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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 December 31, 2002



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



2150
West Washington Street, Suite 110

San Diego, California 92110

(Address of principal executive offices)



(619) 226-6738

(Issuers telephone number)



---



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



There were 55,215,482 shares outstanding of the issuers Common Stock as of February 6, 2003.



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



MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES



For the quarterly period ended December 31, 2002



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##### Table of Contents



Table of Contents



|                                                                                                     |  | Page No.
|---------------------------------------------------------------------------------------------------- |  | --------
|PART I. FINANCIAL INFORMATION                                                                        |  | 1       
|                                                                                                    
|Item 1 Financial Statements (unaudited)                                                              |  | 1       
|                                                                                                    
|Consolidated Balance Sheets as of December 31, 2002 and June 30, 2002                                |  | 1       
|                                                                                                    
|Consolidated Statements of Operations for the three and six months ended December 31, 2002 and 2001  |  | 2       
|                                                                                                    
|Consolidated Statement of Changes in Shareholders Equity for the six months ended December 31, 2002 |  | 3       
|                                                                                                    
|Consolidated Statements of Cash Flows for the six months ended December 31, 2002 and 2001            |  | 4       
|                                                                                                    
|Notes to Consolidated Financial Statements                                                           |  | 5       
|                                                                                                    
|Item 2. Managements Discussion and Analysis                                                         |  | 11      
|                                                                                                    
|Item 3. Controls and Procedures                                                                      |  | 18      
|                                                                                                    
|PART II. OTHER INFORMATION                                                                           |  | 19      
|                                                                                                    
|Item 1. Legal Proceedings                                                                            |  | 19      
|                                                                                                    
|Item 2. Changes in Securities                                                                        |  | 19      
|                                                                                                    
|Item 6. Exhibits and Reports of Form 8-K                                                             |  | 19      
|                                                                                                    
|Signatures                                                                                           |  | 20      
|                                                                                                    
|Certifications                                                                                       |  | 21      



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##### Table of Contents



PART I.



FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS (Unaudited)



MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2002 (Unaudited) and June 30, 2002



|                                                                                                                                                                            |  | December 31, 2002 |             |   | June 30, 2002 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | - | ------------- | -
|ASSETS                                                                                                                                                                      |  |                   |             |   |               |  
|Current assets                                                                                                                                                              |  |                   |             |   |               |  
|Cash                                                                                                                                                                        |  | $                 | 377,086     |   |               | $
|Accounts receivable, net of allowance for doubtful accounts of $116,000 at December 31,
2002 and June 30, 2002, respectively                                                |  |                   | 3,113,180   |   |               |  
|Prepaid expenses                                                                                                                                                            |  |                   | 814,241     |   |               |  
|Deposits and other assets                                                                                                                                                   |  |                   | 309,960     |   |               |  
|                                                                                                                                                                            |  |                   |             |   |               |  
|Total current assets                                                                                                                                                        |  |                   | 4,614,467   |   |               |  
|Property and equipment, net                                                                                                                                                 |  |                   | 14,231,867  |   |               |  
|Other assets                                                                                                                                                                |  |                   |             |   |               |  
|Accrued interest receivable                                                                                                                                                 |  |                   | 10,573      |   |               |  
|Due from London Radiosurgical Centre, Ltd                                                                                                                                   |  |                   | 127,123     |   |               |  
|Subordinated equity participation                                                                                                                                           |  |                   | 200,000     |   |               |  
|Restricted cash                                                                                                                                                             |  |                   | 346,345     |   |               |  
|                                                                                                                                                                            |  |                   |             |   |               |  
|Total assets                                                                                                                                                                |  | $                 | 19,530,375  |   |               | $
|                                                                                                                                                                            |  |                   |             |   |               |  
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                                                        |  |                   |             |   |               |  
|Current liabilities                                                                                                                                                         |  |                   |             |   |               |  
|Accounts payable                                                                                                                                                            |  | $                 | 1,609,229   |   |               | $
|Current portion of long-term debt                                                                                                                                           |  |                   | 27,300      |   |               |  
|Loans payable to related parties                                                                                                                                            |  |                   | 203,050     |   |               |  
|Accrued and other liabilities                                                                                                                                               |  |                   | 667,945     |   |               |  
|Other liabilities                                                                                                                                                           |  |                   |            |   |               |  
|Obligations under capital leasecurrent                                                                                                                                     |  |                   | 5,522,949   |   |               |  
|                                                                                                                                                                            |  |                   |             |   |               |  
|Total current liabilities                                                                                                                                                   |  |                   | 8,030,473   |   |               |  
|Noncurrent liabilities                                                                                                                                                      |  |                   |             |   |               |  
|Obligations under capital lease                                                                                                                                             |  |                   | 7,783,324   |   |               |  
|Long-term debt                                                                                                                                                              |  |                   | 58,262      |   |               |  
|                                                                                                                                                                            |  |                   |             |   |               |  
|Total liabilities                                                                                                                                                           |  |                   | 15,872,059  |   |               |  
|                                                                                                                                                                            |  |                   |             |   |               |  
|Shareholders equity                                                                                                                                                        |  |                   |             |   |               |  
|Preferred stock; $0.001 par value; 10,000,000 shares authorized:                                                                                                            |  |                   |             |   |               |  
|Preferred stock; Series A; 0 and 23 shares issued and outstanding at December 31, 2002
and June 30, 2002, respectively                                                      |  |                   |            |   |               |  
|Preferred stock; Series B; 0 and 27 shares issued and outstanding at December 31, 2002
and June 30, 2002, respectively                                                      |  |                   |            |   |               |  
|Common stock; $0.0001 par value; 90,000,000 shares authorized; 55,027,982 and
44,966,267 shares issued and outstanding at December 31, 2002 and June 30, 2002, respectively |  |                   | 5,503       |   |               |  
|Additional paid in capital                                                                                                                                                  |  |                   | 27,436,684  |   |               |  
|Accumulated deficit                                                                                                                                                         |  |                   | (23,783,871 | ) |               |  
|Foreign currency translation adjustment                                                                                                                                     |  |                   |            |   |               |  
|                                                                                                                                                                            |  |                   |             |   |               |  
|Total shareholders equity                                                                                                                                                  |  |                   | 3,658,316   |   |               |  
|                                                                                                                                                                            |  |                   |             |   |               |  
|Total liabilities and shareholders' equity                                                                                                                                  |  | $                 | 19,530,375  |   |               | $
|                                                                                                                                                                            |  |                   |             |   |               |  



See
accompanying notes.



1



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##### Table of Contents



PART I .



FINANCIAL INFORMATION (continued)



MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

For the Three and Six Months Ended December 31, 2002 and
2001

(Unaudited)



|                                                                                                                                |  | Three Months Ended December 31, |           |   | Six Months Ended December 31, |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | --------- | - | ----------------------------- | -
|                                                                                                                                |  | 2002                            |           |   | 2001                          |  
|Service revenues                                                                                                                |  | $                               | 5,059,366 |   |                               | $
|Cost of service revenues                                                                                                        |  |                                 | 3,062,309 |   |                               |  
|                                                                                                                                |  |                                 |           |   |                               |  
|Gross profit                                                                                                                    |  |                                 | 1,997,057 |   |                               |  
|                                                                                                                                |  |                                 |           |   |                               |  
|Expenses                                                                                                                        |  |                                 |           |   |                               |  
|Selling and marketing                                                                                                           |  |                                 | 465,692   |   |                               |  
|General and administrative                                                                                                      |  |                                 | 1,474,804 |   |                               |  
|                                                                                                                                |  |                                 |           |   |                               |  
|Total expenses                                                                                                                  |  |                                 | 1,940,496 |   |                               |  
|                                                                                                                                |  |                                 |           |   |                               |  
|Income (loss) from operations                                                                                                   |  |                                 | 56,561    |   |                               |  
|                                                                                                                                |  |                                 |           |   |                               |  
|Other income (expense)                                                                                                          |  |                                 |           |   |                               |  
|Other income (expense)                                                                                                          |  |                                 | (4,057    | ) |                               |  
|Interest expense                                                                                                                |  |                                 | (434,788  | ) |                               |  
|                                                                                                                                |  |                                 |           |   |                               |  
|Total other income (expense)                                                                                                    |  |                                 | (438,845  | ) |                               |  
|                                                                                                                                |  |                                 |           |   |                               |  
|Loss from continuing operations before provision for income taxes                                                               |  |                                 | (382,284  | ) |                               |  
|Provision for income taxes                                                                                                      |  |                                 |          |   |                               |  
|                                                                                                                                |  |                                 |           |   |                               |  
|Loss from continuing operations                                                                                                 |  |                                 | (382,284  | ) |                               |  
|Income (loss) from discontinued operations (including a $2,219,300 gain on the sale for
the six months ended December 31, 2002) |  |                                 |          |   |                               |  
|                                                                                                                                |  |                                 |           |   |                               |  
|Net income (loss)                                                                                                               |  |                                 | (382,284  | ) |                               |  
|Preferred stock dividend                                                                                                        |  |                                 |          |   |                               |  
|                                                                                                                                |  |                                 |           |   |                               |  
|Net income (loss)available to common shareholders                                                                              |  | $                               | (382,284  | ) |                               | $
|                                                                                                                                |  |                                 |           |   |                               |  
|Loss per share from continuing operationsbasic                                                                                 |  | $                               | (0.01     | ) |                               | $
|                                                                                                                                |  |                                 |           |   |                               |  
|Income (loss) per share from discontinued operationsbasic                                                                      |  | $                               |          |   |                               | $
|                                                                                                                                |  |                                 |           |   |                               |  
|Net income (loss) per share available to common
shareholdersbasic                                                              |  | $                               | (0.01     | ) |                               | $
|                                                                                                                                |  |                                 |           |   |                               |  
|Loss per share from continuing operationsdiluted                                                                               |  | $                               | (0.01     | ) |                               | $
|                                                                                                                                |  |                                 |           |   |                               |  
|Income (loss) per share from discontinued operationsdiluted                                                                    |  | $                               |          |   |                               | $
|                                                                                                                                |  |                                 |           |   |                               |  
|Net income (loss) per share available to common
shareholdersdiluted                                                            |  | $                               | (0.01     | ) |                               | $
|                                                                                                                                |  |                                 |           |   |                               |  



See
accompanying notes.



2



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##### Table of Contents



PART I .



FINANCIAL INFORMATION (continued)



MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Shareholders Equity

(Unaudited)



|                                                                |  |                 |   |  |              |            |   |        |            |   |        |   |       | Additional Paid In Capital |  |   | Accumulated Deficit |   |  | Foreign Currency Translation Adjustment |             |   | Total Shareholders Equity |  
|--------------------------------------------------------------- |  | --------------- | - |  | ------------ | ---------- | - | ------ | ---------- | - | ------ | - | ----- | -------------------------- |  | - | ------------------- | - |  | --------------------------------------- | ----------- | - | -------------------------- | -
|                                                                |  | Preferred Stock |   |  | Common Stock |            |   |        |            |  
|                                                                |  | Shares          |   |  | Amount       |            |   | Shares |            |   | Amount |   |       |                            |  |  
|Balance June 30, 2002                                           |  | 50              |   |  | $            | 2,946,834  |   |        | 44,966,267 |   |        | $ | 4,497 |                            |  | $ | 20,186,052          |   |  | $                                       | (23,204,517 | ) |                            | $
|Common stock issued in private placement, net of offering costs |  |                 |   |  |              |            |   |        | 9,821,429  |   |        |   | 982   |                            |  |   | 6,184,424           |   |  |                                         |             |   |                            |  
|Preferred stock redemption                                      |  | (50             | ) |  |              | (2,946,834 | ) |        | (374,000   | ) |        |   | (37   | )                          |  |   | (837,201            | ) |  |                                         |             |   |                            |  
|Preferred stock dividend-beneficial conversion feature realized |  |                 |   |  |              |            |   |        |            |   |        |   |       |                            |  |   | 1,599,740           |   |  |                                         | (1,599,740  | ) |                            |  
|Common stock issued for services                                |  |                 |   |  |              |            |   |        | 614,286    |   |        |   | 61    |                            |  |   | 284,939             |   |  |                                         |             |   |                            |  
|Noncash charge for stock options issued                         |  |                 |   |  |              |            |   |        |            |   |        |   |       |                            |  |   | 18,730              |   |  |                                         |            |   |                            |  
|Net income-July 1, 2002 to December 31, 2002                    |  |                 |   |  |              |            |   |        |            |   |        |   |       |                            |  |   |                     |   |  |                                         | 1,020,386   |   |                            |  
|Foreign currency translation adjustment                         |  |                 |   |  |              |            |   |        |            |   |        |   |       |                            |  |   |                     |   |  |                                         |             |   |                            |  
|                                                                |  |                 |   |  |              |            |   |        |            |   |        |   |       |                            |  |   |                     |   |  |                                         |             |   |                            |  
|Balance December 31, 2002                                       |  |                |   |  | $            |           |   |        | 55,027,982 |   |        | $ | 5,503 |                            |  | $ | 27,436,684          |   |  | $                                       | (23,783,871 | ) |                            | $
|                                                                |  |                 |   |  |              |            |   |        |            |   |        |   |       |                            |  |   |                     |   |  |                                         |             |   |                            |  





See accompanying notes.



3



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##### Table of Contents



PART I .



FINANCIAL INFORMATION (continued)



MOBILE PET SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)



|                                                                                    |  | Six Months Ended December 31, |           
|----------------------------------------------------------------------------------- |  | ----------------------------- | ----------
|                                                                                    |  | 2002                          |           
|Cash flows from operating activities                                                |  |                               |           
|Net income (loss)                                                                   |  | $                             | 1,020,386 
|Adjustments to reconcile net income (loss) to net cash used in operating
activities |  |                               |           
|Depreciation                                                                        |  |                               | 1,414,619 
|Noncash stock options and warrants charge (credit)                                  |  |                               | 18,730    
|Common stock issued for compensation                                                |  |                               |          
|Common stock issued for services                                                    |  |                               | 285,000   
|Gain on sale of discontinued operations                                             |  |                               | (2,219,300
|(Increase) decrease in operating assets                                             |  |                               |           
|Accounts receivable                                                                 |  |                               | 131,780   
|Due from London Radiosurgical Center, LTD                                           |  |                               | 2,194     
|Prepaid expenses                                                                    |  |                               | (175,504  
|Deposits and other assets                                                           |  |                               | 135,529   
|Restricted cash                                                                     |  |                               | 6,145     
|Cash of discontinued operations                                                     |  |                               | (37,574   
|Increase (decrease) in operating liabilities                                        |  |                               |           
|Accounts payable                                                                    |  |                               | (2,328,102
|Accrued and other liabilities                                                       |  |                               | (257,659  
|                                                                                    |  |                               |           
|Net cash used in operating activities                                               |  |                               | (2,003,756
|                                                                                    |  |                               |           
|Cash flows from investing activities                                                |  |                               |           
|Capital expenditures                                                                |  |                               | (136,908  
|Loan made                                                                           |  |                               | (250,000  
|Proceeds from sale of discontinued operations                                       |  |                               | 1,884,917 
|                                                                                    |  |                               |           
|Net cash provided by (used in) investing activities                                 |  |                               | 1,498,009 
|                                                                                    |  |                               |           
|Cash flows from financing activities                                                |  |                               |           
|Payments on loans                                                                   |  |                               | (315,962  
|Payments on obligations under capital lease                                         |  |                               | (2,109,343
|Preferred stock redeemed                                                            |  |                               | (3,284,072
|Common stock issued                                                                 |  |                               | 6,185,406 
|                                                                                    |  |                               |           
|Net cash provided by financing activities                                           |  |                               | 476,029   
|                                                                                    |  |                               |           
|Effect of exchange rate on changes in cash                                          |  |                               | 312,661   
|                                                                                    |  |                               |           
|Net increase in cash                                                                |  |                               | 282,943   
|Cashbeginning of period                                                            |  |                               | 94,143    
|                                                                                    |  |                               |           
|Cashend of period                                                                  |  | $                             | 377,086   
|                                                                                    |  |                               |           
|Supplemental disclosures                                                            |  |                               |           
|Interest paid                                                                       |  | $                             | 872,247   
|                                                                                    |  |                               |           
|Income taxes paid                                                                   |  | $                             |          
|                                                                                    |  |                               |           
|Noncash investing and financing activities                                          |  |                               |           
|Equipment under capital lease                                                       |  | $                             | 1,606,684 
|                                                                                    |  |                               |           
|Common stock issued under consulting agreement                                      |  | $                             | 225,000   
|                                                                                    |  |                               |           
|Preferred stock dividendwarrants re-priced in redemption                           |  | $                             | 23,176    
|                                                                                    |  |                               |           
|Obligations under capital lease                                                     |  | $                             | 1,606,684 
|                                                                                    |  |                               |           



See
accompanying notes.



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



4



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##### Table of Contents



PART 1.



FINANCIAL INFORMATION (continued)



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



Note 1The Company



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



Note 2Summary of Significant Accounting Policies



Basis of Presentation



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



Unaudited Financial Statements



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



Estimates



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



Revenue Recognition



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



Service revenues from third party payors are
reported at net realizable amounts. Revenue under third party payor agreements is subject to adjustment. Provisions for estimated third party payor settlements are provided in the period the related services are rendered. Differences between
estimated amounts and accrued and interim and final settlements are reported in operations in the 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 December 31, 2001 financial statements to conform to the December 31, 2002 presentation.



Note 3Discontinued Operations



On July 12, 2002, the Company discontinued operations of The London PET Centre, LTD and Mobile PET Leasing Limited, a stationary PET facility in the United Kingdom. The Company recognized a gain on the
disposal of $2,219,300. No income tax effect was recognized due to net operating loss 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 six months ended December 31, 2001 were $276,967 and $558,787 respectively. Expenses from the operations of discontinued operations for the three and six months ended December 31, 2001 were $421,157 and $735,391,
respectively.



5



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##### Table of Contents



PART 1.



FINANCIAL INFORMATION (continued)



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



Note 4Deposits and Other Assets



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



|                                    |  | December 31, 2002 |         | June 30, 2002
|----------------------------------- |  | ----------------- | ------- | -------------
|Equipment depositsMobile PET Units |  | $                 | 50,000  |              
|Other                               |  |                   | 9,960   |              
|Loan receivable                     |  |                   | 250,000 |              
|Preferred stock redemption deposit  |  |                   |        |              
|                                    |  |                   |         |              
|                                    |  | $                 | 309,960 |              
|                                    |  |                   |         |              



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.



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 entered into a Securities Purchase Agreement, pursuant to which 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. Under this Securities Purchase Agreement, the Company also 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 of up to
$10,000,000, at a price equal to eighty five percent (85%) of the average closing bid price five (5) consecutive days immediately prior to the Company providing a tranche notice to the buyer. The Company has received an aggregate $1,075,000, net of
offering costs, and issued 2,703,093 shares of common stock under this facility. This facility has not been utilized subsequent to June 30, 2001. On May 30, 2001 the liquidation value was increased to $58,937 when the Company entered into a
Settlement Agreement and Conditional Release of a lawsuit surrounding the Securities Purchase Agreement. The sixty (60) shares of Series A Stock provided an intrinsic value of beneficial conversion feature of approximately $1,206,000. The holders
converted cumulative preferred dividends in the amount of $66,274 and converted 37 shares of Series A into 3,459,361 shares of common stock 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 acquisition fees. In addition, under this Securities Purchase Agreement, the Company issued 50,000 warrants to purchase shares of common stock at
an exercise price of $3 per share and 29,851 warrants to purchase shares of common stock at an exercise price of $2.5125 per share. The warrants expire on September 30, 2005. On May 30, 2001 the liquidation value was increased to $58,937 when the
Company entered into a Settlement Agreement and Conditional Release of a lawsuit surrounding the Securities Purchase Agreement. The thirty (30) shares of Series B Stock issued provided an intrinsic value of beneficial conversion feature of
approximately $414,580.



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



6



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##### Table of Contents



PART 1.



FINANCIAL INFORMATION (continued)



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



Note 5Capitalization (Continued)



Stock Options



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



As of December 31, 2002, the Company has granted options to purchase 3,826,500 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 of Shares |            |   | Vested Shares |           
|------------------------------- |  | -------------- | ---------- | ---------------- | ---------- | - | ------------- | ----------
|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 
|                                |  |                |            |                  |            |   |               |           



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 non-cash charges of $7,610 and $18,730 for the three and six months ended December 31, 2002, respectively, and non-cash credits of ($515,510) and ($591,114) for the three and six months ended
December 31, 2001, respectively.



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 6Related Party Transactions



Subordinated Equity Participation



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



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##### Table of Contents



PART 1.



FINANCIAL INFORMATION (continued)



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



Note 6Related Party Transactions
(Continued)



Subordinated Equity Participation
(Continued)



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



The Memorandum of Agreement provides for a distribution to the Company of 8.42% of LRCs net distributable cash flow,
until a total of $210,573 has been distributed and then the distribution of 5.05% of net distributable cash flow, subject to future dilution. The Memorandum of Agreement stopped the accrual of interest at June 1, 1999. At the date of the Memorandum
of Agreement, the Company canceled $47,447 of accrued interest from the original investment and at December 31, 2002 and 2001 accrued interest on the investment was $10,573. The related shareholder, officer and director personally guarantee the
investment.



Loans



On August 23, 2000, the Company received an eight percent (8%) bridge loan
from a director and shareholder in the amount of $200,000, with an original due date of October 11, 2000. The loans due date has been extended several times and the Company has agreed to make monthly payments of $10,000 per month beginning on
January 8, 2002, until paid in full. At December 31, 2002 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 December 31, 2002 and June 30, 2002, the loan has a balance of $50,000 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 December 31, 2002, and June 30, 2002, the individual is no longer a
director and the loan has a balance of $43,050 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 December 31, 2002 and June 30, 2002, the loan has a balance of $0 and
$67,600, respectively, with accrued interest of $0 and $371, respectively.



Note 7Long Term Debt



|                                                                                                                                                                                                  |  | December 31, 2002 |         |   | June 30, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------- | -
|Long-term debt at December 31, 2002 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                                                                           |  | $                 | 14,000  |   |               | $
|Promissory Note with interest at a rate of 11% per annum, due in monthly installments
of $2,343, with the First payment beginning on January 1, 2002, with a variable 5% to 1% prepayment penalty |  |                   | 71,562  |   |               |  
|                                                                                                                                                                                                  |  |                   |         |   |               |  
|                                                                                                                                                                                                  |  |                   | 85,562  |   |               |  
|Less current portion                                                                                                                                                                              |  |                   | (27,300 | ) |               |  
|                                                                                                                                                                                                  |  |                   |         |   |               |  
|Long term debt, net of current portion                                                                                                                                                            |  | $                 | 58,262  |   |               | $
|                                                                                                                                                                                                  |  |                   |         |   |               |  



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##### Table of Contents



PART 1.



FINANCIAL INFORMATION (continued)



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



Note 7Long Term Debt (Continued)



The maturities of long-term debt for each of the succeeding
four years subsequent to December 31, 2002, are as follows:



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



Note
8Commitments



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



|                              |  | December 31, 2002 |   |  | June 30, 2002 |  
|----------------------------- |  | ----------------- | - |  | ------------- | -
|Equipment                     |  | 19,652,153        |   |  | 18,014,272    |  
|Less accumulated amortization |  | (6,149,780        | ) |  | (4,843,966    | )
|                              |  |                   |   |  |               |  
|Net capital lease assets      |  | 13,502,373        |   |  | 13,170,306    |  
|                              |  |                   |   |  |               |  



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 October 2007. Rent expense under these operating leases was $527,392 and $1,132,107,
respectively for the three and six months ended December 31, 2002, compared to $309,981 and $740,861, respectively, for the three and six months ended December 31, 2001.



The Company leases certain other PET equipment under capital leases. The equipment leases expire through October 2007. The
capital leases are secured by the Companys assets. The chief executive officer of the Company has personally guaranteed certain leases. Certain leases contain covenants that restrict the use of cash and require the Company to maintain
financial ratios. The Company has been advised of its failure to maintain a debt service coverage ratio of not less than 1.25 to 1.00, placing three leases in default, although payments on these leases are otherwise current. Obligations under
capital lease  current include $2,203,179 of lease obligations currently in default.



The following is a schedule by year of the future minimum lease payments at December 31, 2002:



|December 31,                                                                      |  | Capital Lease |            |   | Operating Leases
|--------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ----------------
|2003                                                                              |  |               | 5,903,376  |   |                 
|2004                                                                              |  |               | 5,654,247  |   |                 
|2005                                                                              |  |               | 3,255,255  |   |                 
|2006                                                                              |  |               | 474,984    |   |                 
|2007                                                                              |  |               | 435,403    |   |                 
|                                                                                  |  |               |            |   |                 
|                                                                                  |  |               | 15,723,265 |   |                 
|                                                                                  |  |               |            |   |                 
|Less amount representing interest at 11.49%                                       |  |               | (2,416,992 | ) |                 
|                                                                                  |  |               |            |   |                 
|Present value of minimum lease payments (including current portion of
$5,522,949) |  | $             | 13,306,273 |   |                 
|                                                                                  |  |               |            |   |                 



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##### Table of Contents



PART 1.



FINANCIAL INFORMATION (continued)



Notes to Consolidated Financial Statements



Note 9Retirement Plan



On August 1, 2001, the Company established a defined contribution plan
covering substantially all of its employees. Participation is limited to all regular employees who meet specific age and service requirements. The Company made no contributions during the three months and six months ended December 31, 2002.



Note 10Concentrations of Credit Risk



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



Note 11Earnings (Loss) Per Share



Computations of basic and diluted earnings per share for the three and six
months ended December 31, 2002 and 2001 were as follows:



|                                                                     |  | Three months ended December 31, 2002 |            |   | Three months ended December 31, 2001 |   |            | Six months ended December 31, 2002 |  | Six months ended December 31, 2001 |           
|-------------------------------------------------------------------- |  | ------------------------------------ | ---------- | - | ------------------------------------ | - | ---------- | ---------------------------------- |  | ---------------------------------- | ----------
|Net income (loss) per share available to common
shareholdersbasic   |  |                                      |            |   |                                      |   |            |                                    |  |                                    |           
|Numerator:                                                           |  |                                      |            |   |                                      |   |            |                                    |  |                                    |           
|Net income (loss)available to common shareholders                   |  | $                                    | (382,284   | ) |                                      | $ | (1,362,586 | )                                  |  | $                                  | 997,210   
|Denominator:                                                         |  |                                      |            |   |                                      |   |            |                                    |  |                                    |           
|Weighted-average shares                                              |  |                                      | 53,281,881 |   |                                      |   | 32,823,114 |                                    |  |                                    | 53,281,881
|Net income (loss) per share available to common shareholdersbasic   |  | $                                    | (0.01      | ) |                                      | $ | (0.04      | )                                  |  | $                                  | 0.02      
|Net income (loss) per share available to common
shareholdersdiluted |  |                                      |            |   |                                      |   |            |                                    |  |                                    |           
|Numerator:                                                           |  |                                      |            |   |                                      |   |            |                                    |  |                                    |           
|Net income (loss)available to common shareholders                   |  | $                                    | (382,284   | ) |                                      | $ | (1,362,586 | )                                  |  | $                                  | 997,210   
|Denominator:                                                         |  |                                      |            |   |                                      |   |            |                                    |  |                                    |           
|Weighted-average shares                                              |  |                                      | 73,290,615 |   |                                      |   | 32,823,114 |                                    |  |                                    | 73,290,615
|Net income (loss) per share available to common
shareholdersdiluted |  | $                                    | (0.01      | ) |                                      |   | (0.04      | )                                  |  |                                    | 0.01      



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##### Table of Contents



PART I. Item 2.



MANAGEMENTS
DISCUSSION AND ANALYSIS



Overview



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.



We
provide, under service agreements, 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 who is provided by the medical institution.



As of December 31, 2002, we were providing our services to approximately 75 healthcare facilities in the United States. We believe there are and will be significant opportunities to develop and operate additional mobile and
stationary PET facilities.



We owned and operated the only
private sector stationary PET facility in the United Kingdom (London PET Centre). We sold this facility in July 2002. The results of operations of the London PET Centre for the three and six month periods ended December 31, 2001 and 2002 have been
reclassified as income (loss) from operations of discontinued operations.



Results of Operations



As of December 31,
2002, we had eighteen mobile units deployed in 22 states, generating revenues for the three and six months ended December 31, 2002 of $5,059,366 and $9,611,695, respectively compared to the three and six months ended December 31, 2001, in which we
had fifteen mobile units deployed, generating revenues of $3,870,809 and $7,269,714, respectively. Our cost of service for the three and six months ended December 31, 2002 were $3,062,309 and $6,121,587, respectively, compared to $2,402,267 and
$4,444,820, respectively, for the three and six months ended December 31, 2001. These results exclude the operations of the London PET Centre. This substantial difference in revenues is largely attributable to better utilization of each existing
unit, plus the deployment of two new units towards the end of calendar year 2002. The cost of service revenues represents salaries paid to technologists and drivers, system maintenance, transportation and insurance on our mobile PET systems. Gross
profit increased from 37.9% for the three months ended December 31, 2001 to 39.5% for the three months ended December 31, 2002 primarily due to a reduction in the cost of outside transportation services. Gross profit decreased from 38.9% for the six
months ended December 31, 2001 to 36.3% for the six months ended December 31, 2002 primarily due to increased equipment expense and service contract costs.



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



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. For reasons described above, for the three and six months
ended December 31, 2002, our average revenues per weekday for all units increased to approximately $75,014 and $70,548, respectively, from average revenues per weekday for all units of approximately $60,413 and $56,686 for the three and six months
ended December 31, 2001, 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.



Since our inception we have incurred significant losses. Through December 31, 2002, we have an accumulated deficit of $23,783,871, which we have financed primarily through equity sales. For the three and six months ended
December 31, 2002, we experienced a loss from continuing operations of $382,284 and $1,204,258, respectively, compared to a loss from continuing operations of $1,142,363 for the three months and $2,166,266 for the six months ended December 31, 2001.
For the three months ended December 31, 2002 there was a net loss available to common shareholders of $382,284, compared to the net loss of $1,362,586 for the three months ended December 31, 2001. However, due to the sale of the London PET Centre,
there was net income available to common shareholders of $997,210 for the six months ended December 31, 2002, compared to a net loss available to common shareholders of $2,495,557 for the six months ended December 31, 2001.



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



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##### Table of Contents



PART I. ITEM 2.



MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



Selling and marketing expenses for the three and six months
ended December 31, 2002 were $465,692 and $968,033, respectively, as compared to $229,543 for the three months and $770,916 for the six months ended December 31, 2001. This increase resulted primarily from a non-cash credit for stock options
forfeited in 2001 of $268,504.



General and administrative
expenses for the three and six months ended December 31, 2002 were $1,474,804 and $2,957,031, respectively, as compared to $1,904,482 and $3,189,987 for the three and six months ended December 31, 2001. The primary reasons for the decreases related
to charges for common stock issued for services in 2001, partially offset by non-cash credits for stock options forfeited in 2002.



Other income (expenses) for the six months ended December 31, 2002 consists primarily of income resulting from the settlement of claims under a Preferred
Provider Radiopharmaceutical Agreement with P.E.T. Net Pharmaceuticals, Inc.



Our interest expense was $434,788 for the three months ended December 31, 2002, as compared to interest expense of $467,719 for the three months ended December 31, 2001 and $872,247 for the six months ended December 31, 2002 compared
to $1,021,513 for the six months ended December 31, 2001.



Liquidity and Capital Resources



At
December 31, 2002, our total assets were $19,530,375, compared to $20,876,584 at June 30, 2002. The reduction was mainly caused by the sale of assets from the London PET Centre Ltd. Our current assets at December 31, 2002 totaled $4,614,467, and our
current liabilities were $8,030,473, as compared to current assets of $5,037,607 and current liabilities of $12,581,697 at June 30, 2002. Shareholders equity increased to $3,658,316 at December 31, 2002, from ($379,795) 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 redemption of the Series A and Series B Preferred Stock of $3,284,072 and the loss from
continuing operations of $1,204,258. 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, 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 patients scans during the period. We may not be able to reduce our expenses, including our debt service obligations, quickly enough to respond to these declines in revenue, which would make our
business difficult to operate and would harm our financial results. In addition, we may be unable to adjust our expenditures if revenues in a particular period fail to meet our expectations, which would harm our operating results for that period.



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.



12



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##### Table of Contents



PART I. ITEM 2.



MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



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



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



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



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



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



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



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



Equipment and other assets of the Company secure certain of our indebtedness.
If 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 have a
limited sales force and may need to hire additional technologists and sales and marketing personnel to grow the acceptance of PET services. We believe PET technology is now accepted as a valid diagnostic and staging tool for certain conditions, but
we cannot promise this acceptance will continue to expand to other conditions.



Our future revenues and profitability depend in part on our ability to demonstrate to hospitals the potential cost and performance advantages of the PET system over traditional diagnostic imaging systems. Our ability to 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.



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.



13



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##### Table of Contents



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 Tenn.; Siemens Medical Systems, Inc. of Iselin N.J.; and GE Medical Systems of Milwaukee, Wisc. While we believe that alternative suppliers could be found for 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 product deployment or on an ongoing basis. An inability to provide sufficient support to our customers could have an adverse affect on our
reputation and relationship with our customers, prevents us from gaining new customers, and adversely affects our business, financial condition or results of operations.



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



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



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



We believe that our available short-term assets,
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 PET systems and purchase or lease their own PET systems, use our competitors PET systems or rely on alternate imaging technologies.
Approximately twenty-eight percent of our client contracts expire in 2003; twenty-nine percent in 2004; twenty-five percent in 2005; seventeen percent in 2006; and one percent in 2007. Moreover, one-third of our client contracts permit the client,
upon typically 180 days notice, to terminate the contract without cause, and two-thirds of our client contracts permit the client, upon typically 180 days notice, to terminate the contract if the client obtains a fixed site for a PET
system. In addition, a portion of our contracts do not have minimum usage requirements.



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##### Table of Contents



PART I. ITEM 2.



MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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##### Table of Contents



PART I. ITEM 2.



MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



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



The provision of 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 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 regulations, some of our clients may have difficulty qualifying our services for provider-based status. If a client cannot obtain provider-based status for our services, then the provider might decide not to contract or to continue to contract
with us or might acquire a fixed base PET system.



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##### Table of Contents



PART I. ITEM 2.



MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



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



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



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



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



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



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



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



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##### Table of Contents



PART I. ITEM 2.



MANAGEMENTS DISCUSSION AND ANALYSIS (continued)



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



We have a limited operating history.



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



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



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



ITEM 3. CONTROLS AND PROCEDURES



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



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



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##### Table of Contents



PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



From time
to time the Company becomes involved in legal proceedings, either as a plaintiff or defendant. The Company is currently involved in one such proceeding to enforce the termination provisions or minimum number of procedure provisions of its service
contract. The Company does not believe that this proceeding is material.



Although there is currently no pending legal proceeding, the Company has received notice, dated April 4, 2002, from Finova Capital Corporation of an event of default relating to certain violations of debt service ratio covenants
contained in capital equipment leases with the Company.



ITEM 2. CHANGES IN SECURITIES



Changes in Securities.



In January 2003,
we granted 187,500 options to American Financial Communications, Inc. as compensation for services provided. These options vested immediately, were exercisable at a price of $0.01 per share and were exercised in January 2003. The issuance of options
was in reliance on Section 4(2) of the Act.



Effective December
1, 2002, we entered into an employment agreement with Steven J. Davis pursuant to which he became our General Counsel. Pursuant to the terms of that agreement, we granted to Mr. Davis 250,000 options under the 1999 Stock Option Plan to purchase
common stock at a price of $0.31 per share, and a warrant to purchase 400,000 shares of common stock at a price of $0.29 per share. The options vest at a rate of 4,167 shares per month, and the warrants vest at a rate of 6,667 shares per month,
commencing January 1, 2003. The options and warrants are exercisable until December 1, 2009. The issuance of warrants was in reliance on Section 4(2) of the Act.



Effective October 28, 2002, we entered into an employment agreement with Craig Froley pursuant to which he became our Senior
Vice President of Business Development. Pursuant to the terms of that agreement, we granted Mr. Froley 250,000 options under the 1999 Stock Option Plan to purchase common stock at a price of $0.60 per share, and a warrant to purchase 100,000 shares
of common stock at a price of $0.60 per share. In recognition of Mr. Froleys employment with the Company prior to the date of his employment agreement, 68,054 options and warrants vested as of the date of the employment agreement. The
remaining options vest at a rate of 6,944 shares per month, and the remaining warrants vest at a rate of 2,778 shares per month, commencing on November 1, 2002. The options and warrants are exercisable until October 28, 2008. The issuance of
warrants was in reliance on Section 4(2) of the Act.



In October
2002 we granted 10,000 options each to seven members of our Medical Advisory Board, and 30,000 options to Dr. Peter Conti, a member of our Board of Directors, as Chairman of the Medical Advisory Board, at a price of $0.74 per share for service on
our Medical Advisory Board in 2001. These options vested immediately and are exercisable until November 30, 2004. In December 2002 we granted 10,000 options each to seven members of our Medical Advisory Board at a price of $0.60 per share for
service on our Medical Advisory Board in 2002. These options vested immediately and are exercisable until November 30, 2005. These issuances were in reliance on Section 4(2) of the Act.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



(a) Exhibits



Exhibit 10.45Employment
Agreement dated October 28, 2002 by and between Mobile PET Systems, Inc. and Craig Froley



Exhibit 10.46Employment Agreement dated December 1, 2002 by and between Mobile PET Systems, Inc. and Steven J. Davis



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



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##### Table of Contents



SIGNATURES



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



|MOBILE PET SYSTEMS, INC. a Delaware corporation
|-----------------------------------------------
|                                               
|By:                                            
|                                               



Date: February 12, 2003



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##### Table of Contents



CERTIFICATIONS



1. Chief Executive
Officer



I, Paul J. Crowe, certify that:



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



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



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



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



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



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



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



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



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



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



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



|   
|---
|By:
|   



Date: February 12, 2003



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2. Chief Financial Officer



I, Thomas H. Insley, certify that:



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



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



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



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



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



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



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



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



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



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



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



|   
|---
|By:
|   



Date: February 12, 2003



22