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UNITED STATES





SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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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 September 30, 2001





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




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




Commission file number 000-27915





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MOBILE PET SYSTEMS, INC.,


A Delaware Corporation


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





Delaware (State or other jurisdiction
of incorporation or organization)

11-2787966 (IRS Employer Identification No.)





2150 West Washington Street, Suite 110


San Diego, California 92110


(Address of principal executive offices)





(619) 226-6738


(Issuers telephone number)





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 35,224,338 shares outstanding of the issuers Common Stock as of October 31, 2001.





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





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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





For the quarterly period ended September 30, 2001





TABLE OF CONTENTS





Page No.PART I

FINANCIAL INFORMATION


3ITEM 1.

FINANCIAL STATEMENTS (UNAUDITED)


3Consolidated Balance Sheets as of September 30, 2001 and 2000


3Consolidated Statements of Operations for the three months and nine months ended
     September 30, 2001 and 2000


4Statement of Changes in Shareholders Equity


5Consolidated Statements of Cash Flows for the three months ended September 30, 2001 and2000


6Notes to Consolidated Financial Statements


7ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS


17PART II

OTHER INFORMATION


27ITEM 1.

LEGAL PROCEEDINGS


27ITEM 2.

CHANGES IN SECURITIES


27ITEM 6.

EXHIBITS AND REPORTS ON FORM 8-K


28SIGNATURES


29







2


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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





For the quarterly period ended September 30, 2001





PART I    FINANCIAL INFORMATION





ITEM
1.    FINANCIAL STATEMENTS (UNAUDITED)





MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


(Unaudited)


September 30, 2001 and 2000





2001

2000ASSETSCurrent assetsCash

$       19,018


$      178,028Accounts receivable, net of allowance for doubtful accounts of $116,000 and $129,320 at September 30,
    2001 and 2000, respectively

2,341,267


567,535Stock subscriptions receivable




547,500Other receivables

2,415


34,876Prepaid expenses

838,744


136,393Deposits and other assets

484,511


1,344,678Total current assets

3,685,955


2,809,010Property and equipment, net

17,038,255


8,895,925Other assetsAccrued interest receivable

10,573


50,520Due from London Radiosurgical Centre, Ltd

171,137


421,783Subordinated equity participation

200,000


200,000Restricted cash

347,544


333,576Total assets

$21,453,464


$12,710,814LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable

$   2,474,617


$   1,081,469Current portion of long-term debt

18,576


Loans payable

475,000


200,000Accrued and other liabilities

896,394


483,036Income taxes payable




800Obligations under capital leasecurrent

4,067,837


1,434,077Total current liabilities

7,932,424


3,199,382Noncurrent liabilitiesObligations under capital lease

13,209,270


7,040,803Long-term debt

76,537


Other liabilities

85,050


Deferred revenue




12,008Total liabilities

21,303,281


10,252,193Shareholders equityPreferred stock; 10,000,000 shares authorized:Preferred stock; Series A; 40 and 60 shares issued and outstanding at September 30, 2001 and 2000,
        respectively

2,364,264


3,000,000Preferred stock; Series B; 24 and 20 shares issued and outstanding at September 30, 2001 and 2000,
        respectively

1,437,157


1,000,000Common stock; $0.0001 par value; 90,000,000 shares authorized; 32,624,338 and 14,944,658 shares
        issued and outstanding at September 30, 2001 and 2000, respectively

3,263


1,495Additional paid in capital

16,022,045


9,105,719Accumulated deficit

(19,342,803
)

(10,678,798
)Foreign currency translation adjustment

(333,743
)

30,205Total shareholders equity

150,183


2,458,621Total liabilities and shareholders equity

$21,453,464


$12,710,814




3


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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


For
the Three Months Ended September 30, 2001 and 2000





2001

2000Service revenues

$3,680,725


$    840,981Cost of service revenues

2,094,932


612,753Gross profit

1,585,793


228,228ExpensesSelling and marketing

942,984


1,225,664General and administrative

1,160,491


1,027,058Total expenses

2,103,475


2,252,722Loss from operations

(517,683
)

(2,024,494
)Other income (expense)Interest income

2,601


13,277Other income (expense)

72


(7,252
)Interest expense

(594,988
)

(244,558
)Total other income (expense)

(592,315
)

(238,533
)Loss before provision for income taxes

(1,109,998
)

(2,263,027
)Provision for income taxes

2,256


Net loss

(1,112,254
)

(2,263,027
)Preferred stock dividend

(76,654
)

(276,387
)Net lossavailable to common shareholders

$(1,188,908
)

$(2,539,414
)Loss per sharebasic

$            (0.04
)

$            (0.18
)Loss per sharediluted

$            (0.04
)

$            (0.18
)




4


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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY


(Unaudited)


For the Three Months Ended September 30, 2001 and 2000





AdditionalPreferred Stock

Common Stock

Paid In Capital

Accumulated Deficit

Foreign Currency Translation Adjustment

Total Shareholders EquityShares

Amount

Shares

AmountBalanceJune 30, 2000


60



$3,000,000


14,944,658


$1,495


$  8,580,888



$  (8,415,771
)



$  (42,938
)



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


20



1,000,000








(115,000
)












885,000Stock subscribed, net of offering costs















547,500













547,500Options issued as compensation















92,331













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



















(2,263,027
)








(2,263,027
)Foreign currency translation adjustment
























73,143




73,143BalanceSeptember 30, 2000


80



4,000,000


14,944,658


1,495


9,105,719



(10,678,798
)



30,205




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


10



500,000






















500,000Recapitalization of preferred stock






621,456








(347,500
)


(273,956
)








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









3,735,584


374


1,320,776













1,321,150Common stock issued through conversion





























ofpreferred stock


(26
)


(1,320,035
)

1,743,735


175


1,319,860













Common stock issued through conversion





























ofpreferred stock dividends









47,778


4


20,095



(20,099
)








Common stock issued through conversion





























ofdebt









1,875,000


188


749,812













750,000Common stock issued through settlement    agreement









2,733,981


273


749,727













750,000Common stock subscribed, net of offering    costs















1,000,000













1,000,000Common stock issued for services









403,350


40


201,635













201,675Options issued as compensation















321,584













321,584Convertible debt intrinsic beneficial    conversion feature















7,800













7,800Net lossOctober 1, 2000 to June 30,    2001



















(7,551,989
)








(7,551,989
)Foreign currency translation adjustment
























(350,562
)



(350,562
)BalanceJune 30, 2001, as originally    stated


64



3,801,421


25,484,086


2,549


14,449,508



(18,524,842
)



(320,357
)



(591,721
)Prior period adjustmentinterest expense    on obligations under capital lease



















294,293









294,293BalanceJune 30, 2001, as adjusted


64



3,801,421


25,484,086


2,549


14,449,508



(18,230,549
)



(320,357
)



(297,428
)Common stock issued in private    placement, net of offering costs









2,600,000


260


(260
)












Common stock subscribed, net of offering    costs









4,014,285


401


1,404,599













1,405,000Common stock issued as finders fee









100,000


10


(10
)












Common stock issued for compensation









100,000


10


42,990













43,000Common stock issued for services









325,967


33


125,218













125,251Net lossJuly 1, 2001 to September 30,    2001



















(1,112,254
)








(1,112,254
)Foreign currency translation adjustment
























(13,386
)



(13,386
)64



$3,801,421


32,624,338


$3,263


$16,022,045



$(19,342,803
)



$(333,743
)



$    150,183




5


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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


For the Three Months Ended September 30, 2001 and 2000





2001

2000Cash flows from operating activitiesNet loss
$
(1,112,254
)

$
(2,263,027
)Adjustments to reconcile net loss to net cash used in operating activitiesDepreciation and amortization

774,267



279,098Common stock issued for compensation

43,000



92,331Common stock issued for services

125,251



(Increase) decrease in operating assetsAccounts receivable

(284,515
)


(94,802
)Due from London Radiosurgical Centre, Ltd.

251,262



13,317Prepaid expenses

(695
)


105,369Deposits and other assets

58



237,304Restricted cash

(2,674
)


(4,096
)Increase (decrease) in operating liabilitiesAccounts payable

61,447



439,200Income taxes payable

(1,600
)Accrued and other liabilities

(405,493
)


10,952Net cash used in operating activities

(551,946
)


(1,184,354
)Cash flows from investing activitiesCapital expenditures

(24,130
)


(100,576
)Net cash used in investing activities

(24,130
)


(100,576
)Cash flows from financing activitiesProceeds from loan





200,000Repayment of loan

(4,313
)


Payments on obligations under capital lease

(775,886
)


(216,218
)Preferred stock issued





885,000Common stock issued

1,405,000



Net cash provided by financing activities

624,801



868,782Effect of exchange rate changes on cash

(92,787
)


73,143Net decrease in cash

(44,062
)


(343,005
)Cashbeginning of period

63,080



521,033Cashend of period
$
19,018


$
178,028SUPPLEMENTAL DISCLOSURESInterest paid
$
588,939


$
202,619Income taxes paid
$



$
NON CASH INVESTING ACTIVITIESEquipment under capital lease
$



$
2,992,758NON CASH FINANCING ACTIVITIESPreferred stock dividendbeneficial conversion feature
$



$
276,387Obligations under capital lease
$



$
2,992,758







6


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MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





Note 1The Company





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





Note
2Summary of Significant Accounting Policies





| | Basis of Presentation
| | ---------------------




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





| | Unaudited Financial Statements
| | ------------------------------




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





| | Cash and Cash Equivalents
| | -------------------------




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





| | Property and Equipment
| | ----------------------




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





| | Foreign Currency Translation
| | ----------------------------




THE FINANCIAL STATEMENTS OF ALL FOREIGN SUBSIDIARIES WERE PREPARED IN THEIR RESPECTIVE LOCAL CURRENCIES AND TRANSLATED INTO U.S. DOLLARS BASED ON THE
CURRENT EXCHANGE RATE AT THE END OF THE PERIOD FOR THE BALANCE SHEET AND A WEIGHTED-AVERAGE RATE FOR THE PERIOD ON THE STATEMENT OF OPERATIONS. TRANSLATION ADJUSTMENTS ARE REFLECTED AS FOREIGN CURRENCY TRANSLATION ADJUSTMENTS IN SHAREHOLDERS
EQUITY AND ACCORDINGLY HAVE NO EFFECT ON NET LOSS.





| | Estimates
| | ---------




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




7


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| | Advertising
| | -----------




Advertising costs incurred for major new campaigns are expensed in the year in which the advertising takes place. Other advertising costs are expensed when incurred. Advertising
expense for the three months ended September 30, 2001 and 2000 was $35,272 and $84,129, respectively.





| | Income Taxes
| | ------------




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





| | Stock Option Plans
| | ------------------




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





| | Reclassifications
| | -----------------




Certain reclassifications have been made in the September 30, 2000 financial statements to conform to the September 30, 2001 presentation.





Note 3Acquisitions





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





On
December 10, 1999, the Company incorporated a wholly owned subsidiary, The London PET Centre Limited, a United Kingdom private limited company. On December 17, 1999 the Company incorporated two wholly owned subsidiaries, Mobile PET Leasing Limited,
a United Kingdom private limited company and Mobile PET Systems (UK) Limited, a United Kingdom private limited company. Mobile PET Systems (UK) Limited is currently inactive.





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




8


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Note 4Property and Equipment





Property and equipment at September 30, 2001 and 2000 consist of the following:





September 30,2001

2000Leasehold improvements

$           7,071


$      30,389Computer equipment

550,546


433,311Office furniture and fixtures

135,345


28,298Office equipment

43,064


7,092Equipment under capital lease

19,894,612


9,145,74820,630,638


9,644,838Less accumulated depreciation

(3,592,383
)

(748,913
)$17,038,255


$8,895,925





Depreciation expense
for the three months ended September 30, 2001 and 2000 was $774,267 and $279,098, respectively.





Note 5Capitalization





| | Preferred Stock
| | ---------------




On January 20, 2000, the Company authorized for issuance ten million (10,000,000) shares of preferred stock having one hundredth of a cent ($0.0001) par value per share. On March
3, 2000 the Company designated and issued sixty (60) shares 8% Cumulative Convertible Redeemable Preferred, Series A Stock (Series A) for cash in the amount of $2,700,000, net of acquisition fees. In addition, under this Securities
Purchase Agreement the Company issued 120,000 warrants to purchase shares of common stock at an exercise price of $5 per share, which expire in March 2003. The shares of Series A Stock have no voting rights, have an original liquidation value of
$50,000 per share, and accrue dividends at a rate of eight percent (8%) per annum per share on the liquidation value payable upon conversion. On May 30, 2001 the liquidation value was increased to $58,937 when the Company entered into a Settlement
Agreement and Conditional Release of a lawsuit surrounding the Securities Purchase Agreement. The total liquidation value of the shares outstanding at September 30, 2001 and 2000 in the amount of $2,364,264 and $3,000,000, respectively is classified
on the Companys balance sheet as preferred stock. Cumulative preferred dividends are payable upon conversion and at September 30, 2001 there are cumulative preferred dividends in arrears in the amount of $107,137 or $2,712 per share. In the
event of any liquidation, dissolution or winding up of the affairs of the Company, holders of the Series A Stock shall be paid the liquidation value plus all accrued dividends at that date before any payment to other shareholders. At the option of
the holders, the Series A Stock and the cumulative preferred dividends in arrears are convertible into shares of common stock determined by dividing $58,937 by the conversion price of the lesser of $5 or 75% of the average of the closing bid price
of common stock during the five (5) trading days immediately prior to the conversion date. If the Company fails to convert or is unable to issue shares of common stock, the holder may redeem the Series A Stock for cash in an amount equal to the fair
value of the shares of common stock that would have been converted. The sixty (60) shares of Series A Stock provide an intrinsic value of beneficial conversion feature of approximately $1,206,000. During the year ended June 30, 2001, the holders
converted twenty and one half (201⁄2) shares of Series A into 1,108,264 shares of common stock.





On September 21, 2000, the Company designated and subsequently issued thirty (30) shares 8% Cumulative Convertible Redeemable Preferred, Series B Stock (Series B) for
cash in the amount of $1,385,000, net of acquisition fees. In addition, under this Securities Purchase Agreement the Company issued 50,000 warrants to




9


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purchase shares of common stock at an exercise price of $3 per share and 29,851 warrants to purchase shares of common stock at an exercise price of $2.5125 per share. The warrants expire on
September 30, 2005. The shares of Series B Stock have no voting rights, have an original liquidation value of $50,000 per share, and accrue dividends at a rate of eight percent (8%) per annum per share on the liquidation value payable upon
conversion. On May 30, 2001 the liquidation value was increased to $58,937 when the Company entered into a Settlement Agreement and Conditional Release of a lawsuit surrounding the Securities Purchase Agreement. The total liquidation value of the
shares outstanding at September 30, 2001 and 2000 in the amount of $1,437,157 and $1,000,000, respectively is classified on the Companys balance sheet as preferred stock. Cumulative preferred dividends are payable upon conversion and at
September 30, 2001 there are cumulative preferred dividends in arrears in the amount of $33,808 or $1,352 per share. In the event of any liquidation, dissolution or winding up of the affairs of the Company, holders of the Series B Stock shall be
paid, pari passu with holders of the Series A Stock, the liquidation value plus all accrued dividends at the date of liquidation, dissolution or winding up of the affairs before any payment to other shareholders. At the option of the holders,
the Series B Stock and the cumulative preferred dividends in arrears are convertible into shares of common stock determined by dividing $58,937 by the conversion price of the lesser of $3 or 75% of the average of the closing bid price of common
stock during the five (5) trading days immediately prior to the conversion date. If the Company fails to convert or is unable to issue shares of common stock, the holder may redeem the Series B Stock for cash in an amount equal to the fair value of
the shares of common stock that would have been converted. The thirty (30) shares of Series B Stock issued provide an intrinsic value of beneficial conversion feature of approximately $414,580. During the year ended June 30, 2001, the holders
converted five (5) shares of Series B into 635,471 shares of common stock.





| | Common Stock
| | ------------




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





During the year ended June 30, 2001
the Company issued shares of common stock in cash transactions: 3,735,584 shares for cash in the amount of $1,868,650; and 2,733,981 shares for cash in the amount of $750,000 according to the terms of a settlement agreement between the Company and
holders of the Series A and Series B Stock. Also during the year ended June 30, 2001 the Company issued shares of common stock in non-cash transactions: 1,743,735 shares through the conversion of Series A Stock valued at $1,320,035; 47,778 shares
through the conversion of Series A Stock dividends in arrears valued at $20,099; 1,875,000 shares through the conversion of debt valued at $750,000; and 403,350 shares for legal services valued at $201,675.








During the three months ended September 30, 2001
the Company issued shares of common stock in cash transactions: 2,600,000 shares from paid subscriptions at June 30, 2001 in the amount of $1,000,000; and 4,014,285 shares for cash in the amount of $1,405,000. Also during the three months ended
September 30, 2001




10


---





the Company issued shares of common stock in non-cash transactions: 100,000 shares as a finders fee; 100,000 shares as compensation valued at $43,000; and 325,967 shares for services valued at
$125,251.





| | Stock Options
| | -------------




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





As of September 30, 2001, the Company has granted options to
purchase 5,740,750 shares of common stock as follows:





Exercise Price

Number of  Shares

Vested  SharesOutstanding June 30, 1999

$
1.90$4.46

1,735,000


975,000Granted

$
1.00$4.63

4,252,986


2,619,000Exercised







Cancelled







Outstanding, June 30, 2000

$
1.00$4.63

5,987,986


3,594,000Granted

$
.45$3.75

1,187,250


1,140,003Exercised







Cancelled

$
1.70$3.75

(2,124,486
)

(1,277,000
)Outstanding June 30, 2000

$
.45$4.63

5,050,750


3,457,003Granted

$
.43$2.76

1,632,500


1,143,916Exercised







Cancelled

$
1.00$3.25

(942,500
)

(939,167
)Outstanding, September 30, 2001

$
.43-$4.63

5,740,750


3,661,752





The Company accounts
for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, under which no compensation cost for stock options is recognized for the
stock option awards granted at or above fair market value. However, during the three months ended September 30, 2001 and 2000 the Company recognized compensation expense using the intrinsic value method of $0 and $92,331, respectively.





| | Warrants
| | --------




At September 30, 2001 warrants were outstanding to purchase 5,417,644 common stock at exercise prices between $0.35 to $5.00 per share, and at the average of the last reported sale
price of the common stock for the five trading days preceding the issue date. These warrants expire between March 2002 and February 2009.





Note 6Related Party Transactions





| | Subordinated Equity Participation
| | ---------------------------------




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




11


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amount of $200,000, which management believes approximates fair value. The original agreement provided for distributions of cash, if any, including interest at a rate of 15% per annum, up to the
amount of the investment plus accrued interest, after which the Company was to receive its proportionate share of 60% of net distributable income. According to the terms of the participation agreement, net income available for distribution is equal
to net income less equipment financing payments, operating expenses, reserve capital and taxes.





The Memorandum of Agreement provides for a distribution to the Company of 8.42% of LRCs net distributable cash flow, until a total of $210,573 has been distributed and then
the distribution of 5.05% of net distributable cash flow, subject to future dilution. The Memorandum of Agreement stopped the accrual of interest at June 1, 1999. At the date of the Memorandum of Agreement, the Company canceled $47,447 of accrued
interest from the original investment and at September 30, 2001 and 2000 accrued interest on the investment was $10,573 and $50,520, respectively. The related shareholder, officer and director personally guarantee the investment.





| | Due from London Radiosurgical Centre, Ltd
| | -----------------------------------------




During the three months ended September 30, 2001 and 2000, the Company advanced without interest $500 and $0, respectively to LRC for working capital during
LRCs start up period. At September 30, 2001, and 2000 the balance due from London Radiosurgical Centre, Ltd was $171,137 and $421,783, respectively. The advances are covered by a continuing corporate and personal guarantee.





| | 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 is currently extended to October 1, 2001. At September 30, 2001 and 2000, there is a balance of accrued interest in the amount of $17,622 and $0, respectively.





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





On
January 12, 2001, the Company received an eight percent (8%) bridge loan from an officer, director and shareholder in the amount of $25,000, with an original due date of March 12, 2001. The note has been extended several times and is currently
extended to December 1, 2001. At September 30, 2001, there is a balance of accrued interest in the amount of $926.





On January 17, 2001, the Company received an eight percent (8%) bridge loan from an officer, director and shareholder in the amount of $150,000, with an original due date of March
12, 2001. The note has been extended several times and is currently extended to December 1, 2001. At September 30, 2001, there is a balance of accrued interest in the amount of $5,391.





Note 7Securities Purchase Agreement





On March 3, 2000, the Company entered into a Securities Purchase Agreement. As part of the Agreement, the Company issued 60 shares of 8% Cumulative Convertible Redeemable
Preferred, Series A Stock for cash in the amount of $2,700,000, net of acquisition fees and 120,000 warrants to purchase shares of common stock at an




12


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exercise price of $5.00 per share, which expire in March 2003. The buyer of the preferred stock agreed to purchase shares of common stock of the Company in tranches, for an aggregate purchase
price of up to $10,000,000, at a price equal to eighty five percent (85%) of the average closing bid price five (5) consecutive days immediately prior to the Company providing a tranche notice to the buyer. During the year ended June 30, 2001 the
Company received $1,075,000, net of offering costs and issued 2,703,093 shares of common stock. There is an aggregate commitment remaining in the amount of $8,925,000 at September 30, 2001.





Note 8Employment Agreements





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





Note 9Long Term Debt





Long term debt at
September 30, 2001 and 2000 consists of the following:





2001

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

$95,113


$      Less current portion

(18,576
)

Long term debt, net of current portion

$76,537








The maturities of
long term debt for each of the succeeding five years subsequent to September 30, 2001, are as follows:





September 30,2002

$18,5762003

20,7262004

23,1102005

25,7992006

6,902$95,113





Note 10Commitments





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





September 30,2001

2000Equipment

$19,894,612


$9,145,748Less accumulated amortization

(3,415,225
)

(525,012
)Net capital lease assets

$16,479,387


$8,620,736




13


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





Rent expense for the three months ended September 30, 2001 and 2000 was $309,192 and $19,295,
respectively.





The following is a schedule by year of the future
minimum lease payments at September 30, 2001:





September 30,

Capital Lease

Operating Leases2002

$   6,192,047


$122,4242003

5,672,777


128,5502004

5,596,403


65,8442005

4,578,400


2006

660,517


22,700,144


$318,968Less amount representing interest at 12.07%

(5,423,037
)Present value of minimum lease payments (including current portion of      $4,067,837)

$17,277,107





The capital leases
are secured by the Companys assets. There is restricted cash in the amount of $347,544 reserved for these lease commitments. The chief executive officer of the Company personally guarantees one of the leases.





Note 11Concentration Of Credit Risk





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





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




14


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Note 12Earnings (Loss) Per Share





The computations of basic and diluted earnings per share from continuing operations
for the three months ended September 30, 2001 and 2000 were as follows:





September 30,2001

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

$  (1,188,908
)

$  (2,539,414
)Denominator:Weighted-average shares

29,379,306


14,115,346Loss per sharebasic

$                 (.04
)

(.18
)Loss per sharedilutedNumerator:Net
lossavailable to Common shareholders

(1,188,908
)

(2,539,414
)Denominator:Weighted-average shares

29,379,306


14,115,346Loss per sharediluted

$                 (.04
)

(.18
)





The weighted average
shares listed below were not included in the computation of diluted loss per share because to do so would have been antidilutive for the three months ended September 30, 2001 and 2000:





September 30,2001

2000Cumulative convertible redeemable preferred stock      common stock equivalent

760,285

356,712Stock options

5,163,576

3,530,880Warrants

3,709,070

779,289





Note 13Deposits and Other Assets





Deposits and other assets consist of the following at September 30, 2001 and 2000:





2001

2000Equipment depositsMobile PET Units

$388,130

$1,091,375Equipment rental depositsother



68,980Lease deposits

96,381

159,073Other



25,250$484,511

$1,344,678





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




15


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Note 14  Prior Period Adjustment





The opening balance of accumulated deficit at June 30, 2001 has been adjusted,
reflecting a reduction in obligations under capital lease. The reduction is the correction of an error calculating the present value of minimum lease payments. The effect of the adjustment is as follows:





For the year ended June 30, 2001

As Previously Reported

As RestatedBalance sheet:Total liabilities

$22,723,419


$22,429,126Total shareholders deficit

$       (591,721
)

$      (297,428
)Statement of operations:Net loss

$   (9,815,016
)

$  (9,520,723
)Net lossavailable to common shareholders

$(10,293,541
)

$  (9,999,248
)Loss per sharebasic

$               (0.61
)

$              (0.60
)Loss per sharediluted

$               (0.61
)

$              (0.60
)





Note 15Subsequent Events





In October 2001 the Company converted $253,050 due to a director into a promissory note without interest
and payable in monthly installments of $14,000 per month beginning on October 15, 2001, until paid in full.





In October 2001 the Company issued 1,628,571 shares of common stock in a private placement for cash in the amount of $570,000.




16


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ITEM 2.    MANAGEMENTS DISCUSSION AND ANALYSIS





Overview





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





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





As of September 30, 2001 we were providing our services to over 75 accounts, which consisted of hospitals and physicians in the United States. We also operated a wholly owned
subsidiary, The London PET Centre Ltd., which is the only private sector stationary PET facility in the United Kingdom. We believe there are and will be significant opportunities to develop and operate additional mobile and stationary PET facilities
in the United States, United Kingdom and in key European markets.





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





Our consolidated revenues for the three months ended
September 30, 2001 were $3,680,725 compared to the three months ended September 30, 2000, in which we had revenues of $840,981. During the twelve months ended June 30, 2001, we emerged from our development stage period in the United States,
establishing the management and operating infrastructure to provide PET imaging services on a national basis to hospitals and other health care professionals. Prior to that date, our efforts were principally focused on capitalization, organizational
and business development activities.





We continue our efforts to
develop and expand our service business by increasing utilzation of our existing units, and developing and operating additional mobile and stationary PET systems. As of September 30, 2001 we had 15 mobile systems operating throughout the United
States and 1 stationary facility in the United Kingdom. We anticipate we will continue to incur additional losses as we pursue our development efforts. Assuming we continue our unit deployment growth and achieve targeted unit revenues, we believe
cash flow will be sufficient to cover our cost of services on a monthly basis commencing in the second quarter of fiscal year 2002.





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





The principal components of our operating overhead costs consists of salaries and benefits paid to
employees, legal and accounting fees, marketing, equipment leasing, equipment service and maintenance,




17


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insurance and transportation costs. Because the majority of these costs are fixed, increased revenues as a result of increased patient procedures may provide higher profitability, while lower
patient procedures may result in lower profitability. There can be no assurance that we will be able to maintain or increase the number of patient procedures.





Since our inception we have incurred significant losses. Through September 30, 2001, we have incurred a net loss of $19,342,803. For the three months ended
September 30, 2001, we experienced a consolidated net loss from operations of $517,683, compared to a consolidated net loss from operations of $2,024,494 for the three months ended September 30, 2000. We anticipate that our operating losses during
the second quarter of fiscal year 2002 should decrease from current levels as we decrease per unit operating costs by deploying additional mobile units or stationary sites, realize higher utilization of our services and subsequent growth in
revenues. We have implemented cost reductions by reducing administrative and travel expense and by negotiating higher discounts for new equipment, service and radiotracers. However, we can give no assurances that our efforts will have the desired
effects. As a result, in order to achieve and maintain profitability, we will need to continue to increase revenues and effectively manage our operating overhead.





During the three months ended September 30, 2001, we have raised $1,405,000 of new equity capital through private placements and warrants
to purchase common stock.





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 since inception, expect future losses and may never become profitable.





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





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





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





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




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




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



18


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




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




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




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





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





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





The acceptance of PET technology may be adversely affected by its high cost, concerns by patients and
physicians relating to its safety and efficacy, and the substantial market acceptance of other diagnostic tools such as MRIs and CT scans. We have a limited sales force and may need to hire additional technologists and sales and marketing personnel
to increase the general acceptance of PET services. Of all the factors affecting our profitability, the failure of PET services to achieve broad market acceptance may likely have the greatest negative impact on our business, financial condition and
results of operations and our profitability.





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





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





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





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




19


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





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





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





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





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








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





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





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





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





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





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




20


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





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





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





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





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





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





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




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




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




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




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




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




| |  |  | 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



21


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





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





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





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





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





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





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




22


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





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





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





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





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





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




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available in a given state. If we are unable to obtain the applicable certificate or approval or additional certificates or approvals necessary to expand our operations, these regulations may
limit or preclude our operations in the relevant jurisdictions. Conversely, states in which we have obtained or will obtain a certificate of need may repeal existing certificate of need regulations or liberalize exemptions from the regulations. The
repeal of certificate of need regulations in states in which we have obtained a certificate of need or a certificate of need exemption would lower barriers to entry for competition in those states and could adversely affect our business.





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





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





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





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





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




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




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





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




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





We have a limited operating history.





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





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





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





Results of Operations





During the period ended
December 31, 1999, we placed our first mobile unit into operation, which generated revenues and operating costs in addition to those costs related to establishing the initial management and operating infrastructure to provide PET systems and
services for health care providers on a mobile, shared user basis.





For the three months ended September 30, 2001, our net loss from operations was $517,683, compared to our net loss from operations of $2,024,494 for the three months ended
September 30, 2000. Our net loss available to common shareholders, after accrued preferred stock dividend, was $1,188,908 for the three months ended September 30, 2001, compared to the net loss of $2,539,414 for the three months ended September 30,
2000.





We took delivery on our first PET unit in July 1999 and
began accruing revenues in August 1999. For the three months ended September 30, 2001, we had fifteen mobile units and one fixed site accepted and placed into service, generating revenues of $3,680,725, and incurring cost of services of $2,094,932,
compared to $840,981 in revenues and $612,753 in cost of services for the three months ended September 30, 2000. This substantial difference in revenues and costs is largely attributable to the number of units, which were in service during the
applicable periods. As a result of these activities, accounts receivables increased to $2,341,267, net of allowances for doubtful accounts, as of September 30, 2001, as compared to accounts receivables of $567,535, net of allowances for doubtful
accounts, as of September 30, 2000. The costs of service revenues represent salaries paid to technologists and drivers, system maintenance, transportation and insurance on our mobile PET systems.





General and administrative expenses for the three months ended September 30, 2001 were $1,160,491, as
compared to $1,027,058 for the three months ended September 30, 2000. Selling and marketing expenses for the three months ended September 30, 2001 were $942,984, as compared to $1,225,664 for the three months ended September 30, 2000. The decrease
in selling and marketing expenses was primarily due to employee reductions and reduced traveling expenses.




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Depreciation expense increased
from $279,098 for the three months ended September 30, 2000 to $774,267 for the three months ended September 30, 2001 mainly due to the increase in mobile PET units deployed to fifteen mobile and one fixed site at September 30, 2001 compared to five
mobile units and one fixed site at September 30, 2000. In addition, we continue to incur costs in building our infrastructure and incur costs in connection with business development advertising and marketing our mobile PET services.





Our interest income was $2,601 for the three months ended September 30, 2001, as
compared to $13,277, for the three and nine months ended September 30, 2000. The reduction in interest was caused by the reduction of cash in money market and other bank accounts from $178,028 to $19,108. Our interest expense of $594,988 for the
three months ended September 30, 2001, as compared to the interest expense of $244,558 for the three months ended September 30, 2000, was principally due to the capitalization of our equipment leases of image scanners, coaches and computer
equipment.





Liquidity and Capital Resources





At September 30, 2001, our total assets were $21,453,464, compared to $12,710,814 at September 30, 2000. Our current assets at September
30, 2001 totaled $3,685,955 and our current liabilities were $7,932,424, as compared to September 30, 2000, that reflected current assets of $2,809,010 and current liabilities of $3,199,382. Shareholders equity at September 30, 2001 decreased
to $150,183 from $2,458,621, due primarily to a net loss of $10,927,270 incurred during the period July 1, 2000 to September 30, 2001.





Our foreign currency translation adjustment in shareholders equity amounted to $(333,743) at September 30, 2001 compared to $30,205 at September 30, 2000. We have reflected
the transaction gains and losses in the cash flow as the effect of exchange rate changes on cash of $(92,787) for the three months ended September 30, 2001, compared to $73,143 for the three months ended September 30, 2000.





Our net cash used in investing activities for the three months ended September 30,
2001 was $24,130 as compared to $100,576 in the three months ended September 30, 2000. This difference is primarily a result of the $24,130 we invested in computers and related equipment for our business and personnel growth, compared to $100,576
for the three months ended September 30, 2000.





The net cash
provided by our financing activities for the three months ended September 30, 2001 was $624,801, a result of the repayment of loans totaling $4,313; common stock issued of $1,405,000 less payments on obligations under capital leases of $775,886,
compared to $868,782 for the three months ended September 30, 2000 as a result of preferred stock issued of $885,000; payments on obligations under capital lease of $216,218 and proceeds from loans of $200,000.




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PART II OTHER INFORMATION





ITEM 1.    LEGAL PROCEEDINGS


As previously disclosed in the Companys Form
10-KSB/A for the fiscal year ended June 30, 2001, the Company is currently involved in Twenty-Five Forty LLC v. Mobile PET Systems, Inc., an abandonment of lease case. On February 27, 2001, Twenty-Five-Forty, LLC filed suit against the Company in
the Superior Court for the State of California (San Diego) for damages for breach of contract, alleging that the Company abandoned a sub-lease that the Company had entered into with Twenty-Five Forty LLC. The monthly rent under the sub-lease was
$2,990, and the space was re-let by the end of May, 2001. The amount at issue is approximately $9,000$10,000 plus fees and costs.





The Company filed a cross-complaint against Twenty-Five Forty LLC for intentional and negligent misrepresentation. The cross-complaint alleges, among other things, that Twenty-Five
Forty LLC fraudulently induced the Company to enter into the contract and accordingly the lease contract is void. Twenty-Five Forty LLC answered the Companys cross-complaint on May 4, 2001. This matter is currently scheduled for mediation on
December 6, 2001.





ITEM 2.    CHANGES IN SECURITIES





Between July 1, 2001 and September 5, 2001 we sold an additional 3,714,285 shares of common stock and
1,857,143 warrants to purchase common stock exercisable for a period of 6 months at $0.35 per share, in reliance on Section 4(2) of the Act. The proceeds of this offering was $1,300,000.





On September 19, 2001 we sold an additional 300,000 shares of common stock and 150,000 warrants to
purchase common stock exercisable for a period of two (2) years at $0.35 per share, in reliance on Section 4(2) of the Act. The proceeds of this offering was $105,000.





On February 15, 2001, we entered into a Corporate and Financial Consultant Agreement with Seraph Capital AG (Seraph), to
provide investment relations and other services for a two (2) year term. On July 5, 2001, we issued 100,000 shares of common stock as compensation in connection with that agreement, and we are obligated to file a registration statement for such
shares on a subsequent registration filing. Seraph also has the right to acquire 150,000 common shares at a price of $1.00 per share for a term of 3 years and 150,000 common shares at a price of $2.00 per share for a term of 3 years. These issuances
are made in reliance on Section 4(2) of the Act. We are also obligated to pay a fee of $10,000 per month during the term of that agreement and to pay a finders fee equal to 7% of the financing proceeds received by the Company where Seraph is
directly the effective cause of such financing.





On August
1, 2001 we granted 100,000 shares of common stock valued at $43,000 to an existing consultant of the Company for services previously rendered to us and as an employment continuance bonus, in reliance on Section 4(2) of the Act. In addition, on the
same date we issued to that consultant 150,000 fully vested options to purchase common shares at a price of $0.50 per share for a term of 3 years.





On August 9, 2001 we issued 186,432 shares of common stock at a price of $0.35 per share in satisfaction of an obligation to pay $62,251 to a legal advisor
for services previously rendered to us, in reliance on Section 4(2) of the Act.





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




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gross consideration received by the Company in connection with certain financing and other transactions with, and investments made by third parties introduced by Dunlap to Company.





As previously disclosed in the Companys Form 10-KSB/A for the fiscal year
ended June 30, 2001, on October 8, 2001, effective as of September 21, 2001, we entered into a Consulting Agreement with American Financial Communications, Inc. (AFC), to provide investment relations and other services. In connection with this
agreement we are obligated to issue 2,500,000 common shares as a non-refundable retainer, subject to the terms and conditions set forth in that agreement. We are also obligated to file a registration statement for such shares no later than October
31, 2002. We are also obligated to issue 200,000 options to purchase common shares at a price of $1.00 per share for a term of 4 years, and to pay finders fees (i) equal to 2.5% of the gross funding provided by a lender or equity purchaser with no
preexisting relationship with the Company and introduced by AFC, and (ii) equal to 2.0% of the gross consideration of an acquisition introduced by AFC and not having a preexisting relationship with the Company. These issuances were in reliance on
Section 4(2) of the Act. The voting rights to the 2,500,000 common shares and the 200,000 option shares are granted to the Board of Directors during the ownership of the shares by AFC.





On August 15, 2001, we entered into a Letter Agreement with Windsor Capital Corporation
(Windsor), to provide financial consulting services for a period of two (2) years. That agreement provides for compensation in the form of restricted stock, payable at the rate of $10,000 per month based upon the ten (10) day average
price immediately prior to such payment. On September 24, 2001, we issued 139,535 shares of restricted stock valued at $60,000 to Windsor at a price of $0.43 per share in connection with that agreement, in reliance on Section 4(2) of the Act.





On August 15, 2001, we entered into a Letter Agreement with
National Media Associates to provide public relations and media services on an ongoing basis. On September 5, 2001, in connection with that agreement we issued 450,000 options to purchase common shares for a term of 5 years at a price of $0.50 per
share, in reliance on Section 4(2) of the Act.





Between October 8,
2001 and October 10, 2001 we sold an additional 1,628,571 shares of common stock and 814,286 warrants to purchase common stock exercisable for a period of 2 years at $0.35 per share, in reliance on Section 4(2) of the Act. We paid a finders fee of
6% in the form of warrants to purchase 25,714 shares of common stock at $0.35 per share in connection with the placement of $150,000 of the shares and warrants to clients of the bank purchasing such shares for the account of its customers. The total
proceeds of this offering was $570,000.





ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K





(a)  Exhibits





None.





(b)  Reports on Form 8-K





Form 8-K filed with the SEC on July 23, 2001, covering the settlement of certain pending lawsuits pursuant to that certain Settlement Agreement and Conditional Release, dated May
30, 2001.




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SIGNATURES





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


| | MO | BILE PET SYSTEMS, INC.
| | -- | ----------------------




| | 
| | 

|Da | te: November 14, 2001
|-- | ---------------------

| | By: /s/    Anthony R.
Turnbull
| | ------------------------------

| | An | thony R. Turnbull
| | -- | -----------------

| | Ch | ief Financial Officer, Secretary and Treasurer
| | -- | ----------------------------------------------



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