United States
Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2004

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___to ___

Commission File Number: 000-49867

CTI MOLECULAR IMAGING, INC.

(exact name of registrant as specified in its charter)


Delaware		62-1377363
(State of Incorporation)		(I.R.S. Employer Identification No.)

810 Innovation Drive, Knoxville, Tennessee 37932
(Address of Principal Executive Offices) (Zip Code)

(Registrant’s Telephone Number, Including Area Code): (865) 218-2000

Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

APPLICABLE ONLY TO CORPORATE ISSUERS

As of February 1, 2005, the registrant had outstanding 47,160,278 shares of common stock, par value $0.01.

CTI Molecular Imaging, Inc.
Quarterly Report on Form 10-Q

Table of Contents


	Page
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS		3
PART I
Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheets at December 31, 2004 and September 30, 2004		4
Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2004 and 2003		5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2004 and 2003		6
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3. Quantitative and Qualitative Disclosures About Market Risk		49
Item 4. Controls and Procedures		50
PART II
Other Information
Item 1. Legal Proceedings		51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		51
Item 3. Defaults Upon Senior Securities		51
Item 4. Submission of Matters to a Vote of Security Holders		52
Item 5. Other Information		52
Item 6. Exhibits		52
SIGNATURE		53
CERTIFICATIONS		54
EXHIBIT INDEX		56
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements.” Forward-looking statements relate to expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts or that necessarily depend upon future events. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” and similar expressions. Specifically, this report contains, among others, forward-looking statements about:

	•	our expectations regarding financial condition or results of operations for periods after December 31, 2004;

	•	our critical accounting policies;

	•	the timing of the exercisability of the Siemens option to purchase an additional ownership interest in CTI PET Systems, Inc. (CPS) and the effect of the Siemens option, or its exercise, on our business;

	•	our expectations regarding the size and growth of the market for our products and services and the market acceptance of CTI’s products and services;

	•	our business strategies and our ability to grow our business;

	•	competition, pricing, the seasonality of capital equipment sales, the timing of orders from and shipments to distribution partners and customers, and the availability of financing services for customers;

	•	our ability to enhance existing, or develop new, products and services and the impact of any such enhancements or developments;

	•	the development and timing of new applications for PET and the impact of any such new applications;

	•	the implementation or interpretation of current or future regulations and legislation;

	•	the number and scope of procedures involving our products and services for which third-party reimbursement is available and the reimbursement levels of third-party payors;

	•	our ability to maintain contracts and relationships with key suppliers, customers, distributors or research and development collaboration partners;

	•	our ability to maintain our existing, or to develop additional, valuable intellectual property rights; and

	•	our future sources of and needs for liquidity and capital resources.

The forward-looking statements contained in this report reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties. Many important factors could cause actual results or achievements to differ materially from any future results or achievements expressed in or implied by our forward-looking statements. Many of the factors that will determine future events or achievements are beyond our ability to control or predict. Important factors that could cause actual results or achievements to differ materially from the results or achievements reflected in our forward-looking statements include, among other things, the factors discussed in Part I, Item 2 of this report under the sub-heading “Factors Affecting Operations and Future Results.”

You should read this report, the information incorporated by reference into this report and the documents filed as exhibits to this report completely and with the understanding that our actual future results or achievements may be materially different from what we expect or anticipate.

The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is signed. Except as required by law, we assume no responsibility for updating any forward-looking statements.

We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

CTI MOLECULAR IMAGING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	December 31,			September 30,
	2004			2004
(In thousands, except share and per share data)	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	24,853		$	36,381
Accounts receivable — trade, less allowance for doubtful accounts of $5,767 at December 31, 2004 and $4,951 at September 30, 2004		63,815			65,946
Accounts receivable — related party, less allowance for doubtful accounts of $239 at December 31, 2004 and September 30, 2004		56,077			34,231
Inventories (Note 3)		85,253			92,219
Deferred tax asset		13,839			13,474
Prepaid expenses and other current assets		7,674			8,345

Total current assets		251,511			250,596


Property and equipment, net (Note 4)		137,211			133,074
Goodwill		48,096			46,629
Other assets		35,975			34,915


Total assets	$	472,793		$	465,214


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Cash management clearing	$	6,911		$	4,945
Accounts payable		19,635			26,700
Accounts payable — related party		3,667			1,367
Current maturities of long-term debt and capital lease obligations (Note 6)		4,003			4,289
Accrued payroll and benefits		10,861			13,095
Customer advances — trade		9,399			8,517
Customer advances — related party		1,685			1,284
Accrued warranty expense		6,378			6,148
Income taxes payable		770			4,472
Other accrued expenses		3,294			2,816

Total current liabilities		66,603			73,633


Deferred revenues		5,381			4,447
Deferred tax liability		4,815			5,013
Long-term debt and capital lease obligations, less current maturities (Note 6)		12,322			12,856

Total liabilities		89,121			95,949


Commitments and contingencies (Note 5)
Minority interest		67,638			62,213

Shareholders’ equity:
Preferred stock, Series C, $.01 par value, 50,000 shares authorized, no shares issued or outstanding at December 31, 2004 and September 30, 2004 (Note 11)		—			—
Common stock, $ .01 par value; 500,000,000 shares authorized, 48,918,173 shares issued and 47,086,208 shares outstanding at December 31, 2004; 48,455,820 shares issued and 46,623,855 shares outstanding at September 30, 2004		489			484
Additional paid-in capital		273,660			270,821
Retained earnings		43,787			39,827
Unearned compensation		(2,607	)		(3,465	)
Other comprehensive income — currency translation adjustment		1,668			348
Treasury stock, at cost, 1,831,965 shares		(963	)		(963	)

Total shareholders’ equity		316,034			307,052

Total liabilities and shareholders’ equity	$	472,793		$	465,214

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

CTI MOLECULAR IMAGING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended
	December 31,
	2004			2003
(In thousands, except share and per share data)	(unaudited)
Revenues ⁽¹⁾	$	111,467		$	74,107
Cost of revenues ^{(2) (3)}		69,702			43,735

Gross margin		41,765			30,372


Operating expenses:
Selling, general and administrative expenses ⁽³⁾		16,850			15,260
Research and development expenses ⁽³⁾		9,261			10,190
Stock-based compensation expense		1,471			511

Total operating expenses		27,582			25,961


Income from operations		14,183			4,411

Interest expense, net		223			485
Other income		(15	)		(595	)

Income before income taxes and minority interest		13,975			4,521


Provision (benefit) for income taxes:
Current		5,816			2,880
Deferred		(544	)		(1,181	)

		5,272			1,699


Income before minority interest		8,703			2,822
Amount applicable to minority interest, net of taxes		4,743			2,105

Net income	$	3,960		$	717


Earnings per share (Note 2):
Basic	$	0.09		$	0.02
Diluted	$	0.08		$	0.02

Weighted average shares:
Basic		45,229,213			44,331,007
Diluted		48,060,300			46,321,070

⁽¹⁾ Includes revenues from related parties	$	65,411		$	33,471
⁽²⁾Includes cost of revenues to related parties	$	41,386		$	22,479
⁽³⁾ Excludes stock-based compensation expense as follows:
Cost of revenues	$	34		$	56
Selling, general and administrative expenses		1,394			348
Research and development expenses		43			107

	$	1,471		$	511

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

CTI MOLECULAR IMAGING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended
	December 31,
	2004			2003
(In thousands, except share and per share data)	(unaudited)
Cash flows (used in) provided by operating activities:
Net income	$	3,960		$	717
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest in income of subsidiaries		4,743			2,105
Depreciation and amortization		5,567			3,984
Deferred tax benefit		(544	)		(1,181	)
Provision for bad debts		550			190
Equity in income of equity investees		(122	)		(78	)
Stock-based compensation expense		1,471			511
Gain on disposal of machinery and equipment		123			33
Tax benefit realized from exercises of employee stock options		369			320
Changes in operating assets and liabilities:
Accounts receivable		(19,824	)		30,130
Inventories		8,739			(20,713	)
Prepaid expenses and other current assets		677			459
Accounts payable		(4,917	)		(1,766	)
Accrued payroll and benefits		(2,234	)		(5,045	)
Customer advances		309			2,204
Accrued warranty expense		230			(210	)
Income taxes payable		(3,832	)		(4,139	)
Other accrued expenses		439			(1,825	)

Net cash (used in) provided by operating activities		(4,296	)		5,696


Cash flows used in investing activities:
Additions to property and equipment		(8,649	)		(10,055	)
Proceeds from the sale of other assets		59			4,781
Acquistion of businesses, net of cash acquired		(3,431	)		—
Increase (decrease) in other non-current assets and liabilities		664			(84	)

Net cash used in investing activities		(11,357	)		(5,358	)


Cash flows provided by (used in) financing activities:
Increase (decrease) in cash management clearing		1,966			(5,751	)
Proceeds from exercise of stock options		1,255			314
Proceeds from issuance of common stock		607			808
Principal payments on long-term debt and capital lease obligations		(820	)		(947	)
Draws on line of credit		3,013			7,785
Payments under line of credit		(3,013	)		(7,785	)

Net cash provided by (used in) financing activities		3,008			(5,576	)


Effect of foreign currency exchange rates on cash and cash equivalents		1,117			(311	)


Net decrease in cash and cash equivalents		(11,528	)		(5,549	)
Cash and cash equivalents, beginning of year		36,381			49,978

Cash and cash equivalents, end of period	$	24,853		$	44,429

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

CTI MOLECULAR IMAGING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share and per share data)

1. Organization and Presentation

The unaudited condensed consolidated financial statements include the accounts of CTI Molecular Imaging, Inc. (CTI) and all of its subsidiaries (the Company). All of the subsidiaries are wholly owned except for CTI PET Systems, Inc. (CPS) in which CTI owns 50.1%. The balance of CPS is owned by Siemens Medical Solutions USA, Inc. (Siemens).

The Company’s products and services can be broadly classified into two principal businesses: Clinical Scanner Business and Molecular Biomarker Technologies. Effective October 1, 2004, the Company reorganized its management reporting structure along these lines of business. In accordance with Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company has reevaluated its segment reporting requirements. Management has determined that the Company now has six reporting segments. Primarily, the reporting segment changes resulted in the various product lines of the previously reported CTI Solutions segment being separated into their respective operating segments for determination as to which operating segments met the criteria as reporting segments. As a result, the CTI Solutions reporting segment has been discontinued and disaggregated into the following new reporting segments: Service and Distribution, PETNET, Molecular Technologies, Inc. (MTI), and Molecular Imaging Products.

CPS manages the development, production and distribution of a full line of Positron Emission Tomography (PET) scanners. Detector Materials develops and manufactures detector materials used in PET scanners. Service and Distribution includes CTI’s division that manufactures and sells calibration sources; CTI’s domestic scanner service division; CTI’s division that provides sales and marketing services to Siemens; and CTI’s division that distributes and installs our remaining backlog of direct distribution orders for PET scanners manufactured by CPS. PETNET develops, produces and distributes radiopharmaceuticals. MTI manages the research and development of new biomarker products. Molecular Imaging Products includes the production, direct sale and service of cyclotron systems, microPET® and microCAT® animal scanners, and Mirada image analysis tools.

2. Summary of Significant Accounting Policies

Interim Financial Statements — The unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on December 14, 2004. Information in the accompanying condensed consolidated financial statements and notes to the financial statements for the three month periods ended December 31, 2004 and 2003 are unaudited. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented have been included. Operating results for the three month period ended December 31, 2004 are not necessarily indicative of the results that may be expected for the year ending September 30, 2005 or any future period.

Principles of Consolidation — All significant intercompany balances and transactions have been eliminated. The Company periodically enters into arrangements in which it holds a majority of the equity ownership. In some instances, the Company also has influence over a majority of the board of directors or managers. The Company determines accounting for these investments in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46(R), Consolidation of Variable Interest Entities (FIN 46(R)), SFAS No. 94, Consolidation of All Majority-Owned Subsidiaries (SFAS 94), and Accounting Principles Board (APB) Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock (APB 18) and, where appropriate, evaluates its and the minority shareholders’ participating rights in accordance with Emerging Issue Task Force (EITF) Issue 96-16,

Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights (EITF 96-16) to determine whether consolidation or equity method accounting is appropriate in each case.

The Company evaluated FIN 46(R)’s effects on its investments during the second quarter of fiscal year 2004. In conjunction with this evaluation, the Company identified one of its consolidated investments as a variable interest entity as defined by FIN 46(R). However, the evaluation of FIN 46(R) did not have a significant impact on the Company’s consolidated financial statements since the Company has the majority voting interest and is also identified as the primary beneficiary of the variable interest entity and therefore is not required to make changes to the entities included in the consolidated financial statements for this reporting period. As required by FIN 46(R), the Company continues to monitor its investments in both consolidated and unconsolidated entities for events that may occur which would require the Company to reevaluate whether any of these investments qualifies as a variable interest entity. The evaluation of FIN 46(R) did not result in changes in the application of previously issued generally accepted accounting principles, SFAS 94 and APB 18, to the Company’s investments.

CTI owns a majority interest in CPS. Under the terms of the CPS operating agreement, CTI has influence over a majority of the board of directors. Decisions deemed participating rights, including approval of operating budgets and management compensation, are determined by a majority vote of the board of directors. The board of directors of CPS consists of two directors selected by CTI, two directors selected by Siemens, and a fifth director selected by Siemens from a list of persons selected by CTI. Neither Siemens nor any member of the board of directors of CPS who was selected or nominated by Siemens has any substantive participating or veto rights with regard to significant operating, budget, capital and other decisions. CPS is consolidated in the Company’s financial statements.

Through PETNET, we own 90.0% and 51.0% interests in radiopharmacies in Denver and Houston, respectively. Under the terms of the Denver and Houston radiopharmacy operating agreements, PETNET has control over all significant operating decisions and these radiopharmacies are consolidated in our financial statements.

Where appropriate, the Company evaluates its and the minority interest shareholders’ participating rights in accordance with EITF 96-16 to determine whether consolidation or equity method accounting is appropriate in each case. In cases where the minority shareholder is deemed to have “veto rights” or has equal representation on the board of directors, the Company accounts for these investments using the equity method as the Company does not have control over significant operating decisions. The Company has invested in three radiopharmacies that are accounted for under the equity method. For the entities not previously included in the consolidated financial statements, the evaluation of FIN 46(R) resulted in the Company continuing to apply previously issued generally accepted accounting principles to the respective investments and continuing to account for these entities under the equity method.

Revenue Recognition —The Company derives its revenues from product sales, services and software licensing. Product sales include sales of scanners, detector materials, calibration sources, spare parts, radiopharmaceuticals, and cyclotrons. Services include; site planning, installation, preventive maintenance and technical support, repair, training, and assistance with licensing. Software includes licensing medical image analysis applications. The Company also recognizes as revenue reimbursements for certain sales and marketing services as such services are provided to Siemens as the Company is the primary obligor for the expenses incurred in providing these services. Revenue from product sales is recognized upon either shipment or arrival at destination depending on shipment terms. Revenue from services is recognized as the services are performed. For both products and services, revenue is recognized as described as long as persuasive evidence of an arrangement exists, the contract price is fixed or determinable, and collectibility is reasonably assured as required by the SEC’s Staff Accounting Bulletin No. 104 (SAB 104). No right of return privileges are granted to customers after shipment. Equipment maintenance service contracts are typically more than one year in duration and related revenues are recognized ratably over the respective contract periods as the services are performed. For other services, revenue is recognized upon completion of the services. The Company’s product sales contracts typically require customer payments in advance of revenue recognition. These deposit amounts are reflected as customer advances when received and later recognized as revenue as the Company fulfills its obligations under the respective contracts.

For arrangements with multiple deliverables, such as scanner and cyclotron sales, we recognize product revenue by allocating the revenue based on the fair value of each deliverable in accordance with EITF Issue 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21) and SAB 104, and recognize revenue for equipment upon delivery and for installation and other services as performed. The Company determines the value of the equipment, installation and training services based on sales of the equipment both with and without installation and training.

Revenues derived from our software license arrangements are recognized in accordance with Statement of Position (SOP) No. 97-2, “Software Revenue Recognition,” and SOP 98-9, “Modifications of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions.” Our software licenses generally are sold with training and installation services. Accordingly, as these services are included in our software license fees, revenue is recognized at the time of delivery. These services are usually provided within less than a year of delivery; the costs of providing such services are insignificant. No other services are considered essential to the functionality of the software. Revenue is recognized as described provided that evidence of an arrangement exists, collection of our fee is considered probable and the fee is fixed or determinable.

Stock-Based Compensation – SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123 (SFAS 148), amends the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), to require more prominent disclosure in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

The Company currently applies APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its stock option plans. Under APB 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of the Company’s stock and the exercise price. Had compensation expense related to the Company’s outstanding options been determined based on the fair value at the grant dates consistent with SFAS 123, net income and earnings per share would be as reflected below:


	Three Months Ended
	December 31,
	2004			2003
(In thousands)	(unaudited)
Net income, as reported	$	3,960		$	717

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		1,093			399

Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(2,084	)		(1,196	)


Pro forma net (loss) income	$	2,969		$	(80	)


Earnings per share:
Basic - as reported	$	0.09		$	0.02
Basic - pro forma	$	0.07		$	—

Diluted - as reported	$	0.08		$	0.02
Diluted - pro forma	$	0.06		$	—

Earnings Per Share - Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding during the period. The weighted-average number of common shares outstanding does not include unvested restricted shares. These shares, although classified as issued and outstanding, are considered contingently returnable until the restrictions lapse and will not be included in the basic earnings per share calculation until the shares are vested. Diluted earnings per share is computed by giving effect to all dilutive potential common shares, including restricted stock and stock options. A reconciliation of the numerator and denominator used in the calculation of historical basic and diluted earnings per share follows:


	Three Months Ended
	December 31,
	2004		2003
	(unaudited)
Numerator:
Net income available to common shareholders — basic and diluted	$	3,960	$	717


Denominator:
Weighted-average number of common shares outstanding		45,229,213		44,331,007


Dilutive potential common shares relating to:
Restricted stock and deferred stock units		1,753,568		170,896
Options and warrants		1,077,519		1,819,167

		2,831,087		1,990,063


Total weighted-average number of shares used in computing diluted net income per share		48,060,300		46,321,070

The following amounts of outstanding warrants and options were excluded from the computation of diluted net income per common share for the three month periods ended December 31, 2004 and 2003 because including them would have had an antidilutive effect:


	Three Months Ended
	December 31,
	2004		2003
	(unaudited)
Warrants		45,631		32,386
Options		2,945,742		2,362,183

		2,991,373		2,394,569

Other Assets – Other assets include purchased technology and trademarks arising from the Mirada Solutions Limited (Mirada) and Concorde Microsystems, Inc. (CMSI) acquisitions, precious metals utilized in the production of detector materials, other long-term receivables and investments accounted for under the equity method. Purchased technology, patents, trademarks are presented at cost, net of accumulated amortization. Intangible assets with finite lives are amortized over their estimated useful lives of 5 to 11 years using the straight-line method. Amortization of other assets for the three months ended December 31, 2004 and 2003 was $790 and $399, respectively.

Recent Accounting Pronouncements

Share-Based Payment - In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic value method under APB 25, and generally would require instead that such transactions be accounted for using a fair-value-based method. The Company is currently evaluating SFAS 123R to determine which fair-value-

based model and transitional provision it will follow upon adoption. The options for transition methods as prescribed in SFAS 123R include either the modified prospective or the modified retrospective methods. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock as the requisite service is rendered beginning with the first quarter of adoption, while the modified retrospective method would record compensation expense for stock options and restricted stock beginning with the first period restated. Under the modified retrospective method, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. SFAS 123R will be effective for the Company beginning in its fourth quarter of fiscal 2005. Although the Company will continue to evaluate the application of SFAS 123R, management expects adoption of this standard to have a material impact on its results of operations.

Inventory Costs – On November 24, 2004, the FASB issued SFAS No. 151, Inventory Costs- an amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151 requires that these costs be recognized as current period charges regardless of whether they are abnormal. In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of manufacturing be based on the normal capacity of the production facilities. SFAS 151 shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect SFAS 151 to have a material effect on its financial statements.

Exchange of Nonmonetary Assets – In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29 (SFAS 153). SFAS 153 addresses the remeasurement of exchanges of nonmonetary assets. This statement eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets within APB Opinion No. 29, and replaces it with an exception for exchanges that do not have commercial substance. The provisions of SFAS 153 shall be effective for nonmonetary transactions occurring in fiscal periods beginning after June 15, 2005. The Company will apply the provisions of SFAS 153 if we exchange nonmonetary assets.

3. Inventories

Inventories consist of the following:


	December 31,		September 30,
	2004		2004
(In thousands)	(unaudited)
Component parts	$	42,008	$	30,885
Work in process		11,076		17,900
Finished goods		32,169		43,434

	$	85,253	$	92,219

4. Property and Equipment

Property and equipment consist of the following:


	December 31,			September 30,
	2004			2004
(In thousands)	(unaudited)
Land	$	2,044		$	2,044
Buildings		20,956			20,956
Building and leasehold improvements		29,477			27,048
Machinery and equipment		100,128			96,097
Software and computer equipment		20,374			19,653
Less accumulated depreciation		(52,117	)		(49,242	)
Assets under construction		16,349			16,518

Property and equipment, net	$	137,211		$	133,074

Depreciation expense for the three months ended December 31, 2004 and 2003 was $4,777 and $3,585, respectively.

5. Commitments and Contingencies

Guarantees - The Company guarantees lease obligations for radiopharmacy facilities and equipment on behalf of unconsolidated investees in the maximum aggregate amount of $225 at December 31, 2004. No liability has been recorded for these lease obligations which expire through 2009. The guarantees are not collateralized by any assets and are without recourse.

In August 2003, the Company also guaranteed a debt obligation related to a cyclotron and radiopharmacy project for an international distributor in the maximum aggregate amount of €5,256 (or approximately $7,131). The debt obligation and the guarantee expire in July 2009. In the event a claim is made under this guarantee, the Company has the right to acquire the facility and all related customer contracts and would operate the facility as a PETNET radiopharmacy. At December 31, 2004, the Company had recorded a liability of $300 for this guarantee to reflect the estimated fair value of the Company’s obligation in accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45).

The Company has a financing program arrangement with De Lage Landen Financial Services, Inc. (DLL). The program provides flexible lease financing to Service and Distribution’s customers for the full range of PET and PET/CT scanners and other products and services sold by the Company through Service and Distribution. In connection with this program a credit reserve pool was established whereby the Company provided a guarantee to DLL for 9.9% on the first $25,000 of transactions and 5.0% thereafter, of the principal balance of all leases DLL executes on behalf of Service and Distribution’s customers. At December 31, 2004 the Company had recorded a reserve of $280 to reflect the estimated fair value of the Company’s obligation for this guarantee after recovery and resale of the underlying equipment in accordance with FIN 45.

Warranties - The Company provides a parts and labor warranty on certain products it manufactures, typically for a period of twelve months after installation. Estimated costs of this warranty obligation are charged to cost of revenues at the time revenue is recognized. A summary of the activity in our warranty reserve is as follows:


	Three Months Ended
	December 31,
	2004			2003
(In thousands)	(unaudited)
Balance at the beginning of the period	$	6,148		$	3,740
Accruals for warranties issued during the period		1,308			963
Settlements made (in cash or in kind)		(1,078	)		(1,758	)

Balance at the end of the period	$	6,378		$	2,945

Litigation - On January 30, 2004, the University of Pittsburgh (Pitt) filed suit in the U.S. Western District of Pennsylvania, Civil Action No. 04-0127, against Dr. David Townsend, Dr. Ronald Nutt, CTI and CPS alleging that Pitt has an ownership interest in the intellectual property associated with the PET/CT system manufactured and sold by CPS. Under a variety of causes of action, the relief sought by Pitt in the complaint is a declaration of Pitt’s ownership rights, injunctive relief against disclosure and transfer of the intellectual property, actual and punitive damages, and attorney’s fees. Based on the results of the Company’s investigation, which is continuing, the Company intends to vigorously defend against Pitt’s claim of an ownership interest in these patents or in any other intellectual property used in the PET/CT system manufactured and sold by CPS, or that Pitt has any right to a share of the profits earned from the sale of PET/CT systems. On June 30, 2004, the District Court for the Western District of Pennsylvania entered an order transferring the case to the District Court for the Eastern District of Tennessee. On December 13, 2004, the district court judge issued an order dismissing two of Pitt’s copyright claims asserted in its

complaint. A trial date of May 1, 2006 has been scheduled with the District Court. The Company denies liability as to Pitt’s remaining claims, and intends to vigorously defend this suit; however, given the uncertainties inherent in the litigation process, the Company is unable to predict the ultimate outcome of this suit.

On October 8, 2004, CPS received a letter from the U.S. Environmental Protection Agency (EPA) requesting information on a Superfund site operated by a former supplier. Based on CPS’ investigation, it appears that the sole nature of CPS’ dealing with the supplier was strictly for the acquisition of supplies and not the provision of waste products or by-products by or on behalf of CPS. No legal action has been initiated or threatened by the EPA against CPS at present and we have no basis at this time to believe that any formal legal claim will be brought by the EPA.

The Company is also involved in various other lawsuits and claims arising in the normal course of business. Although the outcomes of these other lawsuits and claims are uncertain, the Company does not believe any of them will have a material adverse effect on our business, financial condition or results of operations.

6. Long-Term Debt

The Company has a $125,000 syndicated revolving credit facility (the Syndicated Facility) with a group of banks. Borrowing under the Syndicated Facility is collateralized by all property and interests in property; provided, however, that all real property of CTI as of March 14, 2002 is excluded; and provided further that the property and interests of CPS are limited to the inventory and accounts receivable and all proceeds there from of CPS. Interest is at LIBOR plus 0.75% to 1.75% or, at the Company’s option, the lender’s base rate plus 0.00% to 0.75%, payable monthly (3.56% at December 31, 2004). The Syndicated Facility matures on October 15, 2005 and contains certain restrictive covenants, which, among other things, require minimum tangible net worth, funded debt, and debt service ratios; impose limitations on other indebtedness and liens; and, restrict investments, disposals of assets and dividend payments. As of December 31, 2004 no balance was outstanding under the credit agreement, and after deducting $6,605 in outstanding letters of credit, $118,395 was available to the Company.

In 1988 the Company entered into an agreement with the Industrial Development Board of Blount County, Tennessee (the Board) relating to the issue of Industrial Development Revenue Bonds (the Series 1988 Bonds) by the Board in the aggregate principal amount of $5,000 for the purpose of lending proceeds from the Bonds to the Company. Such proceeds were restricted to use in the acquisition, construction, improvement, and equipping of a manufacturing plant in Blount County, Tennessee. The remaining $4,000 balance of the Series 1988 Bonds is supported by an irrevocable letter of credit agreement that expires February 7, 2006. The Series 1988 Bonds are due in August 2008.

On August 1, 2000 the Company entered into an agreement with the Board relating to the issue of Industrial Development Revenue Bonds (the Series 2000 Bonds) by the Board in the aggregate principal amount of $3,000 for the purpose of lending proceeds from the Series 2000 Bonds to the Company. Such proceeds are restricted to use in the acquisition, construction, improvement and equipping of the Company’s manufacturing plant in Blount County, Tennessee. At December 31, 2004, the remaining balance of the Series 2000 Bonds was $1,600 and is supported by an irrevocable letter of credit agreement that expires February 7, 2006. The Series 2000 Bonds are due in August 2010.

CTI is required to repay 10.0% of the outstanding debt annually, for both series. Both bond series bear interest at variable rates, which change from time to time as set by the remarketing agents for the bonds, in order to remarket both bond series in a secondary market (interest rates were 2.13% and 2.45% at December 31, 2004).

In August 2003 in conjunction with the acquisition of Mirada, we assumed a $365 bank note and issued $3,188 of unsecured loan notes. The bank note was repaid in March 2004. For the unsecured loan notes issued during the acquisition, the remaining balance of $692 and any outstanding interest is due on April 30, 2005. Interest on the unsecured loan notes is fixed at 1.50%.

In 2003, CTI, through its subsidiary CPS, entered into a mortgage loan to purchase additional manufacturing space, which had previously been leased. The Company is required to make principal and interest payments totaling $78 per year through 2008, with a balloon payment upon maturity. The debt bears interest at a fixed rate of 4%. The outstanding balance on this mortgage loan was $818 at December 31, 2004.

7. Income Taxes

The Company files a consolidated U.S. federal income tax return that includes all of its wholly owned domestic subsidiaries. CPS files a separate U.S. federal income tax return and all foreign subsidiaries file returns in their country of incorporation. The Company’s effective tax rate on income before taxes and minority interest differs from the federal statutory rate as follows:


	Three Months Ended
	December 31,
	2004		2003
(In thousands)	(unaudited)
Federal tax @ 35%	$	4,891	$	1,582
State tax		357		94
Permanent differences		24		23

Provision for income taxes	$	5,272	$	1,699

8. Stock Options and Restricted Stock

Incentive Stock Option Plans

Since 1998 the Company has had an incentive stock option plan for officers and key employees with the latest plan being adopted in 2002. Options are generally exercisable in installments of 25% per year from the grant date and expire after five to ten years. At December 31, 2004, options for 1,498,558 shares of the Company’s common stock were available for granting. The following table summarizes information about incentive stock options at December 31, 2004:


	Options Outstanding						Options Exercisable
	Number		Average		Average		Number		Average
Range of Exercise Prices	of Shares		Life⁽¹⁾		Price⁽²⁾		of Shares		Price⁽²⁾
$2.87 to $3.87		294,941		1.96	$	3.16		294,941	$	3.16
$4.69 to $6.12		731,430		3.96		5.13		664,304		5.10
$7.84 to $10.76		232,850		9.78		8.05		—		—
$12.01 to $17.63		263,408		9.07		14.94		41,749		15.52
$18.31 to $25.00		126,706		7.88		22.00		83,668		22.01

		1,649,335			$	8.05		1,084,662	$	6.28


	⁽¹⁾ Weighted average contractual life remaining in years.

	⁽²⁾ Weighted average exercise price.

Non-qualified Options

In addition, the Company grants non-qualified stock options to certain officers and key employees. The options are generally exercisable in installments of 25% per year from the grant date and expire after five to ten years.

The following table summarizes information about non-qualified stock options at December 31, 2004:


	Options Outstanding						Options Exercisable
	Number		Average		Average		Number		Average
Range of Exercise Prices	of Shares		Life⁽¹⁾		Price⁽²⁾		of Shares		Price⁽²⁾
$2.81 to $3.52		43,016		1.72	$	3.10		43,016	$	3.10
$4.69 to $5.56		519,434		4.12		5.21		459,701		5.26
$7.84 to $8.02		428,150		9.75		8.02		—		—
$12.89 to $19.00		829,807		8.86		15.23		293,521		15.94
$19.76 to $22.40		390,455		7.62		20.35		314,493		20.49

		2,210,862			$	12.15		1,110,731	$	12.31


	⁽¹⁾ Weighted average contractual life remaining in years. ⁽²⁾ Weighted average exercise price.

Stock-Based Compensation

In October 2004, the Company issued 60,000 restricted shares of common stock at a price of $8.16 to a senior executive. In connection with these restricted common shares, the Company recorded unearned compensation of $490. The Company is amortizing the unearned compensation balance to stock-based compensation expense over a six-month vesting period during which the restrictions expire. The Company amortized $245 to stock-based compensation expense for the three months ended December 31, 2004. In addition, the Company accelerated the vesting schedule of 128,000 options previously issued to this senior executive. The options were revalued to $8.16, the price on the day of remeasurement. The Company recorded unearned compensation for the excess of estimated fair value at the remeasurement date over the previously calculated fair value of the options, totaling $266 and amortized this amount to stock-based compensation expense during the three months ended December 31, 2004.

9. Related Party Transactions

Siemens is the primary distributor of scanners manufactured by CPS. Transfer prices are set annually and vary with product type and annual shipment volume. Sales are F.O.B. factory. Siemens is provided a warranty discount, recorded as a reduction of sales price, to cover their cost of parts during the first twelve months of usage. Siemens is responsible for all site planning, installation and customer training. The Company’s sales to Siemens were $65,411 and $33,471, during the three month periods ended December 31, 2004 and 2003, respectively. Accounts receivable from Siemens totaled $56,077 and $34,231, at December 31, 2004 and September 30, 2004, respectively. Accounts payable to Siemens totaled $3,667 and $1,367, at December 31, 2004 and September 30, 2004, respectively. Also, customer advances from Siemens totaled $1,685 and $1,284, at December 31, 2004 and September 30, 2004, respectively.

Effective May 1, 2004, CTI and CPS entered into a Sales Agency and Services Agreement with Siemens (the Agency Agreement), pursuant to which Siemens appointed CTI as Siemens’ non-exclusive sales representative to solicit purchases of CPS-manufactured PET and PET/CT scanners throughout the United States, on terms and conditions and at prices determined by Siemens and subject to acceptance by Siemens. CPS products sold by CTI as Siemens’ sales representative are marketed and sold under the Siemens brand. In connection with this arrangement, Siemens will reimburse CTI for all directly related sales and marketing expenses, up to $10.0 million annually. During the three month period ended December 31, 2004, CTI recorded $2.0 million of revenue related to the reimbursement of sales and marketing expenses.

Service contracts entered into in connection with scanner sales in the United States after May 1, 2004 will be divided equally between CTI and Siemens in terms of revenue. Siemens and CTI remain free to independently pursue sales of service contracts to the installed base of CPS scanner customers.

During the two-year term of the Agency Agreement, CTI agreed to cease its sales and service of PET and PET/CT scanners in international markets, except in South Korea and Japan. All existing scanner service contracts in international markets other than South Korea and Japan were assigned to Siemens. During the term of the Agency Agreement, CTI has agreed not to enter or re-enter any international market to sell or service PET or PET/CT scanners, except that CTI may continue to pursue its existing business in South Korea and may retain its existing distribution agreement in Japan. In exchange for the assignment of the international service contracts, covenants not to compete in the United States and international markets other than South Korea and Japan, certain price reductions for detector materials including on international scanner sales, and as compensation for the cost of closing certain international operations, Siemens paid CTI $2.2 million. CTI recognized $1.1 million as revenue during the year ended September 30, 2004, in association with the assignment of international service contracts. The remaining amount is being amortized over the two-year term of the agreement concurrent with our LSO price reduction and non-compete commitments.

Under the Agency Agreement, Siemens serves as CTI’s non-exclusive representative to offer for sale other products manufactured by CTI to Siemens’ customers. Subject to the expiration or termination of any existing agreements Siemens agreed to offer exclusively CTI’s cyclotrons, radiopharmaceuticals and calibration sources for sale to Siemens’ customers.

The parties also agreed to certain changes in transfer prices charged to and received from CPS. Siemens and CTI have reduced the transfer prices for CT components and LSO detector materials, respectively, sold to CPS. These price reductions are being passed on, dollar-for-dollar, in the form of lower transfer prices on scanners sold by CPS to Siemens. CPS agreed to a second round of transfer price reductions on scanners sold to Siemens, which are expected to become effective during the second quarter of fiscal year 2005.

The initial term of the Agency Agreement is two years commencing May 1, 2004, and the term will be extended automatically for additional one-year periods unless either party provides written notice, as required, of its election not to renew. In the event the Agency Agreement is terminated or not renewed by Siemens for any reason, CTI has the right to resume distribution of PET and PET/CT scanners in competition with Siemens. The Agency Agreement also provides that CTI can terminate this agreement under certain specified circumstances, including the event that certain total unit sales thresholds for PET and PET/CT scanners are not met for a period of two consecutive fiscal quarters.

Siemens also executed an agreement with Mirada, under which Siemens pays Mirada a fee to install Mirada’s image-fusion software on every workstation shipped worldwide with a Siemens-branded PET or PET/CT scanner.

Under the terms of an agreement with Siemens (the Siemens Agreement), Siemens shall have the right to purchase, or CTI shall have the right to require Siemens to purchase, an additional 30.1% of CPS. The exercise of this put/call is contingent upon cumulative unit sales of ECAT^® scanners reaching a defined target level. At December 31, 2004 the cumulative total number of units sold by CPS was 889. By the end of 2005, CPS would need to have sold a cumulative total of 1,129 units to achieve the required cumulative sales level for the put/call to be exercisable, with such cumulative unit sales requirement increasing by 74 units each year thereafter. Upon exercise of the put/call, the Siemens Agreement provides for the purchase price to be established through an independent third party valuation process if the parties are unable to agree upon a price. Once CTI is notified of Siemens’ intent to purchase the additional interest, CTI shall have the right to defer the Siemens purchase for one year. CTI does not expect this target level to be reached before the second half of fiscal year 2006. Siemens cannot exercise its option until the end of the fiscal year in which this target level is reached.

Prior to the Company’s acquisition of the business and assets of CMSI in June 2004, the Company had four agreements with CMSI, a company partially owned and operated by two children of CTI’s President and Chief Executive Officer, who is also a director and major shareholder of CTI.

In September 2002, the Company entered into an agreement to distribute CMSI products throughout the continental United States and Canada. CMSI retained the rights to, and sold products directly to all international markets other than Canada. During the three months ended December 31, 2003, total sales and cost of sales of products purchased from CMSI and resold under this distribution agreement were $1,377 and $1,268, respectively. In connection with the acquisition of CMSI’s business and assets, this distribution agreement was terminated.

On September 5, 2002 CTI entered into an LSO Supply Agreement with CMSI pursuant to which CTI agreed to provide CMSI with LSO. In this agreement, CTI agreed not to sell LSO to another third party engaged in the development or manufacture of PET scanners for use in animal applications. During the three months ended December 31, 2003 and prior to the acquisition of CMSI, LSO sales to CMSI were $25. In connection with the acquisition of CMSI’s business and assets, this LSO Supply Agreement was terminated.

10. Segments

The Company’s products and services can be broadly classified into two principal businesses: Clinical Scanner Business and Molecular Biomarker Technologies. Effective October 1, 2004, the Company reorganized its reporting structure to align with organizational changes made as of that date. Within these two businesses we have six reporting segments. CPS manages the development, production and distribution of the ECAT® line of PET scanners. Detector Materials develops and manufactures detector materials used in PET scanners. Service and Distribution includes the direct sale and service of PET scanners and related products as well as sales and marketing services provided to Siemens. PETNET develops, produces and distributes radiopharmaceuticals. MTI manages the research and development of new biomarker products. Molecular Imaging Products includes the production, direct sale and service of cyclotron systems, microPET® and microCAT® animal scanners, and Mirada image analysis tools. All comparative financial information for the three months ended December 31, 2003 has been retroactively reclassified to reflect the new reporting structure.

The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies.” Segment data includes intersegment revenues. Assets and costs of the corporate headquarters are allocated to the segments based on usage with the exception of the Company’s headquarters building and non-allocable costs which are included in “Corporate & Eliminations”. The Company evaluates the performance of its segments based on net income (loss). The Company’s business is conducted principally in the U.S.; however, the Company does have foreign operations for which identifiable assets are immaterial.

The following table summarizes information about net income (loss) and segment assets used by the chief operating decision maker of the Company in making decisions regarding allocation of assets and resources as of and for the three month periods ended December 31, 2004 and 2003:


	Clinical Scanner Business							Molecular Biomarker Technologies
														Molecular
			Detector		Service &									Imaging			Corporate &
	CPS		Materials		Distribution			PETNET			MTI			Products			Eliminations			Consolidated
Three months Ended December 31, 2004 (unaudited)
External revenues	$	61,680	$	—	$	12,390		$	26,557		$	154		$	10,686		$	—		$	111,467
Intersegment revenues		5,353		7,687		4,764			—			50			3,060			(20,914	)		—
Depreciation and amortization		599		529		180			2,663			58			605			933			5,567
Stock-based compensation expense		41		2		14			183			289			8			934			1,471
Interest expense		11		318		592			540			27			398			(1,534	)		352
Interest income		478		232		66			6			—			60			(713	)		129
Equity in (income) losses of investees		—		—		—			(85	)		—			—			(37	)		(122	)
Income tax expense		5,219		999		(489	)		226			(497	)		(245	)		59			5,272
Minority interest expense		—		—		—			113			—			—			4,630			4,743
Net income (loss)		9,279		1,562		(814	)		19			(898	)		(492	)		(4,696	)		3,960
Total assets		176,397		75,298		157,579			128,202			2,105			143,860			(210,648	)		472,793
Investment in equity method investees		—		—		171			2,007			—			—			(1,028	)		1,150
Capital expenditures		155		151		29			6,528			267			59			1,460			8,649

Three months Ended December 31, 2003 (unaudited)
External revenues	$	37,499	$	25	$	12,269		$	19,454		$	—		$	4,860					$	74,107
Intersegment revenues		17,987		12,064		1,588			35			—			2,351			(34,025	)		—
Depreciation and amortization		565		415		168			2,075			—			156			605			3,984
Stock-based compensation expense		82		5		150			97			—			13			164			511
Interest expense		25		211		351			414			—			329			(516	)		814
Interest income		142		—		88			—			—			9			90			329
Equity in (income) losses of investees		—		—		—			(119	)		—			78			(37	)		(78	)
Income tax expense		2,301		2,410		(1,568	)		128			(296	)		(269	)		(1,007	)		1,699
Minority interest expense		—		—		—			116			—			—			1,989			2,105
Net income (loss)		3,986		4,105		(2,630	)		(61	)		(463	)		(514	)		(3,706	)		717
Total assets		138,146		52,741		71,856			89,865			249			52,246			6,033			411,136
Investment in equity method investees		—		—		373			2,050			—			112			(1,028	)		1,507
Capital expenditures		535		958		652			5,131			—			547			2,232			10,055

Sales were distributed to the following locations:


	Three Months Ended
	December 31,
	2004			2003
	(unaudited)
United States		78.7	%		80.2	%
Foreign		21.3			19.8

		100.0	%		100.0	%

11. Stockholder Protection Rights

During 2002 the Company’s Board of Directors adopted a stockholder protection rights agreement and declared a dividend of one Right for each share of Common Stock held of record on the closing date of the initial public offering. The Rights, which do not have any voting rights, are generally not exercisable until 10 days after an announcement by the Company that a person has acquired at least 15% of the Company’s Common Stock. Each Right, should it become exercisable, will entitle the owner to buy one ten-thousandth of a share of Series C Junior Participating Preferred Stock at an exercise price of $130. The Rights may be terminated without payment by the Company at any time prior to the date that is ten business days after the acquisition of 15% or more of the Company’s Common Stock by a person or group.

In the event the Rights become exercisable as a result of the acquisition of at least 15% of the Company’s Common Stock, each Right will entitle the owner, other than the acquiring person, to buy at the Right’s then current exercise price a number of shares of Common Stock with a market value equal to twice the exercise price. In addition, unless the acquiring person owns more than 50% of the outstanding shares of Common Stock, the Board of Directors may elect to exchange all outstanding Rights (other than those owned by such acquiring person or affiliates thereof) at an exchange ratio of one share of Common Stock per Right. The Rights expire on June 1, 2012 unless earlier terminated by the Board. As a result of the adoption of the Shareholders’ Rights Plan, 50,000 shares of authorized preferred stock have been reserved and designated as Series C Junior Participating Preferred Stock.

12. Business Acquisitions

On November 2, 2004, the Company acquired 100% of the capital stock of ImTek, Inc. (ImTek). ImTek designs and manufactures the microCAT® brand of micro-CT scanners, which are used in preclinical applications of small animal imaging. The balance sheet and results of operations of ImTek and are included in our consolidated financial statements as part of the Molecular Imaging Products segment effective November 2, 2004. The acquisition augments the Company’s expanding capabilities to serve the pharmaceutical research market.

The aggregate purchase price was $3,675 in cash. The purchase price allocation is subject to refinement as additional transaction related costs may be incurred. Under the purchase agreement, the Company may be required to make additional payments if certain separate and defined goals are exceeded in 2005 and 2006 for either gross profit or units delivered. If additional payments are required the Company will adjust goodwill at that time. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.


	At
	November 2,
	2004
Current assets	$	2,083
Property and equipment		49
Trademarks		1,447
Goodwill		1,453

Total assets acquired		5,032


Current liabilities		241
Deferred revenues		1,116

Total liabilities assumed		1,357



Net assets acquired	$	3,675

The acquired trademarks and goodwill are considered to have an indefinite life and no amortization will be recorded against the asset. However, the trademarks and goodwill will be reviewed for impairment on an annual basis. The goodwill is not expected to be deductible for tax purposes. No pro forma disclosures have been included in these financial statements as ImTek was not significant to the consolidated financial statements taken as a whole.

The changes in the carrying value of goodwill for the period ended December 31, 2004 are as follows:


			Molecular
	Detector		Imaging		Corporate &		Consolidated
	Materials		Products		Eliminations		Total
Balance, September 30, 2004	$	711	$	21,437	$	24,481	$	46,629
Goodwill acquired (ImTek)		—		1,453		—		1,453
Goodwill adjustment (Concorde)		—		14		—		14


Balance, December 31, 2004	$	711	$	22,904	$	24,481	$	48,096

The “Corporate & Eliminations” column primarily reflects the goodwill arising from the acquisitions of PETNET and Mirada that was not pushed down for segment reporting. Of the $47,385 total for Molecular Imaging Products and Corporate and Eliminations, $11,272 relates to PETNET, $12,485 relates to Mirada, $21,582 relates to Concorde, $1,453 relates to ImTek and $593 relates to Detector Materials.

ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis contains forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our results could differ materially from the results anticipated by our forward-looking statements as a result of many known or unknown factors, including, but not limited to, those factors discussed below in this Item under the sub-heading “Factors Affecting Operations and Future Results.” See also the “Cautionary Notice Regarding Forward-Looking Statements” set forth at the beginning of this report.

Overview

We are a leading manufacturer of positron emission tomography imaging equipment and related products used in the detection and treatment of cancer, cardiac disease and neurological disorders. Positron emission tomography, or PET, is a medical imaging technology that offers the distinct advantage of imaging at a molecular level, thereby allowing physicians to diagnose and treat a broad range of diseases earlier and more accurately than other medical imaging technologies. We also provide a comprehensive array of services that facilitate entry by health care providers into the business of PET imaging. Our line of PET products and services includes scanners, cyclotrons, detector materials, microPET® and microCAT® animal scanners, radiopharmaceutical manufacturing and distribution, Mirada image analysis tools, and related support services.

Historically, the majority of our consolidated revenues, gross margin and net income have been attributable to CTI PET Systems, Inc., doing business as CPS Innovations (CPS). Our strategy includes plans for growing our other segments over time with a goal of having greater than 50% of our gross revenues being derived from such other segments by 2006, the expected year that Siemens Medical Solutions USA, Inc. (Siemens), a wholly owned subsidiary of Siemens AG, could first announce its intention to exercise its option to purchase a controlling interest in CPS. Upon an exercise by Siemens of the call right, we have a one-time right to defer the sale for a period of one year. This strategy contemplates the following initiatives: (1) expansion of our radiopharmaceutical distribution network to meet market needs; (2) development of new proprietary radiopharmaceuticals; (3) acquisition of complementary PET-related products and services, and (4) growth of our service contract business.

Late in the third quarter of fiscal year 2004, we observed that the rate of unit growth in the PET and PET/CT market had slowed considerably from historic growth rates; however, our most recent projections for fiscal year 2005 indicate a stable domestic market and escalating growth in international shipments.

We expect the demand for PET products and services to grow as more indications are approved for reimbursement. However, it is also reasonable to expect reimbursement rates to decline over time, as PET becomes more widely adopted, which could also affect the demand for our products and services.

Management expects its closer collaboration with Siemens following the execution of the Sales Agency and Services Agreement, effective May 1, 2004, to enable the Company to avoid the substantial costs of the direct scanner distribution business.

Segments

Effective October 1, 2004 we restructured our organization into two business groupings: the Clinical Scanner Business and Molecular Biomarker Technologies. These two businesses operate in six segments for financial reporting purposes: CPS, Detector Materials, Service and Distribution, PETNET, MTI and Molecular Imaging Products. Service and Distribution, PETNET, MTI, and Molecular Imaging Products represent the breakout of the various components of the former CTI Solutions segment. All comparative financial information for the three months ended December 31, 2003 has been retroactively reclassified to reflect the new reporting structure.

CPS

Our CPS segment includes the development, production and sale of PET and PET/CT scanners. We conduct this business through our subsidiary, CPS, which was formed in 1987 as a joint venture with Siemens. We own 50.1% of CPS and Siemens owns the remaining 49.9%.

From 1987 until April 2001, the products of CPS were distributed exclusively by Siemens. In April 2001 we implemented a multiple distributor strategy for CPS by pursuing additional third-party distributor agreements. In November 2001 CPS added Hitachi Medical Systems America, Inc. as a third-party distributor of its products, and in October 2003 we added Toshiba Medical Systems as a third-party distributor of CPS’ products in Japan. Under these agreements, CPS sets the price to distributors who set their own prices to end customers. CPS does not bear credit risk associated with sales made by the distributor to end customers. Effective May 1, 2004, CTI, CPS and Siemens entered into a new Sales Agency and Service Agreement, as discussed below.

The scanners manufactured by CPS have historically ranged in customer price from $0.6 million to $2.3 million and offer customers a broad range of scan times, resolution and image quality.

Detector Materials

Our Detector Materials segment includes our business of developing, manufacturing and selling detector materials for use in PET scanners. The Detector Materials segment has certain exclusive rights to the development and manufacturing of a cerium-doped detector material called lutetium oxyorthosilicate, or LSO. We obtained an exclusive license from Schlumberger Technology Corporation with respect to LSO in February 1995. The rights terminate upon the expiration of Schlumberger’s patents for LSO, which are expected to expire in October 2008. We have invested significant capital in our Detector Materials segment to develop LSO in order to meet an expected increase in demand for detector materials as the PET market continues to grow.

Service and Distribution

Service and Distribution includes CTI’s division that manufactures and sells calibration sources; CTI’s domestic scanner service division; CTI’s division that provides sales and marketing services to Siemens; and CTI’s division that distributes and installs the remaining backlog of direct distribution orders for PET scanners manufactured by CPS.

PETNET

Our PETNET segment consists primarily of our business of developing, manufacturing and distributing positron-emitting radiopharmaceuticals and providing certain PET related services such as reimbursement education, regulatory compliance consulting and marketing assistance.

We currently operate 42 radiopharmacies in the U.S., one radiopharmacy in the United Kingdom and two radiopharmacies in South Korea. Fourteen of these radiopharmacies operate cyclotrons owned by other parties, or hosts, pursuant to contracts. These host contracts vary but typically require us to provide radiopharmaceuticals to the host at below market prices while also allowing us to use the host’s facility to manufacture and distribute radiopharmaceuticals commercially to third parties. In addition, we typically compensate the host for the use of the cyclotron. The 45 radiopharmacies which PETNET operates also include three radiopharmacies we do not consolidate, as the Company does not have control over significant operating decisions.

MTI

MTI is the focal point for our biomarker research and development activities. Through the discovery of new molecular biomarkers of disease and the development of novel molecular synthesis and biological screening platforms, we expect MTI to fuel growth in the diversity of molecular diagnostics used with PET. MTI will augment its initiatives through collaborations with major research institutions as well as major pharmaceutical companies. Through these collaborations, MTI will broaden its technology initiatives in nanotechnologies, microfluidics and systems biology of disease to base its biomarker development on the knowledge of how cells are reprogrammed to gain the properties of disease.

Molecular Imaging Products

Our Molecular Imaging Products segment includes CTI’s subsidiaries and divisions that produce, sell, install and service cyclotrons, microPET® and microCAT® animal scanners, and medical image analysis tools.

Components of Revenues and Expenses

Revenues

Our revenue is derived primarily from sales of PET and PET/CT products and services. Revenues for scanners, detector materials, radiopharmaceuticals, microPET® and microCAT® animal scanners, calibration sources and spare parts are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable. Delivery is considered to have occurred upon either shipment or arrival at destination depending on shipping terms. Amounts attributable to the installation of scanners are deferred and recognized upon completion of installation. Most of the revenue for detector materials is from sales to CPS and, therefore, is eliminated in consolidation for financial reporting purposes. Effective July 1, 2003, in conjunction with the implementation of Emerging Issues Task Force (EITF) Issue 00-21, Accounting for Revenue Arrangements with Multiple Deliverables (EITF 00-21), revenue for cyclotron systems is recognized upon delivery with amounts attributable to installation of the systems deferred until services are performed. Revenue for service contracts is recognized ratably over the period the service is provided.

Cost of Revenues

Our scanners, cyclotrons, microPET® and microCAT® animal scanners, detector materials, calibration sources and spare parts are manufactured at facilities in Knoxville and Rockford, Tennessee. Our radiopharmaceuticals are manufactured at 45 radiopharmacies. We employ a network of field service engineers to service our installed base of scanners and cyclotrons.

Cost of revenues consists primarily of purchase cost of materials; expenses related to internal operations of the manufacturing and service organizations; expenses related to technical support and maintenance; expenses related to distribution, shipping, installation, acceptance, and warranty of our products; royalties payable under technology licenses; amortization of acquired technology; and fixed asset depreciation, primarily for our detector materials and radiopharmacies.

Operating Expenses

Selling, General and Administrative. Selling, general and administrative expenses consist primarily of salaries, commissions, benefits and related expenses for personnel engaged in sales, general and administrative activities; costs associated with advertising, trade shows, promotional and other marketing activities; and legal and accounting fees for professional services.

Research and Development. Significant investment in research and development has been made, and we believe will continue to be required, to develop new products and enhance existing products to allow us to further penetrate the PET market. These expenses consist primarily of salaries and related personnel expenses; expenditures for prototype materials and supplies; overhead allocated to product development; legal costs associated with filing of patents and regulatory matters; and research grants and consulting fees to various third parties.

Agency Agreement with Siemens

Siemens will reimburse CTI for all directly related sales and marketing expenses, up to $10.0 million annually. During the three month period ended December 31, 2004, CTI recorded $2.0 million of revenue related to the reimbursement of sales and marketing expenses.

Service contracts entered into in connection with new or used scanner sales in the United States will be divided equally between CTI and Siemens in terms of revenue. Siemens and CTI remain free to independently pursue sales of service contracts to the installed base of CPS scanner customers.

During the term of the Agency Agreement, CTI agreed to cease its sales and service of PET and PET/CT scanners in international markets, except in South Korea and Japan. All existing scanner service contracts in international markets other than South Korea and Japan were assigned to Siemens. During the term of the Agency Agreement, CTI has agreed not to enter or re-enter any international market to sell or service PET or PET/CT scanners, except that CTI may continue to pursue its existing business model in South Korea and may retain its existing distribution agreement in Japan. In exchange for the assignment of the international service contracts, the covenant not to compete in the United States and international markets other than South Korea and Japan, certain price reductions for detector materials including on international scanner sales, and as compensation for the cost of closing certain international operations, Siemens paid CTI $2.2 million. CTI recognized $1.1 million as revenue during the year ended September 30, 2004, in association with the assignment of international service contracts. The remaining amount is being amortized over the two-year term of the agreement concurrent with our LSO price reduction and non-compete commitments.

Under the Agency Agreement, Siemens serves as CTI’s non-exclusive representative to offer for sale products manufactured by CTI and its subsidiaries to Siemens’ customers. Subject to the expiration or termination of any existing agreements for the provision of cyclotrons or radiopharmaceuticals to Siemens’ customers, Siemens agreed to offer exclusively CTI’s cyclotrons, radiopharmaceuticals and calibration sources for sale to Siemens’ customers.

Results of Operations

The following table shows revenues, cost of revenues, selling, general and administrative expenses, research and development expenses, stock-based compensation and income (loss) from operations for all segments, expressed in millions of dollars.


	Three Months Ended
	December 31,
	2004			2003
	(unaudited)
Revenues:
CPS	$	67.0		$	55.5
Detector Materials		7.7			12.0
Service and Distribution		17.2			13.9

PETNET		26.6			19.5
MTI		0.2			—
Molecular Imaging Products		13.7			7.2

Corporate and Eliminations		(20.9	)		(34.0	)

Total		111.5			74.1


Cost of revenues:
CPS		43.9			37.9
Detector Materials		3.8			4.4
Service and Distribution		14.9			13.1

PETNET		19.2			13.6
MTI		—			—
Molecular Imaging Products		9.9			5.0

Corporate and Eliminations		(22.0	)		(30.3	)

Total		69.7			43.7


Selling, general and administrative expenses:
CPS		3.3			4.5
Detector Materials		0.9			0.7
Service and Distribution		3.0			4.6

PETNET		5.5			4.3
MTI		0.3			—
Molecular Imaging Products		2.6			1.5

Corporate and Eliminations		1.2			(0.4	)

Total		16.8			15.2


Research and development expenses:
CPS		5.8			6.7
Detector Materials		0.2			0.2

PETNET		0.8			1.0
MTI		1.0			0.8
Molecular Imaging Products		1.6			1.7

Corporate and Eliminations		(0.1	)		(0.1	)

Total		9.3			10.3


Stock-based compensation:
CPS		0.1			0.1
Service and Distribution		—			0.1

PETNET		0.2			0.1
MTI		0.3			—

Corporate and Eliminations		0.9			0.2

Total		1.5			0.5


Income (loss) from operations:
CPS		13.9			6.3
Detector Materials		2.8			6.7
Service and Distribution		(0.7	)		(3.9	)

PETNET		0.9			0.5
MTI		(1.4	)		(0.8	)
Molecular Imaging Products		(0.4	)		(1.0	)

Corporate and Eliminations		(0.9	)		(3.4	)

Total	$	14.2		$	4.4

The following table shows revenues and income (loss) from operations for all segments, expressed as a percentage of consolidated revenues and consolidated income (loss) from operations, respectively.


	Three Months Ended
	December 31,
	2004			2003
	(unaudited)
Revenues:
CPS		60.1	%		74.9	%
Detector Materials		6.9			16.2
Service and Distribution		15.4			18.8

PETNET		23.8			26.3
MTI		0.2			—
Molecular Imaging Products		12.3			9.7

Corporate and Eliminations		(18.7	)		(45.9	)

Total		100.0	%		100.0	%


Income (loss) from operations:
CPS		97.9	%		143.2	%
Detector Materials		19.7			152.3
Service and Distribution		(4.9	)		(88.6	)

PETNET		6.3			11.3
MTI		(9.9	)		(18.2	)
Molecular Imaging Products		(2.8	)		(22.7	)

Corporate and Eliminations		(6.3	)		(77.3	)

Total		100.0	%		100.0	%

The following table shows revenues, cost of revenues, selling, general and administrative expenses, research and development expenses, stock-based compensation expenses and income (loss) from operations for all segments, expressed as a percentage of segment revenues.


	Three Months Ended
	December 31,
	2004			2003
	(unaudited)
Clinical Scanner Business
CPS:
Revenues		100.0	%		100.0	%
Cost of revenues		65.5			68.3
Selling, general and administrative		4.9			8.1
Research and development		8.7			12.1
Stock-based compensation		0.2			0.2
Income (loss) from operations		20.7			11.3

Detector Materials:
Revenues		100.0	%		100.0	%
Cost of revenues		49.3			36.7
Selling, general and administrative		11.7			5.8
Research and development		2.6			1.7
Income (loss) from operations		36.4			55.8

Service and Distribution:
Revenues		100.0	%		100.0	%
Cost of revenues		86.6			94.2
Selling, general and administrative		17.4			33.1
Stock-based compensation		—			0.7
Income (loss) from operations		(4.0	)		(28.0	)

Molecular Biomarker Technologies
PETNET:
Revenues		100.0	%		100.0	%
Cost of revenues		72.2			69.7
Selling, general and administrative		20.7			22.1
Research and development		3.0			5.1
Stock-based compensation		0.7			0.5
Income (loss) from operations		3.4			2.6

MTI:
Revenues		100.0	%		—	%
Cost of revenues		—			—
Selling, general and administrative		150.0			—
Research and development		500.0			—
Stock-based compensation		150.0			—
Income (loss) from operations		(700.0	)		—

Molecular Imaging Products:
Revenues		100.0	%		100.00	%
Cost of revenues		72.2			69.4
Selling, general and administrative		19.0			20.8
Research and development		11.7			23.6
Income (loss) from operations		(2.9	)		(13.8	)

Three Months Ended December 31, 2004 Compared to Three Months Ended December 31, 2003

Revenues

Net revenues for the three months ended December 31, 2004 were $111.5 million, an increase of $37.4 million, or 50.5%, from $74.1 million for the three months ended December 31, 2003.

Clinical Scanner Business

CPS. Revenues for the three months ended December 31, 2004 were $67.0 million, an increase of $11.5 million, or 20.7%, from $55.5 million for the three months ended December 31, 2003. The increase in revenues was driven primarily by a 6.8% increase in average scanner sales price due to the continued shift in sales mix from PET to PET/CT scanners. During the three months ended December 31, 2004 and 2003 PET/CT scanner sales were 91.9% and 71.9%, respectively, of total unit sales. In addition, this increase was due to a 15.6% increase in units sold. Intersegment revenues accounted for 8.0% and 32.4% of total CPS revenues for the three months ended December 31, 2004 and 2003, respectively. The decrease in intersegment revenues resulted from reduced sales to Service and Distribution after execution of the Agency Agreement in 2004.

Detector Materials. Revenues for the three months ended December 31, 2004 were $7.7 million, a decrease of $4.3 million, or 35.8%, from $12.0 million for the three months ended December 31, 2003. The decrease in revenues was primarily attributable to reduced transfer pricing to CPS in accordance with the Agency Agreement executed in May 2004 and CPS’ efforts to reduce inventory levels. Intersegment sales accounted for 100.0% and 99.8% of total detector materials revenues for the three months ended December 31, 2004 and 2003, respectively.

Service and Distribution. Revenues for the three months ended December 31, 2004 were $17.2 million, an increase of $3.3 million, or 23.7%, from $13.9 million for the three months ended December 31, 2003. The increase in revenues was due to a $2.0 million expense reimbursement under the Agency Agreement and the sale on a direct basis of one additional PET/CT in the first quarter of 2005 over the prior year. Intersegment sales accounted for 27.8% and 11.5% of total Service and Distribution revenues for the three months ended December 31, 2004 and 2003, respectively. The increase in intersegment revenues is due to the sales of two scanners through to our PETNET segment for international projects.

Molecular Biomarker Technologies

PETNET. Revenues for the three months ended December 31, 2004 were $26.6 million, an increase of $7.1 million, or 36.4%, from $19.5 million for the three months ended December 31, 2003. The increase is primarily attributable to FDG dose shipments increasing by 41.2% in the three months ended December 31, 2004 over the three months ended December 31, 2003; this increase was partially offset by a 12.0% decline in the average revenue per dose during the same time period. The remainder of the increase is attributable to a sale of a PET scanner by our European division of PETNET and revenues from a fee per scan project in Korea (which began after December 31, 2003). Intersegment sales were insignificant for the three months ended December 31, 2004 and 2003.

MTI. Revenues for the three months ended December 31, 2004 were $0.2 million, compared to none for the three months ended December 31, 2003. The increase is due to MTI beginning the distribution of chemistry production equipment during the three months ended December 31, 2004. Intersegment sales accounted for 24.5% of total MTI revenues for the three months ended December 31, 2004.

Molecular Imaging Products. Revenues for the three months ended December 31, 2004 were $13.7 million, an increase of $6.5 million, or 90.3%, from $7.2 million for the three months ended December 31, 2003. The increase in revenues was due to the acquisition of the business and assets of Concorde in June 2004, higher average sales prices on cyclotrons sold and increased sales of cyclotron options and spare parts. During each of the three month periods ended December 31, 2004 and 2003 we sold 3 cyclotrons, however the average cyclotron price increased 25.9% as two of the three units sold during the three months ended December 31, 2004 were third party sales compared to only one third party sale during the three months ended December 31, 2003. Sales of microPET® and microCAT® animal scanners were $4.1 million, an increase of $2.7 million, from $1.4 million for the three months ended December 31, 2003. The sales of microPET® animal scanners recognized during the three months ended

December 31, 2003, were in our role as a distributor of microPET® animal scanners. Intersegment sales accounted for 22.3% and 32.6% of segment revenues for the three months ended December 31, 2004 and 2003, respectively. The decrease in intersegment revenues as a percent of revenues resulted from the increase in third party sales after the acquisition of the business and assets of Concorde and the increase in third party cyclotron sales.

Corporate and Eliminations

Corporate and Eliminations. Intercompany revenues that were eliminated in consolidation for the three months ended December 31, 2004 were $20.9 million, a decrease of $13.1 million, or 38.5%, from $34.0 million for the three months ended December 31, 2003. The decrease in revenue eliminations was primarily due to decreased sales of PET and PET/CT scanners to Service and Distribution from CPS as well as decreased sales of detector materials to CPS. The decreased sale of detector materials to CPS was attributable to lower prices on detector materials sold to CPS after the implementation of the Agency Agreement and CPS efforts to reduce inventory levels. The decreased sale of PET and PET/CT scanners to Service and Distribution was attributable to our decision to exit the business of direct scanner distribution in conjunction with the execution of the Agency Agreement in fiscal 2004.

Cost of Revenues

Cost of revenues for the three months ended December 31, 2004 was $69.7 million, an increase of $26.0 million, or 59.5%, from $43.7 million for the three months ended December 31, 2003. Cost of revenues for the three months ended December 31, 2004 was 62.5% of revenues compared to 59.0% for the three months ended December 31, 2003.

Clinical Scanner Business

CPS. Cost of revenues for the three months ended December 31, 2004 was $43.9 million, an increase of $6.0 million, or 15.8%, from $37.9 million for the three months ended December 31, 2003. Cost of revenues for the three months ended December 31, 2004 decreased to 65.5% of revenues compared to 68.3% of revenues for the three months ended December 31, 2003. The increase in total cost of revenues was due to the increase in PET and PET/CT scanners sold during in the quarter. Cost of revenues decreased as a percentage of revenues due to the LSO and CT price reductions received from the Detector Materials segment and Siemens, respectively, in conjunction with the execution of the Agency Agreement.

Detector Materials. Cost of revenues for the three months ended December 31, 2004 was $3.8 million, a decrease of $0.6 million, or 13.6%, from $4.4 million for the three months ended December 31, 2003. The decrease in cost of revenues was due to the corresponding decrease in sales to CPS. Cost of revenues for the three months ended December 31, 2004 increased to 49.3% of revenues as compared to 36.7% of revenues for the three months ended December 31, 2003. The increase in cost of revenues as a percentage of revenues was due to the reduction in transfer prices to CPS per the Agency Agreement as well as the sale of higher cost LSO inventories that we purchased as a result of an arbitration order issued during the fourth quarter fiscal year 2004.

Service and Distribution. Cost of revenues for the three months ended December 31, 2004 was $14.9 million, an increase of $1.8 million, or 13.7%, from $13.1 million for the three months ended December 31, 2003. Cost of revenues for the three months ended December 31, 2004 decreased to 86.6% of revenues compared to 94.2% of revenues for the three months ended December 31, 2003. The increase in total cost of revenues was due to the increase in direct distribution sales of PET and PET/CT scanners. Cost of revenues decreased as a percentage of revenues primarily due to $2.0 in revenue recognized for sales and marketing services provided to Siemens for which the related costs are classified as operating expenses, offset by lower margins on direct distribution sales of PET and PET/CT scanners.

Molecular Biomarker Technologies

PETNET. Cost of revenues for the three months ended December 31, 2004 was $19.2 million, an increase of $5.6 million, or 41.2%, from $13.6 million for the three months ended December 31, 2003. Cost of revenues for the three months ended December 31, 2004 increased to 72.2% of revenues compared to 69.7% of revenues for the three

months ended December 31, 2003. The increase in total cost of revenues was due to increased FDG sales volume. Cost of revenues increased as a percentage of revenues due to the decrease in average revenue per dose as well as the opening of additional pharmacies.

MTI. Cost of sales were less than $0.1 million for the three months ended December 31, 2004 compared to none for the three months ended December 31, 2003.

Molecular Imaging Products. Cost of revenues for the three months ended December 31, 2004 was $9.9 million, an increase of $4.9 million, or 98.0%, from $5.0 million for the three months ended December 31, 2003. Cost of revenues for the three months ended December 31, 2004 increased to 72.2% of revenues compared to 69.4% of revenues for the three months ended December 31, 2003. The increase in total cost of revenues was due to the acquisition of Concorde in June 2004 and the increase in sales of cyclotron options and spare parts. Cost of revenues increased as a percentage of revenues due to higher production costs on cyclotrons.

Corporate and Eliminations

Corporate and Eliminations. Intercompany cost of revenues that were eliminated in consolidation for the three months ended December 31, 2004 were $22.0 million, a decrease of $8.3 million, or 27.4%, from $30.3 million for the three months ended December 31, 2003. Cost of revenues eliminated for the three months ended December 31, 2004 were 19.7% of revenues compared to 40.9% of revenues for three months ended December 31, 2003. The decrease in cost of revenue eliminations was primarily due to decreased direct sales of PET and PET/CT scanners by Service and Distribution, which were purchased from CPS, as well as reduced transfer pricing on detector materials sold to CPS in accordance with the Agency Agreement.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended December 31, 2004 were $16.8 million, an increase of $1.6 million, or 10.5%, from $15.2 million for the three months ended December 31, 2003. Selling, general and administrative expenses for the three months ended December 31, 2004 were 15.1% of revenues compared to 20.5% of revenues for the three months ended December 31, 2003.

Clinical Scanner Business

CPS. Selling, general and administrative expenses for the three months ended December 31, 2004 were $3.3 million, a decrease of $1.2 million, or 26.7%, from $4.5 million for the three months ended December 31, 2003. Selling, general and administrative expenses for the three months ended December 31, 2004 were 4.9% of revenues compared to 8.1% of revenues for the three months ended December 31, 2003. The decrease is due to reduced selling and marketing costs as Siemens has assumed most selling and marketing activities for CPS products in conjunction with the execution of the Agency Agreement.

Detector Materials. Selling, general and administrative expenses for the three months ended December 31, 2004 were $0.9 million, an increase of $0.2 million, or 28.6%, from $0.7 million for the three months ended December 31, 2003. As a percentage of revenues, selling, general and administrative expenses were 11.7% and 5.8% for the three months ended December 31, 2004 and 2003, respectively. The increase is primarily attributable to increased administrative costs from the implementation of a new management information system during the second quarter of fiscal year 2004. The increase in selling, general and administrative expenses as a percentage of revenue is attributable to the significant decrease in revenues from the same period in fiscal year 2004.

Service and Distribution. Selling, general and administrative expenses for the three months ended December 31, 2004 were $3.0 million, a decrease of $1.6 million, or 34.8%, from $4.6 million for the three months ended December 31, 2003. As a percentage of revenues, selling, general and administrative expenses were 17.4% and 33.1% for the three months ended December 31, 2004 and 2003, respectively. The decrease in total selling, general and administrative expense both in total and as a percentage of revenue is attributable to the decision to exit the scanner direct distribution business. The $2.0 million of underlying expenses for the sales and marketing services provided to Siemens as defined in the Agency Agreement are included in selling, general and administrative expenses, while the reimbursement from Siemens is reflected in revenues.

Molecular Biomarker Technologies

PETNET. Selling, general and administrative expenses for the three months ended December 31, 2004 were $5.5 million, an increase of $1.2 million, or 27.9%, from $4.3 million for the three months ended December 31, 2003. As a percentage of revenues, selling, general and administrative expenses for the three months ended December 31, 2004 were 20.7% compared to 22.1% for the three months ended December 31, 2003. The $1.2 million increase is attributable to increased personnel to provide marketing support for the expanding PETNET network. The decrease in expenses as a percentage of revenue is attributable to the sales growth exceeding the increase in spending.

MTI. Selling, general and administrative expenses for the three months ended December 31, 2004 were $0.3 million, compared to none for the three months ended December 31, 2003. The increase is attributable to the addition of administrative personnel.

Molecular Imaging Products. Selling, general and administrative expenses for the three months ended December 31, 2004 were $2.6 million, an increase of $1.1 million, or 73.3%, from $1.5 million for the three months ended December 31, 2003. As a percentage of revenues, selling, general and administrative expenses for the three months ended December 31, 2004 were 19.0% compared to 20.8% for the three months ended December 31, 2003. The increase in amount is primarily attributable to the acquisition of the business and assets of Concorde in June 2004 and the acquisition of ImTek in November 2004.

Corporate and Eliminations

Corporate and Eliminations. Selling, general and administrative expenses for the three months ended December 31, 2004 were $1.2 million, an increase of $1.6 million from $(0.4) for the three months ended December 31, 2003. The increase is primarily attributable to increased corporate marketing costs that are not allocated to the reporting segments.

Research and Development Expenses

Research and development expenses for the three months ended December 31, 2004 were $9.3 million, a decrease of $1.0 million, or 9.7%, from $10.3 million for the three months ended December 31, 2003. Research and development expenses for the three months ended December 31, 2004 were 8.3% of revenues compared to 13.9% for the three months ended December 31, 2003.

Clinical Scanner Business

CPS. Research and development expenses for the three months ended December 31, 2004 were $5.8 million, a decrease of $0.9 million, or 13.4% from $6.7 million for the three months ended December 31, 2003. Research and development expenses for the three months ended December 31, 2004 were 8.7% of revenues compared to 12.1% for the three months ended December 31, 2003. CPS continued to invest in new scanner technology primarily devoted to PET/CT and LSO scanner developments. The decrease in the amount is attributable to the timing of underlying project expenses. The decrease in expenses as a percentage of revenue is attributable to the sales growth exceeding research and development spending.

Detector Materials. Research and development expenses for the three months ended December 31, 2004 and 2003 were $0.2 million. Research and development expenses for the three months ended December 31, 2004 were 2.6% of revenues compared to 1.7% for the three months ended December 31, 2003. The increase as a percent of revenue is due to the decrease in revenues while research and development expenses remained constant.

Service and Distribution. No research and development expense was incurred for the three months ended December 31, 2004 and 2003.

Molecular Biomarker Technologies

PETNET. Research and development expenses for the three months ended December 31, 2004 were $0.8 million, a decrease of $0.2 million, or 20.0%, from $1.0 million for the three months ended December 31, 2003. Research and development expenses for the three months ended December 31, 2004 were 3.0% of revenues compared to 5.1% for the three months ended December 31, 2003. The $0.2 million decrease is primarily due to the timing of project spending. The decrease in expenses as a percentage of revenue is also attributable to the sales growth exceeding spending.

MTI. Research and development expenses for the three months ended December 31, 2004 were $1.0 million, an increase of $0.2 million, or 25.0%, from $0.8 million for the three months ended December 31, 2003. The increase is attributable to spending on new molecular probe technology and chemistry production equipment.

Molecular Imaging Products. Research and development expenses for the three months ended December 31, 2004 were $1.6 million, a decrease of $0.1 million, or 5.9%, from $1.7 million for the three months ended December 31, 2003. Research and development expenses for the three months ended December 31, 2004 were 11.7% of revenues compared to 23.6% for the three months ended December 31, 2003. The decrease is primarily due to reduced spending on cyclotron related projects partially offset by increased spending on medical image analysis tools and increased research and development expenses due to the acquisition of Concorde in June 2004.

Corporate and Eliminations

Corporate and Eliminations. Research and development expenses for the three months ended December 31, 2004 and 2003 were $(0.1) million.

Stock-based Compensation Expense

Stock-based compensation expense for the three months ended December 31, 2004 was $1.5 million, a increase of $1.0 million, from $0.5 million for the three months ended December 31, 2003 Stock-based compensation expense for the three months ended December 31, 2004 was 1.3% of revenues compared to 0.7% for the three months ended December 31, 2003.

Clinical Scanner Business

CPS. Stock-based compensation expense was $0.1 million for the three months ended December 31, 2004 and 2003. Stock-based compensation expense was 0.2% of revenues for the three months ended December 31, 2004 and 2003 and included charges for the vesting of options granted in 2002 with exercise prices below the fair market value of our stock. No similar grants were issued during the three months ended December 31, 2004 or 2003.

Detector Materials. No stock-based compensation expense was incurred for the three months ended December 31, 2004 and 2003.

Service and Distribution. Stock-based compensation expense decreased to $0 from $0.1 million for the three months ended December 31, 2003. Stock-based compensation expense was 0.7% of revenues for the three months ended December 31, 2003. Stock-based compensation expense in 2003 included charges for the vesting of options granted in 2002 with exercise prices below the fair market value of our stock. No similar grants were issued during the three months ended December 31, 2004 or 2003.

Molecular Biomarker Technologies

PETNET. Stock-based compensation expense for the three months ended December 31, 2004 was $0.2 million, an increase of $0.1 million, or 100.0%, from $0.1 million for the three months ended December 31, 2003. Stock-based compensation expense for the three months ended December 31, 2004 was 0.7% of revenues compared to 0.5% for the three months ended December 31, 2003. The increase is attributable to a restricted share grant during the second quarter of fiscal year 2004.

MTI. Stock-based compensation expense for the three months ended December 31, 2004 was $0.3 million, compared to none for the three months ended December 31, 2003. The increase is attributable to issuances of deferred stock units during the second half of fiscal year 2004 to members of MTI’s board of directors, for which the related market value of the deferred stock units is being amortized over the vesting period.

Molecular Imaging Products. No stock-based compensation expense was incurred for the three months ended December 31, 2004 and 2003.

Corporate and Eliminations

Corporate and Eliminations. Stock-based compensation expense for the three months ended December 31, 2004 was $0.9 million, an increase of $0.7 million, from $0.2 million for the three months ended December 31, 2003. The increase is attributable to current year issuances of restricted stock shares to a senior executive and deferred stock units to members of the Company’s board of directors, for which the market values are being amortized over the vesting periods. In addition, the vesting schedule on certain options previously issued to a senior executive were accelerated, resulting in a remeasurement of the stock options’ fair value. Stock-based compensation was increased to reflect the increase in the stock options’ fair values and the accelerated vesting schedules.

Income (Loss) from Operations

Income from operations for the three months ended December 31, 2004 was $14.2 million, an increase of $9.8 million, from $4.4 million for the three months ended December 31, 2003. Income from operations for the three months ended December 31, 2004 was 12.7% of revenues compared to 5.9% for the three months ended December 31, 2003.

Clinical Scanner Business

CPS. Income from operations for the three months ended December 31, 2004 was $13.9 million, an increase of $7.6 million, from $6.3 million for the three months ended December 31, 2003. Income from operations for the three months ended December 31, 2004 was 20.7% of revenues compared to 11.3% for the three months ended December 31, 2003. This increase in operating profits is primarily due to increased revenues and resulting gross profits and decreased operating expenses.

Detector Materials. Income from operations for the three months ended December 31, 2004 was $2.8 million, a decrease of $3.9 million, or 58.2%, from $6.7 million for the three months ended December 31, 2003. Income from operations for the three months ended December 31, 2004 was 36.4% of revenues compared to 55.8% for the three months ended December 31, 2003. The decrease resulted primarily from the reduction of the LSO transfer prices to CPS in accordance with the Agency Agreement, the sale of higher cost inventories purchased as a result of an arbitration order issued during fiscal year 2004, and increase selling, general and administrative expenses.

Service and Distribution. The operating loss for the three months ended December 31, 2004 was $0.7, a decrease of $3.2 million, or 82.1% from the loss of $3.9 million for the three months ended December 31, 2003. Loss from operations for the three months ended December 31, 2004 was 4.0% of revenues compared to 28.0% for the three months ended December 31, 2003. The decrease in the loss was primarily attributable to the reimbursement of sales and marketing expenses for services provided to Siemens in accordance with the Agency Agreement.

Molecular Biomarker Technologies

PETNET. Income from operations for the three months ended December 31, 2004 was $0.9 million, an increase of $0.4 million, or 80.0%, from $0.5 million for the three months ended December 31, 2003. Income from operations for the three months ended December 31, 2004 was 3.4% of revenues compared to 2.6% for the three months ended December 31, 2003. The increase is primarily attributable to the growth in revenues and margin exceeding operating expense growth.

MTI. Loss from operations for the three months ended December 31, 2004 was $1.4 million, an increase of $0.6 million, or 75.0%, from the loss of $0.8 million for the three months ended December 31, 2003. The increase is primarily attributable to increased research and development spending and the addition of administrative personnel.

Molecular Imaging Products. The operating loss for the three months ended December 31, 2004 was $0.4 million a decrease of $0.6 million, or 60.0%, from the loss of $1.0 million for the three months ended December 31, 2003. Loss from operations for the three months ended December 31, 2004 was 2.9% of revenues compared to 13.8% for the three months ended December 31, 2003. The decrease in the loss from operations is primarily attributable to the increased third party cyclotron sales and the resulting increase in margin.

Corporate and Eliminations

Corporate and Eliminations. Loss from operations for the three months ended December 31, 2004 was $0.9 million, a decrease of $2.5 million, or 73.5% from the loss from operations of $3.4 million for the three months ended December 31, 2003. The majority of this decrease represents the net change in the consolidation entry to eliminate the intercompany gross margin on detector material inventory held by CPS and PET scanner inventory held by Service and Distribution at each period end. As intercompany sales of scanners have decreased the related margin elimination has also decreased.

Interest Expense, Net

Interest expense for the three months ended December 31, 2004 was $0.2 million, a decrease of $0.3 million, from $0.5 million for the three months ended December 31, 2003. The decrease in interest expense resulted from reduced letter of credit charges and lower capital lease and debt balances.

Other Income

Other income for the three months ended December 31, 2004, decreased to $0 from $0.6 million for the three months ended December 31, 2003. The decrease is primarily attributable to decreased gains on foreign currency transactions.

Provision for Income Taxes

The income tax provision for the three months ended December 31, 2004 was $5.3 million, an increase of $3.6 million, from $1.7 million for the three months ended December 31, 2003. The effective tax rate for the three months ended December 31, 2004 was 37.7%. The effective tax rate for the three months ended December 31, 2003 was 37.6%.

Minority Interests

The minority interest expense for the three months ended December 31, 2004 was $4.7 million, an increase of $2.6 million from $2.1 million for the three months ended December 31, 2003. Minority interest expense primarily consists of Siemens’ 49.9% share of the net income of CPS.

Liquidity and Capital Resources

Our principal liquidity requirements are to meet the working capital and capital expenditure needs of our expanding business. These needs have increased in order to support the growth in our business. For example, from September 30, 2004 to December 31, 2004, our total accounts receivable increased from $100.2 million to $119.9 million, offset by a decrease in inventory from $92.2 million to $85.3 million. The decrease in inventory is primarily due to a reduction in scanner inventory due to our decision to exit the direct distribution business, while the increase in accounts receivable is primarily attributable to the increasing amount of sales to Siemens and a brief delay in the timing of payments from Siemens. The brief delay was corrected during January 2005. A greater majority of our scanners are

now sold through distributors with payment terms that are faster than the terms for our direct distribution sales to end customers. Our property and equipment (net) increased from $133.1 million to $137.2 million during this same period. Property and equipment increased due to the continued expansion of our radiopharmacy network and development of our South Korean operation.

On September 30, 2002 we entered into an amended and restated credit agreement with a syndicate of banks agented by SunTrust Bank. The credit agreement makes available to us up to $125 million in revolving loans, with a $10 million sub-limit for letters of credit. Of this total, CPS is allowed to borrow up to $55.0 million to finance its operations. Total availability under the credit agreement may be limited from time to time based on the value of certain of our assets and by our earnings before interest, taxes, depreciation, amortization, and minority interest (referred to as EBITDAM). Our subsidiaries guarantee all obligations under the credit agreement, except that the guarantee of CPS is limited to $55 million and does not include any advances under the credit agreement that are loaned (on an intercompany basis) to our PETNET subsidiary. Our obligations and the obligations of our subsidiary guarantors under the credit agreement are secured by a lien on substantially all of our assets (including the capital stock or other forms of ownership interests we hold in our subsidiaries) and the assets of our subsidiary guarantors, except that the lien securing the guarantee obligations of CPS is principally limited to the accounts receivable and inventory of CPS. As of December 31, 2004 no balance was outstanding under the credit agreement, and after deducting $6.6 million in outstanding letters of credit, $118.4 million was available to the Company.

Interest on outstanding borrowings under the credit agreement accrues at LIBOR for the applicable interest period selected by us or, at our option, a variable base rate (based on SunTrust’s prime rate or the federal funds rate), plus in each case a performance-based margin determined by our debt to EBITDAM ratio. The credit agreement contains customary affirmative, negative and financial covenants. For example, we are restricted in incurring additional debt, disposing of assets, making investments, allowing fundamental changes to our business or organization, and making certain payments in respect of stock or other ownership interests, such as dividends and stock repurchases. Financial covenants include requirements that we maintain a debt to EBITDAM ratio no greater than 2.5 to 1; a fixed charge coverage ratio no less than 3 to 1; and a minimum tangible net worth of $195.0 million plus 50% of positive net income accrued since the end of the preceding fiscal quarter plus 80% of the net proceeds of any equity offering. The credit agreement also contains customary events of default. These include cross-defaults to other debt agreements, a change in control involving us or any subsidiary guarantor, and the failure to comply with certain covenants.

CTI guarantees lease obligations for radiopharmacy facilities and equipment on behalf of unconsolidated investees in the maximum aggregate amount of $0.2 million at December 31, 2004. The guarantees are not collaterized by any assets and are without recourse. No liability has been recorded for these lease obligations which expire through 2009 as these were obligations were entered into prior to the effective date of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45).

In August 2003, the Company also guaranteed a debt obligation related to a cyclotron and radiopharmacy project for an international distributor in the maximum aggregate amount of €5.3 million (or approximately $7.1 million at December 31, 2004). The debt obligation and the guarantee expire in July 2009. In the event a claim is made under this guarantee, the Company has the right to acquire the facility and all related customer contracts and would operate the facility as a PETNET radiopharmacy. The Company has recorded a liability of $0.3 million for this guarantee to reflect the estimated fair value of the Company’s obligation in accordance with FIN 45.

The Company has a financing program arrangement with De Lage Landen Financial Services, Inc. (DLL). The program provides flexible lease financing for the full range of PET and PET/CT scanners and other products and services sold by CTI. In connection with this program a credit reserve pool was established whereby the Company provides a guarantee to DLL for 9.9% of the principal balance of the first $25 million in leases, and 5% thereafter, on all leases DLL executed on the Company’s behalf. At December 31, 2004, the Company had recorded a reserve of $0.3 million for this guarantee to reflect the estimated fair value of the Company’s obligation, after recovery and resale of the underlying equipment, in accordance with FIN 45.

We anticipate that our current cash and cash equivalents balances and our expected operating cash flow, together with borrowings under our credit facility, will be sufficient to meet our future operating expenses, capital expenditures and debt service obligations through the expected date of the CPS put/call. Our decision to exit the direct distribution of scanners in conjunction with executing the Agency Agreement with Siemens should also improve cash flow as we will be able to reduce consolidated scanner inventory levels and receivables from third party customers. We may from time to time evaluate the benefits of raising additional debt or equity capital although there can be no guarantee that such debt or equity will be available at terms we believe are favorable.

Off-Balance Sheet Arrangements

Other than as described above, we have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Cash Flows

Three months ended December 31, 2004 compared to three months ended December 31, 2003

Net cash used in operating activities was $4.3 million for the three months ended December 31, 2004 and net cash provided by operating activities was $5.7 million for the three months ended December 31, 2003. The decrease in net cash from operating activities was primarily due to increasing accounts receivable balances from Siemens offset by efforts to reduce inventory on hand and improved operating results.

Net cash used in investing activities during the three months ended December 31, 2004 and 2003 was $11.4 million and $5.4 million, respectively and consisted primarily of capital expenditures to expand our radiopharmacy network. Cash used during the three months ended December 31, 2004 also included $3.4 million net cash paid for the acquisition of ImTek.

Net cash provided by financing activities during the three months ended December 31, 2004 was $3.0 million compared to net cash used of $5.6 million during the three months ended December 31, 2003. For the three months ending December 31, 2004 financing activities primarily related to changes in our cash management clearing account due to payments to vendors for material needed to support our fourth quarter sales.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We continuously evaluate our critical accounting policies and estimates, including those related to revenue recognition, valuation of goodwill and accounting for investees. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our financial position and results of operations may be significantly different when reported under different conditions or when using different assumptions in the application of such policies. In the event estimates or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information.

We believe the following critical accounting policies require significant judgments and estimates in the preparation of our consolidated financial statements.

Revenue Recognition

We record revenue in accordance with the guidance of the SEC’s Staff Accounting Bulletin (SAB) No. 104 (SAB 104), which supersedes SAB 101 in order to encompass EITF Issue 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21). Our revenue is derived from sales of scanners, calibration sources, spare parts, detector materials, cyclotrons, radiopharmaceuticals, medical image analysis applications, sales and marketing services, and the provision of services on equipment sold, including site planning and installation, preventive maintenance and repair, training, technical support and assistance with licensing. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the contract price is fixed or determinable, and collectibility is reasonably assured. No right of return privileges are granted to customers after shipment. Revenues derived from the sale of scanners, cyclotrons, calibration sources, spare parts, medical image analysis applications and detector materials are recognized upon either shipment or arrival at destination depending on shipment terms. We account for sales of scanning equipment and related installation and associated training services as multiple-element arrangements. We recognize revenue for the elements separately as (i) the sales of the equipment, installation and training services represent separate earnings processes, (ii) revenue is allocated among the elements based on the fair value of the elements and (iii) installation and associated training are not deemed essential to the functionality of the equipment. We determine the value of the equipment and installation and training services based on sales of the equipment both with and without installation and training. We also recognize as revenue reimbursements for certain sales and marketing services as such services are provided to Siemens and as the Company is the primary obligor for the expenses incurred in providing these services.

For arrangements with multiple deliverables, such as scanner and cyclotron sales, we recognize product revenue by allocating the revenue to each deliverable based on the fair value of each deliverable in accordance with EITF 00-21 and SAB 104, and recognize revenue for equipment upon delivery and for installation and other services as performed. EITF 00-21 was effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003.

Revenues derived from distribution of radiopharmaceuticals are recognized upon delivery of the product. Equipment maintenance service contracts are typically more than one year in duration and related revenues are recognized ratably over the respective contract periods as the services are performed. For other services, revenue is recognized upon completion of the service.

Our contracts typically require customer payments in advance of revenue recognition. These deposit amounts are reflected as customer advances and recognized as revenue when the Company has fulfilled its obligations under the respective contracts.

Revenues derived from our software license sales are recognized in accordance with Statement of Position (SOP) No. 97-2, “Software Revenue Recognition,” and SOP 98-9, “Modifications of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions.” For software license sales for which any services rendered are not considered essential to the functionality of the software, we recognize revenue upon delivery of the software, provided (1) there is evidence of an arrangement, (2) collection of our fee is considered probable and (3) the fee is fixed and determinable. If professional services are considered essential to the functionality of the software, we will record revenue for the license and professional services over the implementation period using the percentage of completion method, measured by the percentage of labor hours incurred to date to estimated total labor hours for each contract.

Revenue recognition depends on the timing of shipment and service performance and can be subject to customer readiness and acceptance. If services and shipments are not performed as scheduled, our reported revenues may differ materially from expectations.

Valuation of Goodwill

On October 1, 2001, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS 142) which required us to perform an initial impairment review of our goodwill at that date and also requires us to perform impairment reviews thereafter, at least once annually. We conduct our impairment test at the end of each fiscal year based on judgments regarding ongoing profitability and cash flow of

the underlying assets. Changes in strategy or market conditions could significantly impact these judgments and require adjustments to recorded asset balances. For example, if we had reason to believe that our recorded goodwill had become impaired due to decreases in the fair market value of the underlying business, we would have to take a charge to income for that portion of goodwill that we believe is impaired. The annual impairment test was conducted and it did not result in any impairment charges.

Accounting for Investees

We periodically enter into arrangements in which we hold a majority of the equity ownership. In some instances, we also have influence over a majority of the board of directors or managers. We determine accounting for these investments in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46(R), Consolidation of Variable Interest Entities (FIN 46(R)), SFAS No. 94, Consolidation of All Majority-Owned Subsidiaries (SFAS 94), and Accounting Principles Board (APB) Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock (APB 18) and, where appropriate, evaluate our and the minority shareholders’ participating rights in accordance with EITF Issue 96-16, Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights (EITF 96-16) to determine whether consolidation or equity method accounting is appropriate in each case.

We evaluated FIN 46(R) effects on our investments during the second quarter of fiscal year 2004. In conjunction with this evaluation, we identified one of our investments as a variable interest entity as defined by FIN 46(R). However, the evaluation of FIN 46(R) did not have a significant impact on our consolidated financial statements since the Company is also identified as the primary beneficiary of the variable interest entity and therefore is not required to make changes to the entities included in the consolidated financial statements for this reporting period. As required by FIN 46(R), we will continue to monitor our investments in both consolidated and unconsolidated entities for events that may occur which would require the Company to reevaluate whether any of these investments qualifies as a variable interest entity. The evaluation of FIN 46(R) did not result in changes in the application of previously issued generally accepted accounting principles, SFAS 94 and APB 18, to our investments.

We own a majority interest in CPS. Under the terms of the CPS operating agreement, we have influence over a majority of the board of directors. Decisions deemed participating rights, including approval of operating budgets and management compensation, are determined by a majority vote of the board of directors. The board of directors of CPS consists of two directors selected by us, two directors selected by Siemens, and a fifth director selected by Siemens from a list of persons selected by us. Neither Siemens nor any member of the board of directors of CPS who was selected or nominated by Siemens has any substantive participating or veto rights with regard to significant operating, budget, capital and other decisions. CPS is consolidated in our financial statements.

Where appropriate, we evaluate our and the minority interest shareholders’ participating rights in accordance with EITF 96-16 to determine whether consolidation or equity method accounting is appropriate in each case. In cases where the minority shareholder is deemed to have “veto rights” or has equal representation on the board of directors, we account for these investments using the equity method as we do not have control over significant operating decisions. We have invested in three radiopharmacies that are accounted for under the equity method. For the entities not previously included in the consolidated financial statements, the evaluation of FIN 46(R) resulted in us continuing to apply previously issued generally accepted accounting principles to the respective investments and continuing to account for these entities under the equity method.

Recent Accounting Pronouncements

Share-Based Payment

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic value method under APB 25, and generally would require instead that such transactions be accounted for using a fair-value-based method. The Company is currently evaluating SFAS 123R to determine which fair-value-based model and

transitional provision it will follow upon adoption. The options for transition methods as prescribed in SFAS 123R include either the modified prospective or the modified retrospective methods. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock as the requisite service is rendered beginning with the first quarter of adoption, while the modified retrospective method would record compensation expense for stock options and restricted stock beginning with the first period restated. Under the modified retrospective method, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. SFAS 123R will be effective for the Company beginning in its fourth quarter of fiscal 2005. Although the Company will continue to evaluate the application of SFAS 123R, management expects adoption of this standard to have a material impact on its results of operations.

Inventory Costs

On November 24, 2004, the FASB issued SFAS No. 151, Inventory Costs- an amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151 requires that these costs be recognized as current period charges regardless of whether they are abnormal. In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of manufacturing be based on the normal capacity of the production facilities. SFAS 151 shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect SFAS 151 to have a material effect on its financial statements.

Exchange of Nonmonetary Assets

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29 (SFAS 153). SFAS 153 addresses the remeasurement of exchanges of nonmonetary assets. This statement eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets within APB Opinion No. 29, and replaces it with an exception for exchanges that do not have commercial substance. The provisions of SFAS 153 shall be effective for nonmonetary transactions occurring in fiscal periods beginning after June 15, 2005. The Company will apply the provisions of SFAS 153 if we exchange nonmonetary assets.

Factors Affecting Operations and Future Results

We face intense competition, including competition from competitors with greater resources, which may place pressure on our pricing and otherwise make it difficult for us to compete effectively in the molecular imaging market.

The market for molecular imaging equipment and related products and services is intensely competitive and is affected significantly by new product introductions, aggressive pricing strategies of competitors and other marketing activities of industry participants. We compete directly with a number of other companies in the molecular imaging equipment market including GE Healthcare (formerly known as GE Medical Systems) and Philips Medical Systems. We also compete with Siemens for renewals of service contracts on the installed base of CPS scanner customers shipped prior to the Agency Agreement. The intense and increasing competition in the molecular imaging equipment market has caused and may continue to cause downward pressure on the pricing of our molecular imaging equipment and/or service contracts. In our radiopharmaceutical business, we compete with for-profit corporations, such as Cardinal Health, Inc. and ION Beam Applications s.a. (and its subsidiary, Eastern Isotopes), as well as regional pharmacies and universities. The intense and increasing level of competition in the market for radiopharmaceuticals and the generic nature of the radiopharmaceuticals currently in production have caused and may continue to cause downward pressure on pricing. Many of our competitors are significantly larger than us and enjoy competitive advantages over us, including:

	•	Significantly greater name recognition;

	•	Better established distribution networks and relationships with health care providers, group purchasing entities and third-party payors;

	•	Additional lines of products and the ability to offer rebates, provide upgrades to previously installed machines or bundle products in order to offer discounts or incentives;

	•	Greater ability to finance capital equipment sales for their customers; and

	•	Greater resources for product development, sales and marketing and patent prosecution and litigation.

Our competitors have developed and will continue to develop new products that compete directly with our products. In addition, our competitors spend significantly greater funds for the research, development, promotion and sale of new and existing products. These resources can allow them to respond more quickly to new or emerging technologies and changes in customer requirements. For the foregoing reasons, we may not be able to compete successfully against our current and future competitors.

Since we use distributors to sell our scanners, our future growth could suffer if our existing distributors do not continue to purchase scanners from us in expected volumes or if we are unable to expand our network of distributors.

Our ability to reach our overall sales goals for scanners is dependent upon the sales and marketing efforts of our existing and future third-party distributors, including Siemens, Hitachi Medical Systems America and Toshiba Medical Systems Corporation. For example, for the three month periods ended December 31, 2004 and 2003 sales to Siemens constituted 58.7% and 45.2%, respectively, of our consolidated revenues. If we fail to sell a large volume of our scanners through our distributors, we could experience a decline in overall sales. None of our current scanner distributors is obligated to continue selling, or to commit the necessary resources to effectively market and sell, our scanner products.

Effective May 1, 2004, CTI, CPS, and Siemens executed an agreement appointing CTI as Siemens’ non-exclusive sales representative to solicit purchases of Siemens-branded PET and PET/CT scanners manufactured by CPS in the United States. This agreement provides for us to cease our direct distribution of PET and PET/CT scanners, with the exception of certain rights retained in South Korea and Japan. In compliance with this agreement, we have ceased direct distribution of CPS’ scanner products and terminated our sub-distribution agreements outside of the U.S. as required, yet retained those agreements as permitted in South Korea and Japan. Following this change, our dependence on our third-party distributors, especially Siemens, has increased for sales growth and market information used to develop future guidance.

If third-party payors do not provide adequate levels of coverage or reimbursement for procedures conducted with our products, health care providers may be reluctant to use and purchase our products.

Sales of some of our products indirectly depend on whether coverage and adequate reimbursement is available for procedures conducted with our products from third-party health care payors, such as Medicare, Medicaid, private insurance plans, health maintenance organizations and preferred provider organizations. The availability of such reimbursement affects our customers’ decisions to purchase capital equipment. Third-party payors are increasingly challenging the pricing of medical procedures or limiting or denying reimbursement for specific services or devices, and we cannot assure you that reimbursement levels will be sufficient to enable us to maintain or increase sales and price levels for our products. Without adequate coverage and reimbursement from third-party payors, the market for our products could become limited.

Medicare reimbursement rates are established by the U.S. Department for Health and Human Services’ Centers for Medicare and Medicaid Services (CMS), the government agency that administers Medicare and Medicaid. From time to time, CMS adjusts the reimbursement rates for medical procedures to reflect the costs incurred by health care providers to perform the procedures. Medicare reimbursement rates for PET applications have recently declined and are subject to periodic reevaluation by CMS which could cause further downward adjustments in the future.

Today there is no standard reimbursement rate for PET procedures among private third-party payors such as indemnity insurers, health maintenance organizations and preferred provider organizations. In our experience, private payors typically reimburse health care providers for PET procedures at approximately the same rate as Medicare. However, the reimbursement rates offered by private payors are market-driven and are therefore subject

to market conditions. For example, in markets with significant competition among health care providers, the reimbursement rates can be driven downward due to competitive contracting between third-party payors and health care providers. The reimbursement rates offered by private payors for procedures conducted with our products could be negatively impacted by market conditions or by a decrease in Medicare reimbursement rates.

Moreover, we cannot assure you that additional procedures using our products will qualify for reimbursement from third-party payors in the U.S. or in foreign countries. If additional PET procedures are not approved for reimbursement in a manner consistent with our expectations and assumptions, our business may not grow as much or as fast as it has grown.

If Siemens exercises its option to purchase a majority interest in our subsidiary, CPS, Siemens will acquire a large portion of our revenues, operations and assets.

For the three month periods ended December 31, 2004, and 2003, approximately 55.3% and 50.6%, respectively, of our consolidated revenues were derived from the sale of PET equipment manufactured by our 50.1% owned subsidiary, CPS. Siemens owns the remaining 49.9% of CPS pursuant to a joint venture agreement that we entered into with Siemens in 1987. According to this joint venture agreement, Siemens has an option to acquire from us for cash up to an 80% interest in CPS, if and when CPS achieves specified unit sales volumes. Siemens’ right to exercise this option is contingent upon CPS selling, during the year preceding exercise, in excess of the cumulative total number of units specified in the “Siemens minima plus 20% plan” attached to the joint venture agreement. The “Siemens minima plus 20% plan” provides for annual increases in the cumulative total number of units sold by CPS beginning on December 9, 1987. As of December 31, 2004, the cumulative total number of units sold by CPS under this agreement was 889, and at such date, CPS would need to have sold a cumulative total of 1,129 units to achieve the required cumulative sales level for the option to be exercisable. After 2004, the cumulative unit sales requirement will continue to increase by 74 units each year. It is impossible to state definitively when the option will become exercisable; however, we currently believe that the specified sales volumes are not likely to be met before the second half of fiscal year 2006. Siemens cannot exercise its option until the end of the fiscal year in which this target level is reached. Once these sales volumes are achieved and the call right is exercised, we have the right to defer the exercise of the option for one year. If Siemens exercises its option and increases its ownership interest in CPS to 80%, Siemens could use that controlling ownership interest to cause CPS to engage in a transaction the effect of which would be a purchase by Siemens of our remaining 20% ownership interest in CPS. Accordingly, the Siemens option effectively gives Siemens the ability to acquire 100% of CPS.

Under the terms of our new Agency Agreement with Siemens, in the event the Agency Agreement is terminated or not renewed by Siemens for any reason, we would continue to have the right to distribute PET and PET/CT products manufactured by CPS until at least 2010 on substantially the same terms as existed under the distribution agreement between CTI and CPS. The Agency Agreement also provides that CTI can terminate this agreement under certain specified circumstances, including the event that certain total unit sales thresholds for PET and PET/CT scanners are not met for a period of two consecutive fiscal quarters. The joint venture agreement also contains cross-covenants not to compete, which prohibit the parties to the joint venture agreement from participating in or owning an interest in any business engaged in the manufacture, development, or sale of products that compete with the products offered by CPS currently, and for a period of three years following the closing of the exercise of the Siemens’ option.

The exercise of the Siemens option would eliminate a large portion of our revenues, operations and assets, including some valuable employees and intellectual property assets relating to the manufacture and development of PET scanners. As of December 31, 2004, approximately 37.3% of our total assets was attributable to CPS. Accordingly, if we fail to further diversify our business beyond that which is conducted by CPS, or if we fail to deploy effectively the option exercise proceeds received from Siemens, the exercise of the Siemens option could have a material adverse effect on our business. In addition, the existence of the Siemens option, even if not exercised, could negatively impact the market price of our common stock and limit our ability to enter into transactions or business relationships with companies that have competitive PET products. Further, we cannot assure you that the proceeds received upon exercise of the option will adequately compensate us for the loss of control of CPS.

If we are unable to develop new generations of products and enhancements to existing products, we may be unable to attract or retain customers.

Our success is dependent upon the successful development, introduction and commercialization of new generations of products and enhancements to existing products. Our products are technologically complex and must keep pace with technological change, comply with evolving industry standards and compete effectively with new product introductions of our competitors. Accordingly, many of our products require significant planning, design, development and testing at the technological, product and manufacturing process levels. These activities require significant capital commitments and investments on our part.

Our ability to successfully develop and introduce new products and product enhancements, and the associated costs, are also affected by our ability to:

	§	Properly identify customer needs;

	§	Prove feasibility of new products;

	§	Limit the time required from proof of feasibility to routine products;

	§	Limit the timing and cost of regulatory approvals;

	§	Price our products competitively;

	§	Manufacture and deliver our products in sufficient volumes on time, and accurately predict and control costs associated with manufacturing, installation, warranty and maintenance of the products;

	§	Manage customer acceptance and payment for products;

	§	Limit customer demands for retrofits of both new and old products; and

	§	Anticipate and compete successfully with competitors’ efforts.

We cannot be sure that we will be able to successfully develop, manufacture and phase in new products or product enhancements. Without the successful introduction of new products and product enhancements, we may be unable to attract and retain customers and our revenue and operating results will suffer. In addition, even if customers accept new products or product enhancements, the revenues from such products may not be sufficient to offset the significant costs associated with making such products available to customers. Also, announcements of new products or product enhancements may cause customers to delay or cancel their purchasing decisions in anticipation of such products.

If we fail to protect our intellectual property rights, our competitors may take advantage of our ideas and compete directly against us.

We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, nondisclosure and confidentiality agreements, and other contractual restrictions to protect our proprietary technology and other intellectual property rights. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage based on our intellectual property. For example, our patents may be challenged, invalidated or circumvented by third parties. As of December 31, 2004 we have 34 issued U.S. patents and 42 patent applications pending before the U.S. Patent and Trademark Office. We also have patents issued and pending in Europe, Canada and Japan, including through our ownership of Mirada. We have no assurance that our patent applications will result in issued patents or that they will be issued in a form that will be advantageous to us. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by employees. Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. Litigation may be necessary to enforce our intellectual property rights, which could result in substantial costs to us and substantial diversion of management attention. If our intellectual property is not adequately protected, our competitors could use our intellectual property to enhance their products. This could harm our competitive position, decrease our market share or otherwise harm our business.

The prosecution and enforcement of copyrights and patents relating to software and other technology licensed or sold to us by third parties is not within our control, and without this software and technology, we may be unable to manufacture our products or maintain our technological advantage. For example, we license Siemens’ syngo™ software which is an important component of our PET/CT systems. Also, we license the exclusive right to use lutetium oxyorthosilicate, or LSO, technology from the owner of the LSO patent until such time as the LSO patent

expires in October 2008. While LSO is the only lutetium based scintillator material currently commercially sold in the PET industry, it may be possible for others to produce a lutetium based detector without violating the Schlumberger patent and, therefore, our exclusive license. If the third-party suppliers of this software and technology fail to protect their patents or copyrights or if this technology and software is found to infringe on the rights of another party, the functionality of our products could suffer and our ability to bring new and existing products to market could be delayed. In the case of LSO, the expiration of, or the failure to protect, the LSO patent could result in our competitors gaining access to the LSO technology for use in their molecular imaging products, thereby eliminating one of our important competitive advantages.

Currently, 21 of our issued patents are held in the name of CPS. If Siemens exercises its right to purchase a majority interest in CPS, there is no guarantee that we will have the right to license or otherwise use the technology underlying these patents or other intellectual property that is proprietary to CPS such as manufacturing know-how. Our inability to access or use this technology could harm our business and financial condition.

Our operating results would suffer if we were subject to a protracted infringement claim or a significant damage award.

Substantial intellectual property litigation and threats of litigation exist in our industry. We expect that molecular imaging products may become increasingly subject to third-party infringement claims as the number of competitors grows and the functionality of products increases. Educational institutions or other medical device companies may claim that we infringe their intellectual property rights. Any claims, with or without merit, could have the following negative consequences:

	§	Costly litigation and damage awards;

	§	Diversion of management attention and resources;

	§	Product shipment delays or suspensions; and

	§	The need to enter into royalty or licensing agreements, which may not be available on terms acceptable to us, if at all.

A successful claim of infringement against us could result in a substantial damage award, and could materially harm our financial condition. Our failure or inability to license the infringed or similar technology could prevent us from selling our products and adversely affect our business and financial results.

If we fail to obtain or maintain necessary FDA clearances for our medical device products or similar clearances in non-U.S. markets, or if such clearances are delayed, we will be unable to commercially distribute and market our products.

Our scanner products are medical devices that are subject to extensive regulation in the U.S. and in foreign countries where we do business. Unless an exemption applies, each medical device that we wish to market in the U.S. must first receive clearance from the U.S. Food and Drug Administration, which is referred to as 510(k) clearance, which can be a lengthy and expensive process. The FDA’s 510(k) clearance process for our devices usually takes 90 days from the date the application is submitted, but may take longer. Although we have obtained 510(k) clearance for our current products, our 510(k) clearance can be revoked if safety or effectiveness problems develop. We expect that our scanner products currently under development will require 510(k) clearance. We may not be able to obtain additional clearances in a timely fashion, or at all. Delays in obtaining clearance or the revocation of existing clearances could adversely affect our revenues and profitability.

In addition to clearance requirements, our medical device products are subject to other rigorous FDA regulatory requirements, including Quality System Regulation manufacturing requirements, labeling and promotional requirements and medical device serious adverse event reporting requirements. Our failure to satisfy these requirements could result in, among other things, notice of violation or warning letters, fines, consent decrees and injunctions, civil penalties, repairs, replacements, refunds, recalls or seizures of products, total or partial suspension of production, import or safety alerts, the FDA’s refusal to grant future clearances, withdrawals or suspensions of current product applications, and criminal prosecution. Any of these actions could have a material adverse effect on our business, financial condition, and results of operations.

In many foreign countries in which we market our scanner products, we are subject to regulations affecting, among other things, product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. Many of these regulations are similar to those of the FDA. In addition, in many countries the national health or social security organizations require our products to be qualified before procedures performed using our products become eligible for reimbursement. Failure to receive or delays in the receipt of, relevant foreign qualifications could have a material adverse effect on our business, financial condition and results of operations. Due to the movement towards harmonization of standards in the European Union, we expect a changing regulatory environment in Europe characterized by a shift from a country-by-country regulatory system to a European Union-wide single regulatory system. The timing of this harmonization and its effect on us cannot currently be predicted. Adapting our business to changing regulatory systems could have a material adverse effect on our business, financial condition and results of operations.

The FDA and similar governmental authorities in other countries have the authority to require the recall or related remedies of our scanner products in the event of material deficiencies or defects in design or manufacture. A government-mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors or design defects. Any recall of product would divert management and financial resources and harm our reputation with customers.

Any modification to a FDA-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new FDA 510(k) premarket clearance. The FDA requires every manufacturer to make this determination, but can review any such decision. We may make additional modifications to our products after they have received clearance, and in appropriate circumstances, determine that new clearance is unnecessary. The FDA may not agree with our decision not to seek new clearance. If the FDA requires that we seek 510(k) clearance for any modifications to a previously cleared product, we may be required to cease marketing or recall the modified device until we obtain this clearance. Also, in some circumstances, such as the FDA’s disagreement with our decision not to seek new clearance, we may be subject to significant regulatory fines or civil or criminal penalties.

FDA regulation of our radiopharmaceutical development and manufacturing procedures could hinder our ability to manufacture and distribute our PET products.

Our PET radiopharmaceuticals currently are manufactured and sold through our radiopharmacies, each of which operates under an applicable state pharmacy license and compounds these products in response to the order of a licensed physician. These activities are authorized under Section 121 of the Food and Drug Administration Modernization Act of 1997 (the 1997 Act). The FDA in the past generally has not subjected such compounded PET products to new drug approval procedures and current good manufacturing practice requirements.

The 1997 Act, however, amended the Federal Food, Drug, and Cosmetic Act to provide a new framework for FDA regulation of PET products. The 1997 Act states that the FDA can require the submission and approval of new drug applications (NDAs) or abbreviated new drug applications (ANDAs) in order to continue marketing these products and our adherence to current good manufacturing practice requirements for PET products two years after the agency finalizes appropriate new approval procedures and current good manufacturing practice requirements for PET. The submission of a NDA or ANDA before this time period expires is voluntary. The FDA has issued a guidance document for the chemistry portion of NDAs and ANDAs for PET products, including F-18-fluorodeoxyglucose, or FDG, the product principally produced and distributed by our PETNET radiopharmacies. Because the 1997 Act prohibits the FDA from requiring NDAs or ANDAs for PET products until two years after the agency finalizes appropriate approval procedures and current good manufacturing practice requirements for PET products, the submissions and FDA approval of such applications before these time periods expire is voluntary. The FDA has not yet addressed the procedures for approval of other PET products and of new indications for existing PET products. The FDA has said, however, that it expects that the standards for determining the safety and effectiveness set forth in recently developed FDA proposed regulations for in vivo diagnostic radiopharmaceuticals may apply to PET.

Under the 1997 Act the FDA cannot require NDAs or ANDAs for any PET products that comply with the PET compounding standards and the official monographs of the United States Pharmacopoeia until two years after the issuance of final current good manufacturing practice regulations and appropriate procedures for the approval of the specific PET drug product, whichever occurs later. In March 2002, the FDA issued preliminary draft proposed regulations for the current good manufacturing practice requirements. The public comment period for the draft regulations closed on June 5, 2002, after which the FDA said it intends to issue a proposed rule with an additional period for public comment before issuing the final current good manufacturing practice regulations for PET. It is not possible to accurately predict when the FDA will finalize these regulations, but we have begun working toward compliance with these proposed regulations. We currently anticipate that the FDA authority and the proposed approval procedures and current good manufacturing practice requirements would not take effect until calendar year 2007 at the earliest.

Once the requirements for FDA approval take effect, we could incur significant costs, including upgrading or replacing certain facilities, and spend considerable time obtaining FDA approval for existing and newly developed radiopharmaceuticals or for new indications for existing radiopharmaceuticals. Such additional costs and time spent to obtain any required FDA approval could have a material adverse effect on our business, financial condition, and results of operations. With regard to the FDA’s future issuance of proposed current good manufacturing practice requirements for PET drug products, we cannot predict with certainty the precise nature of these requirements or their future effect on our business, financial condition, and results of operations.

Our PET products are subject to other rigorous FDA regulatory requirements, including compounding standards, reporting of serious adverse events, labeling and promotional requirements. Our failure to satisfy these requirements could result in, among other things, notice of violations or warning letters, fines, consent decrees and injunctions, civil penalties, repairs, replacements, refunds, recalls or seizures of products, total or partial suspension of production, import or safety alerts, the FDA’s refusal to grant future clearances, withdrawals, or suspensions of current product applications, and criminal prosecution. Any of these actions could have a material adverse effect on our business, financial condition, and results of operations.

Our scanners, cyclotrons and radiopharmaceutical business require the use of radioactive materials which subjects us to regulation, related costs and delays and potential liabilities for injuries or violations of laws related to radioactive materials.

Our scanners and radiopharmaceutical business require the use of radioactive materials, and our cyclotrons are utilized to produce radioactive materials. While the radioactive materials utilized in our radiopharmaceuticals have relatively short half-lives, meaning they quickly break down into inert, or non-radioactive substances, the storage, use, and disposal of these materials presents the radiation risk, for our employees and the risk of accidental environmental releases. We are subject to federal, state and local regulations governing storage, handling and disposal of these materials and waste products. Outside of the U.S. we are also subject to radiation regulations that vary from country to country and sometimes vary within a given country. Although we believe that our safety procedures for storing, handling and disposing of these radioactive materials comply in all material respects with the standards prescribed by law and regulation, we cannot completely eliminate the radiological risk from those hazardous materials.

Product liability suits against us could result in expensive and time-consuming litigation, payment of substantial damages, increases in our insurance rates and decreased market acceptance of our products.

The sale and use of our products could lead to the filing of product liability claims if someone were to allege injury from the use of one of our devices or radiopharmaceuticals or allege that one of our devices or radiopharmaceuticals failed to detect a targeted disorder. A product liability claim could result in substantial damages and be costly and time-consuming to defend. We cannot assure you that our product liability insurance will be sufficient to protect us from the financial impact of defending a product liability claim. Any product liability claim brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing insurance coverage in the future. Product liability claims could also adversely affect the marketability of our products and our reputation.

If we are unable to provide the significant education and training required for the health care market to accept our products, our business will suffer.

In order to achieve market acceptance for our products, we are often required to educate physicians about the use of a new procedure and convince health care payors that the benefits of the product outweigh its costs. The timing of our competitors’ introduction of products and the market acceptance of their products may also make this process more difficult. We cannot be sure that any future products we develop will gain any significant market acceptance among physicians, patients and health care payors.

We expect to incur substantial expenses in the future to develop new technology and to expand our business and, as a result, we may not be able to generate sufficient revenues to maintain profitability.

We anticipate that our expenses will increase in the foreseeable future as we grow our business and:

	§	Continue to invest in research and development to enhance our products and develop new technologies;

	§	Develop additional applications for our current technology;

	§	Increase our marketing and selling activities;

	§	Continue to increase the size and number of locations of our customer support organization, including international expansion;

	§	Continue to expand our network of PETNET radiopharmacies in the U.S. and internationally;

	§	Develop additional manufacturing capabilities and infrastructure; and

	§	Hire additional management and other personnel to keep pace with our growth.

As a result of these increased expenses, we will need to generate significantly higher revenues to maintain profitability. We cannot be certain that we will maintain profitability in the future. If we do not maintain profitability, the market price of our common stock may decline substantially.

Our quarterly operating results may fluctuate, which could cause our stock price to decline.

Our revenues and operating results have varied from quarter to quarter in the past and may continue to fluctuate in the future. The following are among the factors that could cause our operating results to fluctuate significantly from quarter to quarter:

	§	The budget cycles of our customers;

	§	The availability of financing to our customers;

	§	The size and timing of specific sales and any collection delays or defaults related to those sales;

	§	Changes in the relative contribution to our revenue from our various products;

	§	The seasonality of capital equipment sales, with the fourth fiscal quarter traditionally being the highest;

	§	Product and price competition;

	§	Development costs of new product introductions and product enhancements;

	§	The timing and market acceptance of new product technologies by us or our competitors;

	§	The length of our sales cycle;

	§	The timing of hiring and the timing of incentive compensation for our sales and marketing personnel;

	§	Changes in healthcare reimbursements and governmental laws and regulations;

	§	A downturn in general economic conditions;

	§	Our dependence on our distributors;

	§	The loss of key sales personnel or distributors; and

	§	Changes in the growth rate of PET.

Many of these factors are beyond our control, and you should not rely on our results of operations for prior periods as an indication of our expected results in any future period. If our revenues vary significantly from quarter to quarter, our business could be difficult to manage and our quarterly results could fall below expectations of investors and stock market analysts, which could cause our stock price to decline.

If we are unable to provide suitable capital equipment financing sources for our customers, our ability to compete in the molecular imaging equipment market may be impaired and our business, operations and financial condition could be adversely impacted.

Many of our customers require or desire financing in connection with purchases of our molecular imaging equipment. Some of our competitors have sufficient capital resources to provide capital equipment financing directly to their customers on attractive terms. In order to compete with these competitors, we maintain relationships with third party financing sources who offer financing services to our customers. Our business, operations and financial condition could be adversely impacted if our new financing source is unable to provide our customers with competitive financing or experiences adverse financial conditions that impact its ability to offer financing or fund future sales.

We are subject to risks associated with international operations.

We conduct business globally. International sales accounted for approximately 21.3% and 19.8% of sales for the three month periods ended December 31, 2004 and 2003, respectively. We also acquire various raw materials and components from international suppliers. We intend to expand our presence in international markets, and we cannot assure you that we will compete successfully in international markets or meet the service and support needs of foreign customers. Our future results could be harmed by a variety of factors relating to international operations, including:

	§	Difficulties in enforcing agreements and collecting receivables through the legal systems of foreign countries;

	§	The longer payment cycles associated with many foreign customers;

	§	The possibility that foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade;

	§	Fluctuations in exchange rates, which may affect product demand and adversely affect the profitability in U.S. dollars of products and services provided by us in foreign markets where payment is made in local currency;

	§	Our ability to obtain U.S. export licenses and other required export or import licenses or approvals;

	§	Changes in the political, regulatory or economic conditions in a country or region; and

	§	Difficulty protecting our intellectual property in foreign countries.

Our production and manufacturing capabilities may not be sufficient to meet the expected future demand for our products and services.

If we are unable to increase our production and manufacturing capabilities, we may be unable to meet the expected future demand for our products. In order to produce a sufficient supply of products using our technology, we must improve and expand our current manufacturing facilities and processes. We may experience quality problems, substantial costs and unexpected delays in our efforts to upgrade and expand our manufacturing capabilities. If we fail to obtain the necessary capital to expand our manufacturing facilities or if we incur delays due to quality problems or other unexpected events, we will be unable to produce a sufficient supply of products necessary to meet our future growth expectations.

If we lose or experience a deterioration in our relationship with any supplier of key product components, or if key components are otherwise not available in sufficient quantities, our manufacturing could be delayed.

We contract with third parties for the supply of some of the components and materials used in our products. For example, we obtain all of the raw materials needed to manufacture our LSO detector material from a single source. Isotopically enriched water, which is necessary for the development of our radiopharmaceuticals, is only available from a limited number of sources. Some of our suppliers are not obligated to continue to supply us. For some of these materials and components, relatively few alternative sources of supply exist. In addition, the lead-time involved in the manufacturing of some of these components can be lengthy. If these suppliers become unwilling or unable to supply us with our requirements, it may be difficult to establish additional or replacement suppliers in a timely manner, if at all. This would cause our product sales to be disrupted and our revenues and operating results to suffer.

Replacement or alternative sources might not be readily obtainable due to regulatory requirements and other complexities of our manufacturing operations and requirements. Incorporation of components from a new supplier into our products may require a new or supplemental filing with applicable regulatory authorities and clearance or approval of the filing before we could resume product sales. This process may take a substantial period of time, and we may be unable to obtain the necessary regulatory clearance or approval. This could also create supply disruptions that would harm our product sales and operating results.

If we fail to comply with health care regulations, we could face substantial penalties and our business, operations and financial condition could be adversely impacted.

While we do not deliver health care services directly to patients, control referrals of health care services or bill directly to Medicare, Medicaid or other third-party payors, due to the breadth of many health care laws and regulations, we cannot assure you that they will not apply to our business. We could be subject to health care fraud and patient privacy regulation by both the federal government and the states in which we conduct our business. The regulations that may affect our ability to operate include:

	§	The federal Medicare and Medicaid Anti-Kickback Law, which prohibits among other things persons from soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal health care programs such as the Medicare and Medicaid programs;

	§	Federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, and which may apply to entities like us which provide coding and billing advice to customers;

	§	The federal Stark Law, which prohibits referrals by a physician for a designated health service to an entity with which the physician, or an immediate family member, has a financial relationship, and which prohibits submission of a claim for reimbursement to Medicare or Medicaid in connection with a prohibited referral;

	§	The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which prohibits executing a scheme to defraud any health care benefit program or making false statements relating to health care matters and which also imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information; and

	§	State law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor (including commercial insurers), and state laws governing the privacy of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA (thus complicating compliance efforts).

If our operations are found to be in violation of any of the laws described above or any of the other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could 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. Moreover, to achieve compliance with applicable federal and state privacy, security, and electronic transaction laws, we may be required to modify our operations with respect to the handling of patient information. Implementing these modifications may prove costly and time consuming. At this time, we are not able to determine the full consequences to us, including the total cost of compliance, of these various federal and state laws.

The application of state certificate of need regulations and compliance with federal and state licensing requirements could substantially limit our ability to sell our products and grow our business.

Some states require health care providers to obtain a certificate of need or similar regulatory approval prior to the acquisition of high-cost capital items including molecular imaging systems like ours or the provision of diagnostic imaging services. In many cases, a limited number of these certificates are available. As a result of this limited availability, hospitals and other health care providers have at times been unable to obtain a certificate of need and purchase our PET scanners. Further, our sales cycle for PET scanners is typically longer in certificate of need states due to the time it takes our customers to obtain the required approvals. Accordingly, certificates of need or similar requirements could limit our ability to market our products and adversely impact our revenues and results of operations. Also, our ability to grow our radiopharmaceutical distribution network is contingent on our or our customers’ ability to obtain the necessary licenses and registrations for each new facility, which may include a radioactive materials license, pharmacy license, and cyclotron registration. If we or our customers fail to obtain such licenses and registrations or if substantial delays are incurred in obtaining such licenses and registrations, we may be unable to expand this business and our sales growth will be negatively impacted. Further, the pharmacists operating in our PETNET radiopharmacies must be licensed and many states require imaging technologists that operate PET systems to be licensed or certified. Any lapse in our licenses, or the licenses of our pharmacists or technologists, could increase our costs and adversely affect our operations and financial results. In addition, our customers must meet various federal and state regulatory and/or accreditation requirements in order to receive payments from the government-sponsored health care programs such as Medicare and Medicaid. Any lapse by our customers in maintaining appropriate licensure, certification or accreditation or the failure of our customers to satisfy the other necessary requirements under government-sponsored health care programs could cause our sales to decline.

Our business strategy emphasizes growth, which places significant demands on our financial, operational and management resources and creates the risk of failing to meet the growth expectations of investors.

Our growth strategy includes establishing new radiopharmacy sites and developing new products, services and technologies as well as new distribution channels. The pursuit of this growth strategy consumes capital resources, thereby creating the financial risk that we will not realize an adequate return on this investment. In addition, our growth may involve the acquisition of companies, the development of products or services or the creation of strategic alliances in areas in which we do not currently operate. This would require our management to develop expertise in new areas, manage new business relationships and attract new types of customers. The success of our growth strategy also depends on our ability to expand our financial, operational and management resources and to attract, train, motivate and manage an increasing number of employees. The success or failure of our growth strategy is difficult to predict. The failure to achieve our stated growth objectives or the growth expectations of investors could disappoint investors and harm our stock price. We may not be able to implement our growth strategy successfully or manage our expanded operations effectively and profitably.

Our costs could substantially increase if we receive a significant number of warranty claims.

We generally warrant each of our products against defects in materials and workmanship for a period of twelve months from the acceptance of our product by a customer or eighteen months from the date of shipment to a distributor. Further, we have entered into long-term service agreements with certain customers pursuant to which we have agreed to provide all necessary maintenance and services for a fixed fee. If we experience an increase in product returns or warranty claims, we could incur unanticipated additional expenditures for parts and service. In addition, our reputation and goodwill in the PET market could be damaged. While we have established reserves for liability associated with product warranties, unforeseen warranty exposure in excess of those reserves could adversely affect our operating results.

Our executive officers and directors and their affiliates hold a substantial portion of our stock and could exercise significant influence over matters requiring stockholder approval, regardless of the wishes of other stockholders.

Our executive officers, principal stockholders and directors and entities affiliated with them beneficially own, in the aggregate, approximately 28.5% of our common stock as of December 31, 2004. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with significant or controlling stockholders. These stockholders, acting

together, will have the ability to exert substantial influence over all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets. In addition, they could exert substantial influence over the management of our business and affairs. This concentration of ownership could have the effect of delaying, deferring, or preventing a change in control, or impeding a merger or consolidation, takeover, or other business combination that some of our investors may consider desirable.

Certain provisions of our charter, bylaws and Delaware law may delay or prevent a change in control of our company.

Our corporate documents and Delaware law contain provisions that may enable our board of directors to resist a change in control of our company. These provisions include:

	§	a staggered board of directors;

	§	limitations on persons authorized to call a special meeting of stockholders;

	§	the authorization of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

	§	advance notice procedures required for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders; and

	§	a stockholder protection rights agreement or “poison pill.”

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire.

Our stock price has been and may continue to be volatile.

The market price for the common stock has fluctuated, may continue to fluctuate and may be affected by a number of factors. Such fluctuations in the market price of our common stock may cause your investment in our common stock to decline. Relevant factors include:

	§	volume and timing of orders for our products;

	§	our ability to develop, obtain regulatory clearance for, and market, new and enhanced products on a timely basis;

	§	the announcement of new products or product enhancements by us or our competitors;

	§	announcements of technological or medical innovations in the monitoring or treatment of diseases;

	§	product liability claims or other litigation;

	§	quarterly variations in our or our competitors’ results of operations;

	§	changes in governmental regulations or in the status of our regulatory approvals or applications;

	§	changes in the availability of third-party reimbursement in the United States or other countries;

	§	changes in earnings estimates or recommendations by securities analysts; and

	§	general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

Our exposure to market risk relates to changes in interest rates for borrowings under our revolving credit facility and our industrial revenue bonds. These borrowings bear interest at variable rates. Based on our outstanding borrowings during the three month period ended December 31, 2004, a hypothetical 1.0% increase in interest rates would have increased our interest expense by less than $0.1 million and would have decreased our cash flow for the quarter from operations by less than $0.1 million.

The Company’s cash equivalents and short-term investments are subject to market risk, primarily interest-rate and credit risk. The Company’s investments are managed by outside professional managers within investment guidelines set by the Company. Such guidelines include security type, credit quality, and maturity and are intended to limit market risk by restricting the Company’s investments to high credit quality securities with relatively short-term maturities.

As of December 31, 2004 we had cash and cash equivalents of $24.9 million which consisted of highly liquid money market instruments with maturities less than 90 days. Because of the short maturities of these instruments, a sudden change in market interest rates would not have a material impact on the fair value of the portfolio. We would not expect our operating results or cash flows to be materially affected by the effect of a sudden change in market interest rates on our portfolio.

Foreign Currency Exchange Risk

International revenues from the Company’s foreign direct sales and distributor sales comprised 21.3% of total revenues for the three months ended December 31, 2004. However, because the vast majority of our international sales are transacted in the United States dollar, our exposure to foreign currency risk associated with these sales is immaterial. The Company experienced approximately $0.1 million of foreign currency transaction losses for the three months ended December 31, 2004. The Company is also exposed to foreign exchange rate fluctuations as the financial results of its international subsidiaries are translated into U.S. dollars in consolidation. As exchange rates vary, these results when translated may vary from expectations and adversely impact overall expected profitability. A 10% adverse change in the value of the U.S. dollar relative to other currencies would decrease our reported net income by approximately $0.1 million.

Equity Security Price Risk

We do not have any investments in marketable equity securities. Therefore, we do not currently have any direct equity price risk.

Commodity Price Risk

We use certain precious metals in the manufacturing of our detector materials. These metals are not traded and are depleted over several years. Accordingly, we do not have any direct commodity price risk.

ITEM 4. Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company maintains disclosure controls and procedures that provide reasonable assurance that information required to be disclosed by the Company in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II: Other Information

ITEM 1. Legal Proceedings

On January 30, 2004, the University of Pittsburgh (Pitt) filed suit in the U.S. Western District of Pennsylvania, Civil Action No. 04-0127, against Dr. David Townsend, Dr. Ronald Nutt, CTI and CPS alleging that Pitt has an ownership interest in the intellectual property associated with the PET/CT system manufactured and sold by CPS. Under a variety of causes of action, the relief sought by Pitt in the complaint is a declaration of Pitt’s ownership rights, injunctive relief against disclosure and transfer of the intellectual property, actual and punitive damages, and attorney’s fees. Based on the results of the Company’s investigation, which is continuing, the Company intends to vigorously defend against Pitt’s claim of an ownership interest in these patents or in any other intellectual property used in the PET/CT system manufactured and sold by CPS, or that Pitt has any right to a share of the profits earned from the sale of PET/CT systems. On June 30, 2004, the District Court for the Western District of Pennsylvania entered an order transferring the case to the District Court for the Eastern District of Tennessee. On December 13, 2004, the district court judge issued an order dismissing two of Pitt’s copyright claims asserted in its complaint. A trial date of May 1, 2006 has been scheduled with the District Court. The Company denies liability as to Pitt’s remaining claims, and intends to vigorously defend this suit; however, given the uncertainties inherent in the litigation process, the Company is unable to predict the ultimate outcome of this suit.

On October 8, 2004, CPS received a letter from the U.S. Environmental Protection Agency (EPA) requesting information on a Superfund site operated by a former supplier. Based on CPS’ investigation, it appears that the sole nature of CPS’s dealing with the supplier was strictly for the acquisition of supplies and not the provision of waste products or by-products by or on behalf of CPS. No legal action has been initiated or threatened by the EPA against CPS at present and we have no basis to believe at this time that any formal legal claim will be brought by the EPA.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

	a)	Modification of Constituent Instruments: None

	b)	Modification of Stockholder’s Rights: None

	c)	Sales of Unregistered Securities: None

	d)	Use of Proceeds: The Registration Statement on Form S-1 (SEC File No. 333-85714) for our initial public offering was declared effective on June 20, 2002, and on June 26, 2002 we closed the initial public offering of our common stock. The net offering proceeds received by us, after deducting underwriting discounts and commissions and estimated offering expenses of approximately $16.0 million was approximately $171.4 million. As of December 31, 2004, $10.2 million of the net offering proceeds had been used to redeem all of our Series A Redeemable Preferred Stock, including all accrued dividends, $0.3 million of the net offering proceeds had been used to redeem 1,191,165 shares of our common stock, approximately $62.0 million of the net offering proceeds had been used to decrease our outstanding balance under our credit facility, approximately $14.5 million had been used to extinguish capital lease obligations, and $11.4 million was used to repay our construction loan and our mortgage loan agreement. In addition, approximately $43.8 million was used for the acquisitions of ImTek, Inc. in November 2004, CMSI’s assets and business in June 2004 and Mirada in August 2003. The balance of the net offering proceeds have been invested in highly liquid instruments, such as commercial paper and U.S. government obligations, with an average maturity of twelve months or less.

ITEM 3. Defaults Upon Senior Securities

None

ITEM 4. Submission of Matters to a Vote of Security Holders

None

ITEM 5. Other Information

None

ITEM 6. Exhibits and Reports on Form 8-K

(a)

Exhibits


(1)	Exhibit 31.1	Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(2)	Exhibit 31.2	Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(3)	Exhibit 32.1*	Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(4)	Exhibit 32.2*	Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)

Reports on Form 8-K


	The Company filed with or furnished to the Commission two (2) Current Reports on Form 8-K during the quarter ended December 31, 2004, as follows:

		(1) Current Report on Form 8-K filed with the Commission on October 13, 2004, reporting the Company’s grant of stock options to, and amendment of certain stock options previously issued to, the Company’s Senior Vice President and Chief Financial Officer; and

		(2) Current Report on Form 8-K furnished to the Commission on November 16, 2004, announcing the Company’s financial results for its fourth quarter and fiscal year ended September 30, 2004.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	CTI Molecular Imaging, Inc.
	/s/ David N. Gill
	David N. Gill
	Chief Financial Officer and Corporate Vice President

	February 8, 2005

CTI MOLECULAR IMAGING INC 10-Q