate imaging technologies. Approximately twenty-eight percent of our client contracts expire in 2003; thirty-two percent in
2004; twenty-two percent in 2005; fourteen percent in 2006; three percent in 2007; and one percent in 2008. 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 develops their own fixed site PET services. In addition, a portion of our contracts do not have minimum
usage requirements.



23



---

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.



24



---

PART I. ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



We are working with third parties to develop stationary imaging centers that we will operate
as IDTFs. These stationary imaging centers are identified and selected based on input from hospital administrators, imaging center operators or physician groups who want to offer molecular imaging on their campus. We analyze the marketplace
demographics, local competition, tumor board statistics, referring physician demographics and the availability of an on-site PET champion to increase the vitality of the PET service. As permitted under state and federal laws, we may also partner
with third party investors in the development and operation of these stationary imaging centers. We anticipate that these partnerships would be in the form of a limited liability company or similar legal entity in which we would have a majority
ownership, control and management rights.



While we will use our experience and
knowledge of the PET marketplace to select IDTF imaging centers that we believe will be successful, there can be no assurances that our selection process will result in an IDTF that is profitable. Also, the factors upon which we select the IDTF
imaging center may change after commencement of operations of the site that could result in reduced patient use and revenues and have an adverse impact on our business. Also, there are no assurances that the current reimbursement rates for IDTF
imaging centers will remain higher than those for hospital based services. A reduction in such reimbursement rates could have an adverse impact on the operation of the IDTF model.



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



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 team 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 resources and experience than us. Furthermore, we expect that other companies will enter the mobile and
stationary PET market, particularly as PET services 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
procedure 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 PET imaging systems. In addition, the hospital industry has been



25



---

PART I. ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



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



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



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



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



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



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



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



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



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



26



---

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 of our business.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



27



---

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.



SIGNATURES



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



MOLECULAR IMAGING CORPORATION a Delaware corporationBy:

/s/    ANTHONY R. TURNBULLAnthony R. Turnbull, Senior Vice President, Finance




Date: July 10, 2003



28



---

CERTIFICATIONS



1. Chief Executive Officer



I, Paul J. Crowe, certify that:



1. I have reviewed this quarterly report on Form 10-QSB of Molecular Imaging Corporation;



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: July 10, 2003



29



---

2. Senior Vice President, Finance



I, Anthony R. Turnbull, certify that:



1. I have reviewed this quarterly report on Form 10-QSB of Molecular Imaging Corporation;



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



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



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



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



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



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



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



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



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



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



By:

/s/    ANTHONY R. TURNBULLAnthony R. Turnbull, Senior Vice President, Finance




Date: July 10, 2003



30