CTI MOLECULAR IMAGING INC - 10-Q Quarterly Report

United States
Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

(Mark One)


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

For the quarterly period ended March 31, 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 (State of Incorporation)		62-1377363 (I.R.S. Employer Identification No.)


810 Innovation Drive, Knoxville, Tennessee (Address of Principal Executive Offices)		37932 (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 x No o

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

APPLICABLE ONLY TO CORPORATE ISSUERS

As of May 3, 2004, the registrant had outstanding 45,543,843 shares of common stock, par value $0.01.

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 March 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

CONSOLIDATED BALANCE SHEETS


	March 31,			September 30,
(In thousands, except share and per share data)	2004			2003
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	56,134		$	49,978
Accounts receivable — trade, less allowance for doubtful accounts of $5,152 at March 31, 2004 and $3,475 at September 30, 2003		46,421			72,240
Accounts receivable — related party, less allowance for doubtful accounts of $318 at at March 31, 2004 and $186 at September 30, 2003		33,986			42,430
Inventories		90,917			70,852
Deferred tax asset		19,197			17,751
Prepaid expenses and other current assets		6,611			7,691

Total current assets		253,266			260,942

Property and equipment, net		119,327			107,293
Goodwill		25,076			25,040
Other assets		20,988			31,773

Total assets	$	418,657		$	425,048

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Cash management clearing	$	3,069		$	12,017
Accounts payable		28,087			34,490
Current maturities of long-term debt and capital lease obligations		3,938			5,501
Accrued payroll and benefits		14,986			16,708
Customer advances — trade		9,091			6,537
Customer advances — related party		784			326
Accrued warranty expense		4,790			5,262
Income taxes payable		4,705			3,724
Other accrued expenses		2,668			3,884

Total current liabilities		72,118			88,449

Deferred revenues		1,709			2,332
Deferred tax liability		5,844			8,999
Long-term debt and capital lease obligations, less current maturities		17,380			18,688

Total liabilities		97,051			118,468

Commitments and contingencies (Note 5)
Minority interest		51,457			46,727
Shareholders’ equity:
Preferred stock, Series C, $.01 par value, 50,000 shares authorized, no shares issued or outstanding at March 31, 2004 and September 30, 2003 (Note 11)		—			—
Common stock, $.01 par value; 500,000,000 shares authorized, 46,701,298 shares issued and 44,869,333 shares outstanding at March 31, 2004; 46,290,459 shares issued and 44,458,494 shares outstanding at September 30, 2003		467			463
Additional paid-in capital		246,805			243,400
Retained earnings		27,691			21,207
Unearned compensation		(4,076	)		(4,516	)
Other comprehensive income — currency translation adjustment		225			262
Treasury stock, at cost, 1,831,965 shares		(963	)		(963	)

Total shareholders’ equity		270,149			259,853

Total liabilities and shareholders’ equity	$	418,657		$	425,048

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

CTI MOLECULAR IMAGING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended						Six Months Ended
	March 31,						March 31,
(In thousands, except share and per share data)	2004			2003			2004			2003
	(unaudited)						(unaudited)
Revenues ⁽¹⁾	$	106,282		$	81,964		$	180,389		$	142,523
Cost of revenues ^{(2) (3)}		65,135			49,384			108,870			82,030

Gross margin		41,147			32,580			71,519			60,493

Operating expenses:
Selling, general and administrative expenses ⁽³⁾		16,145			12,429			31,859			24,633
Research and development expenses ⁽³⁾		8,652			7,435			18,487			14,064
Stock-based compensation expense		559			325			1,070			881

Total operating expenses		25,356			20,189			51,416			39,578

Income from operations		15,791			12,391			20,103			20,915
Interest expense, net		309			199			788			275
Other income		(72	)		(238	)		(760	)		(679	)

Income before income taxes and minority interest		15,554			12,430			20,075			21,319

Provision (benefit) for income taxes:
Current		9,310			4,180			12,190			7,680
Deferred		(3,380	)		414			(4,561	)		406

		5,930			4,594			7,629			8,086

Income before minority interest		9,624			7,836			12,446			13,233
Amount applicable to minority interest, net of taxes		3,857			3,316			5,961			5,329

Net income	$	5,767		$	4,520		$	6,485		$	7,904

Earnings per share (Note 2):
Basic	$	0.13		$	0.11		$	0.15		$	0.19
Diluted	$	0.12		$	0.10		$	0.14		$	0.17
Weighted average shares:
Basic		44,581,083			42,929,659			44,455,362			42,467,888
Diluted		46,592,397			46,582,627			46,508,318			46,610,690
⁽¹⁾ Includes revenues through related parties	$	53,359		$	37,131		$	86,830		$	62,385
⁽²⁾ Includes cost of revenues through related parties	$	36,890		$	23,911		$	59,369		$	38,585
⁽³⁾ Excludes stock-based compensation expense as follows:
Cost of revenues	$	41		$	46		$	97		$	112
Selling, general and administrative expenses		450			195			799			584
Research and development expenses		68			84			174			185

	$	559		$	325		$	1,070		$	881

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

CTI MOLECULAR IMAGING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended
	March 31,
(In thousands, except share and per share data)	2004			2003
	(unaudited)
Cash flows provided by operating activities:
Net income	$	6,485		$	7,904
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest in income of subsidiaries		5,961			5,329
Depreciation and amortization		8,359			5,205
Deferred tax (benefit) provision		(4,561	)		406
Provision for bad debts		1,310			652
Equity in (income) losses of equity investees		(51	)		5
Stock-based compensation expense		1,070			881
Loss (gain) on disposal of machinery and equipment		38			(168	)
Tax benefit realized from exercises of employee stock options		855			—
Accretion of discount on marketable securities		—			(52	)
Changes in operating assets and liabilities:
Accounts receivable		32,099			(432	)
Inventories		(21,007	)		(12,289	)
Prepaid expenses and other current assets		5			(339	)
Accounts payable		(6,403	)		5,543
Accrued payroll and benefits		(1,722	)		(1,662	)
Customer advances		3,013			(4,307	)
Accrued warranty expense		(472	)		(598	)
Income taxes payable		3,943			(4,518	)
Other accrued expenses		(1,216	)		(199	)

Net cash provided by operating activities		27,706			1,361

Cash flows used in investing activities:
Additions to property and equipment		(19,537	)		(19,115	)
Purchase of marketable securities		—			(7,897	)
Proceeds from sale of marketable securities		—			11,100
Proceeds from the sale of other assets		8,997			—
Cash acquired from consolidation of joint venture		—			64
Additions to other assets		(903	)		(246	)

Net cash used in investing activities		(11,443	)		(16,094	)

Cash flows (used in) provided by financing activities:
(Decrease) increase in cash management clearing		(8,949	)		864
Proceeds from exercise of stock options		1,115			4,591
Proceeds from issuance of common stock		808			1,275
Issuance of long-term debt		—			602
Principal payments on long-term debt and capital lease obligations		(2,870	)		(1,894	)
Draws on line of credit		7,785			39,751
Payments under line of credit		(7,785	)		(39,751	)

Net cash (used in) provided by financing activities		(9,896	)		5,438

Effect of foreign currency exchange rates on cash and cash equivalents		(211	)		691

Net increase (decrease) in cash and cash equivalents		6,156			(8,604	)
Cash and cash equivalents, beginning of year		49,978			84,553

Cash and cash equivalents, end of period	$	56,134		$	75,949

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

CTI MOLECULAR IMAGING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1. Organization and Presentation

The unaudited 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 three principal categories: Positron Emission Tomography (PET) scanners, detector materials, and other PET products and services. 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 manufactured by CPS. CTI Solutions includes the production and distribution of radiopharmaceuticals and the direct sale and service by CTI of PET scanners, cyclotron systems, workstations and other PET related products. The CTI Solutions segment was formed effective October 1, 2003 and reflects the combination of the former CTI Services and PETNET segments, which previously were separately reported.

2. Summary of Significant Accounting Policies

Interim Financial Statements — The unaudited 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 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 latest Annual Report on Form 10-K filed with the SEC on December 23, 2003. Information in the accompanying consolidated financial statements and notes to the financial statements for the three month and six month periods ended March 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 and six month periods ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending September 30, 2004 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 under Financial Accounting Standards Board (FASB) Interpretation No. 46(R) (FIN 46(R)), Statement of Financial Accounting Standard (SFAS) No. 94 and Accounting Principles Board (APB) Opinion No. 18 and, where appropriate, evaluates its and the minority shareholders’ participating rights in accordance with Emerging Issues Task Force (EITF) Issue 96-16 to determine whether consolidation or equity method accounting is appropriate in each case.

The Company adopted FIN 46(R) during the second quarter of fiscal year 2004. In conjunction with this adoption, the Company identified one of its investments as a variable interest entity as defined by FIN 46(R). However, the adoption of FIN 46(R) did not have a significant impact on the Company’s 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), the Company will continue 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.

For the entities previously included in the consolidated financial statements, the application of FIN 46(R) resulted in the Company continuing to apply previously issued generally accepted accounting principles to the respective investments. Accordingly, for these investments the Company applies SFAS No. 94 and APB Opinion No. 18 to determine whether consolidation or equity method is appropriate in each case.

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.

CTI Solutions through our subsidiary, PETNET Pharmaceuticals, Inc. (PETNET), owns 90.0% and 51.0% interests in radiopharmacies in Denver and Houston, respectively. Under the terms of the Denver and Houston radiopharmacy operating agreements, CTI Solutions has control over all significant operating decisions and these radiopharmacies are consolidated in our financial statements. CTI Solutions accounted for the Houston joint venture under the equity method in the financial statements prior to March 2003 in accordance with EITF 96-16. In March 2003, an amendment to the joint venture agreement was adopted that removed the participating rights of the minority partner. Accordingly, CTI Solutions is now deemed to have control over the significant operating decisions of the joint venture and the entity was consolidated in the Company’s financial statements effective March 1, 2003.

Where appropriate, the Company evaluates its and the minority interest shareholders’ participating rights in accordance with EITF Issue 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 four radiopharmacies that are accounted for under the equity method. For the entities not previously included in the consolidated financial statements, the application 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 records revenues in accordance with the guidance of the SEC’s Staff Accounting Bulletin No. 104 (SAB 104), which supersedes SAB 101 in order to encompass EITF Issue 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21). 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.

The Company accounts for sales of scanning equipment and related installation and associated training services as multiple-element arrangements. The Company recognizes 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 (as other companies are available to provide the installation and associated training services and are sometimes employed by CTI to do so). The Company determines the value of the equipment and installation and training services based on sales of the equipment both with and without installation and training. The Company derives its revenues from sales of scanners, calibration sources, spare parts, detector materials, cyclotrons, radiopharmaceuticals and the provision of services on equipment sold, including site planning and installation, repair and maintenance, training, technical support and assistance with licensing. Revenues derived from the sale of scanners, calibration sources, spare parts, and detector materials are recognized upon either shipment or arrival at destination depending on shipment terms.

June 15, 2003. Due to our adoption of the provisions of EITF 00-21 the Company can now, for cyclotron arrangements entered into after July 1, 2003, separate cyclotron equipment from cyclotron installation services and recognize revenue for cyclotron equipment upon shipment and for cyclotron installation as services are performed. Prior to the implementation of EITF 00-21, the Company recognized revenue for all cyclotron sales in accordance with SAB 101 and did not recognize revenue for cyclotron system sales until installation was complete and customer acceptance was obtained, as functionality was deemed essential for cyclotrons. In accordance with transition provisions of EITF 00-21, revenue recognition for any cyclotron system sales, for which contracts were entered into prior to July 1, 2003 will continue to be accounted for under SAB 104 with revenue recognition deferred until installation is complete and customer acceptance is obtained.

Revenues derived from distribution of radiopharmaceuticals are recognized upon delivery of the product. Equipment maintenance service contracts are typically three or more years 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.

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

Stock-Based Compensation — As permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123), the Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its stock option plans.

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						Six Months Ended
	March 31,						March 31,
	2004			2003			2004			2003
(In thousands)	(unaudited)						(unaudited)
Net income, as reported	$	5,767		$	4,520		$	6,485		$	7,904
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		461			263			860			692
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,445	)		(824	)		(2,684	)		(1,748	)

Pro forma net income	$	4,783		$	3,959		$	4,661		$	6,848

Earnings per share:
Basic - as reported	$	0.13		$	0.11		$	0.15		$	0.19
Basic - pro forma	$	0.11		$	0.09		$	0.10		$	0.16
Diluted - as reported	$	0.12		$	0.10		$	0.14		$	0.17
Diluted - pro forma	$	0.10		$	0.08			0.10		$	0.15

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				Six Months Ended
	March 31,				March 31,
	2004		2003		2004		2003
	(unaudited)				(unaudited)
Numerator:
Net income available to common shareholders — basic and diluted	$	5,767	$	4,520	$	6,485	$	7,904

Denominator:
Weighted-average number of common shares outstanding		44,581,083		42,929,659		44,455,362		42,467,888

Dilutive potential common shares relating to:
Restricted stock		214,294		214,528		192,477		214,528
Options and warrants		1,797,020		3,438,440		1,860,479		3,928,274

		2,011,314		3,652,968		2,052,956		4,142,802

Total weighted-average number of shares used in computing diluted net income per share		46,592,397		46,582,627		46,508,318		46,610,690

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


	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2004		2003		2004		2003
	(unaudited)				(unaudited)
Warrants		45,809		52,867		45,809		54,240
Options		2,465,965		1,621,983		2,354,114		1,569,968

		2,511,774		1,674,850		2,399,923		1,624,208

Other Assets — Other assets include purchased technology arising from the Mirada Solutions Limited acquisition, long-term lease receivables, precious metals utilized in the production of detector materials, other long-term receivables and investments accounted for under the equity method. Purchased technology, patents, and trademarks are presented at cost, net of accumulated amortization. Intangible assets with finite lives are amortized over their estimated useful lives of 5 to 10 years using the straight-line method. Amortization expense for the three month and six month periods ending March 31, 2004 was $344 and $688, respectively, and has been recorded in cost of sales. There was no amortization expense during the three month and six month periods ending March 31, 2003.

Recent Accounting Pronouncements

Consolidation of Variable Interest Entities - On January 17, 2003, the FASB issued FIN 46(R), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51 Consolidated Financial Statements. FIN 46(R) expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is any legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. Previously, one company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46(R) changes that by requiring a

variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The adoption of FIN 46(R) did result in the identification of the Company as a primary beneficiary in one variable interest entity as defined by FIN 46(R). However, as the variable interest entity was already included in our consolidated financial statements the adoption of FIN 46(R) did not have a significant impact on the Company’s financial statements.

Revenue Recognition - On December 17, 2003, the Staff of the Securities and Exchange Commission (SEC) issued SAB 104, Revenue Recognition, which supersedes SAB 101, Revenue Recognition in Financial Statements. SAB 104’s primary purpose is to supplement accounting guidance contained in SAB 101 related to multiple element arrangements, superseded as a result of the issuance of EITF 00-21. The guidance contained in SAB 104 reflects the issuance of EITF 00-21, but the revenue recognition principles remaining largely unchanged. As the Company has already incorporated EITF 00-21 and SAB 101, into its revenue recognition policies, the adoption of SAB 104 did not have a significant impact on the Company’s financial statements.

3. Inventories

Inventories consist of the following:


	March 31,		September 30,
(In thousands)	2004		2003
	(unaudited)
Component parts	$	51,017	$	25,581
Work in process		15,312		27,122
Finished goods		24,588		18,149

	$	90,917	$	70,852

Cyclotrons that have been delivered but not yet accepted by customers are included in inventories as finished goods in the consolidated balance sheets at March 31, 2004 and September 30, 2003 in the amount of $1,346.

4. Property and Equipment

Property and equipment consist of the following:


	March 31,			September 30,
(In thousands)	2004			2003
	(unaudited)
Land	$	2,044		$	2,044
Buildings		20,963			21,179
Building and leasehold improvements		24,320			22,025
Machinery and equipment		76,457			78,958
Software and computer equipment		15,216			4,123
Less accumulated depreciation		(40,701	)		(33,062	)
Assets under construction		21,028			12,026

Property and equipment, net	$	119,327		$	107,293

Depreciation expense for the three months ended March 31, 2004 and 2003 was $3,927 and $2,572, and for the six months ended March 31, 2004 and 2003 was $7,512 and $5,089, respectively.

5. Commitments and Contingencies

CTI guarantees lease obligations for radiopharmacy facilities and equipment on behalf of unconsolidated investees in the maximum aggregate amount of $898 at March 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 guarantees 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 Euros (or approximately $6.5 million at March 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 CTI Solutions radiopharmacy. The Company has recorded a liability of $150 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% on the first $25 million of transactions and 5.0% once $50 million in transactions is achieved, of the principal balance of all leases DLL executes on the Company’s behalf. At March 31, 2004, the Company had recorded a reserve of $215 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.

The Company provides a parts and labor warranty on its products 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:


	Six Months Ended
	March 31,
(In thousands)	2004			2003
	(unaudited)
Balance at the beginning of the period	$	5,262		$	3,740
Accruals for warranties issued during the period		1,445			1,925
Settlements made (in cash or in kind)		(1,917	)		(2,523	)

Balance at the end of the period	$	4,790		$	3,142

On November 21, 2002, General Electric Company filed an action against the Company and a former General Electric employee now employed by the Company in the District Court of Johnson County, Kansas, Civil Case No. 02-CV-07947. The complaint charges the Company and its employee with alleged misappropriation of trade secrets and unfair competition, and the employee with breach of contract and breach of fiduciary duty. The complaint seeks injunctive relief and an undisclosed amount of damages. On November 21, 2002, General Electric, without notice to the Company or its employee, obtained a temporary restraining order enjoining the employee from using General Electric’s confidential information and trade secrets, and enjoining us from disclosing or using any confidential information or trade secrets gained by the employee during his employment at General Electric. We have denied liability and intend to vigorously defend this suit; however, given the uncertainties inherent in the litigation process, we are unable to predict the ultimate outcome of this suit.

without prejudice, which afforded General Electric an opportunity to refile the action in another United States District Court and potentially include additional defendants in addition to the two former employees. On November 24, 2003, General Electric refiled this action in the United States District Court for the Eastern District of Tennessee, Knoxville Division, against the two employees, CTI and PETNET. The defendants filed their motion for dismissal of GE’s claims on December 15, 2003. Given the uncertainties inherent in the litigation process, we are unable to predict the ultimate outcome of this suit; however, we intend to deny the allegations and vigorously defend this action.

On January 30, 2004, the University of Pittsburgh (“Pitt”) filed suit in the 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 March 5, 2004, the defendants filed a series of motions to dismiss the Complaint. We deny liability and intend to vigorously defend this suit; however, given the uncertainties inherent in the litigation process, we are unable to predict the ultimate outcome of this suit.

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 therefrom 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 (2.35% at March 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. There was no outstanding balance under the Syndicated Facility at March 31, 2004.

Industrial Revenue Bonds — 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 October 15, 2005. 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 March 31, 2004, the remaining balance of the Series 2000 Bonds was $900 and is supported by an irrevocable letter of credit agreement that expires October 15, 2005. The Series 2000 Bonds are due in August 2010. In May 2002, the Company redeemed all outstanding tax-exempt bonds and reissued taxable bonds for the purpose of terminating federal government limitations on aggregate capital expenditures.

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 from 1.17% to 1.20% at March 31, 2004, respectively).

Notes Payable — In August 2003 in conjunction with the acquisition of Mirada Solutions Limited, 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 note holders can request to be paid the lower of $15 or their outstanding note balance on April 30, 2004 along with any accrued interest to date. The remaining balance and outstanding interest on the unsecured loan notes will then be paid in full by 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 $851.

7. Income Taxes

The Company files a consolidated U.S. federal income tax return that includes CTI, Detector Materials and the domestic subsidiaries of the CTI Solutions segment. 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						Six Months Ended
	March 31,						March 31,
(In thousands)	2004			2003			2004			2003
	(unaudited)						(unaudited)
Federal tax @ 35%	$	5,444		$	4,351		$	7,026		$	7,462
State tax		734			292			828			589
Permanent differences		(248	)		(49	)		(225	)		35

Provision for income taxes	$	5,930		$	4,594		$	7,629		$	8,086

8. Stock Options and Restricted Stock

Incentive Stock Option Plans

In 1998 the Company adopted an incentive stock option plan for officers and key employees. The options are generally exercisable in installments of 25% per year from the grant date, except that options granted to persons who, at the time of grant, have been employed by the Company for at least 10 years are fully exercisable upon grant. The options expire after five to seven years. Twelve million eight hundred thousand shares had been authorized under this plan; however, after the adoption of the 2002 Long-Term Incentive Plan in May 2002, no further awards have been or will be granted under this plan. On May 23, 2002, the Company’s shareholders approved the 2002 Long-Term Incentive Plan (the Plan) which authorized three million shares. On March 2, 2004 the Company’s shareholders approved certain amendments to the Plan increasing the number of shares available for issuance under the Plan from 3,000,000 to 5,000,000 shares. At March 31, 2004, options for 2,667,085 shares of the Company’s stock are available for granting.

The following table summarizes information about incentive stock options under both plans at March 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		349,454		1.54	$	2.81		349,454	$	2.81
$3.09 to $3.87		290,977		2.46		3.39		290,977		3.39
$4.69		468,136		4.49		4.69		363,968		4.69
$5.56 to $6.12		445,880		4.85		5.61		307,254		5.63
$14.29 to $16.15		190,823		9.41		15.24		21,195		15.44
$17.00 to $17.63		43,108		9.61		17.00		4,993		17.10
$18.31 to $18.80		13,987		9.05		18.35		8,575		18.33
$19.37 to $19.76		25,404		8.34		19.68		12,186		19.69
$21.97 to $22.40		73,721		8.63		22.06		33,441		22.09
$23.90 to $25.00		40,029		8.68		24.92		19,372		24.93

		1,941,519			$	7.05		1,411,415	$	5.27

⁽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, except that options granted to persons who, at the time of grant, have been employed by the Company for at least 10 years are fully exercisable upon grant. The options expire after five to ten years.

The following table summarizes information about non-qualified stock options at March 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 $3.09		75,696		1.70	$	3.08		75,696	$	3.08
$4.69 to $5.56		539,734		4.87		5.21		403,803		5.33
$12.89		118,000		9.51		12.89		10,000		12.89
$15.05 to $15.55		925,780		8.80		15.37		289,140		15.55
$17.00 to $18.37		107,041		8.67		17.49		92,041		17.35
$19.00 to $19.76		343,321		8.42		19.67		191,398		19.60
$22.40 to $25.00		88,608		8.43		22.46		58,542		22.44

		2,198,180			$	13.38		1,120,620	$	12.20

⁽¹⁾ Weighted average contractual life remaining in years.

⁽²⁾ Weighted average exercise price.

9. Related Party Transactions

From 1987 through April 2001 Siemens was the exclusive distributor of scanners manufactured by CPS. In April 2001 CPS implemented a new multiple distributor strategy. The current distribution agreement with Siemens, which was effective March 1, 2002, has an initial term of five years with a one-year renewal period. The agreement is cancelable with three years notice upon the expiration of the then current term. 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 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 through and to Siemens were $53,359 and $37,131, respectively, during the three month periods ended March 31, 2004 and 2003 and $86,830 and $62,385, respectively, for the six months ended March 31, 2004 and 2003. Accounts receivable from Siemens totaled $33,986 and $42,430, at March 31, 2004 and September 30, 2003, respectively. Also, customer advances from Siemens totaled $784 and $326, at March 31, 2004 and September 30, 2003, respectively.

Under the terms of an agreement with Siemens (the Siemens Agreement), Siemens has the right to purchase, and CTI has 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 March 31, 2004 the cumulative total number of units sold by CPS was 769. By September 30, 2004, CPS would need to have sold a cumulative total of 1,055 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 has 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 2005.

The Company has a distribution agreement with Concorde Microsystems, Inc (Concorde), a company partially owned and operated by children of CTI’s President and Chief Executive Officer, who is also a director and major shareholder of CTI. Under the terms of the agreement, the PETNET division of CTI Solutions was granted an exclusive, royalty-free license to distribute Concorde products throughout the continental United States and Canada. The Company is responsible for sales, marketing and education activities while Concorde is responsible for all product warranty, installation, training, service and technical support. Total sales and cost of sales of Concorde products under this distribution agreement during the three months ended March 31, 2004, were $1,718 and $1,546, respectively, and $3,095 and $2,814, respectively, for the six months ended March 31, 2004. Total sales and cost of sales of Concorde products under this distribution agreement during the three months and six months ended March 31, 2003, were $450 and $419, respectively.

10. Segments

The Company operates in three reportable business segments based on differences in products and services: CPS, Detector Materials, and CTI Solutions. CPS designs, manufactures and markets medical research and scanning equipment. Detector Materials manufactures a scintillation component sold primarily to CPS. CTI Solutions includes the production and distribution of radiopharmaceuticals, and the direct sale and service by CTI of PET scanners, cyclotron systems and other PET related products. CTI Solutions reflects the combination of the former PETNET and CTI Services segments which previously were reported separately. Corporate reflects administrative activities not included in the three reportable segments. All comparative financial information for fiscal year 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”. 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 and six month periods ended March 31, 2004 and 2003:


			Detector			CTI					Eliminating			Consolidated
	CPS		Materials			Solutions			Corporate		Entries			Total
Three months Ending March 31, 2004 (unaudited)
External revenues	$	60,602	$	210		$	45,470		$	—	$	—		$	106,282
Intersegment revenues		9,261		15,314			1,682			—		(26,257	)		—
Depreciation and amortization		618		431			2,222			769		335			4,375
Stock-based compensation expense		81		5			214			259		—			559
Interest expense		26		161			798			298		(908	)		375
Interest income		144		—			17			813		(908	)		66
Equity in (income) losses of investees		—		23			4			—		—			27
Income tax expense		4,316		3,080			(1,864	)		167		231			5,930
Minority interest expense		—		—			126			—		3,731			3,857
Net income (loss)		7,476		5,238			(3,086	)		475		(4,336	)		5,767
Total assets		146,457		64,181			193,229			106,043		(91,253	)		418,657
Investment in equity method investees		—		67			2,492			—		—			2,559
Capital expenditures		1,700		825			5,319			1,577		61			9,482
Three months Ending March 31, 2003 (unaudited)
External revenues	$	40,618	$	1,089		$	40,257		$	—	$	—		$	81,964
Intersegment revenues		10,945		13,920			1,441			—		(26,306	)		—
Depreciation and amortization		262		379			1,506			483		—			2,630
Stock-based compensation expense		61		5			99			160		—			325
Interest expense		2		227			735			290		(761	)		493
Interest income		45		28			65			917		(761	)		294
Equity in (income) losses of investees		—		—			158			—		—			158
Income tax expense		3,854		2,012			(1,315	)		423		(380	)		4,594
Minority interest expense		—		—			42			—		3,274			3,316
Net income (loss)		6,560		3,146			(1,948	)		631		(3,869	)		4,520
Total assets		121,425		48,052			141,956			105,675		(36,206	)		380,902
Investment in equity method investees		—		—			2,110			—		—			2,110
Capital expenditures		2,701		494			5,653			2,215		—			11,063
Six months Ending March 31, 2004 (unaudited)
External revenues	$	98,101	$	235		$	82,053		$	—	$	—			180,389
Intersegment revenues		27,248		27,377			2,882			—		(57,507	)		—
Depreciation and amortization		1,183		846			4,308			1,351		671			8,359
Stock-based compensation expense		163		10			475			422		—			1,070
Interest expense		51		366			1,714			613		(1,727	)		1,017
Interest income		286		—			115			1,555		(1,727	)		229
Equity in (income) losses of investees		—		(31	)		(20	)		—		—			(51	)
Income tax expense		6,617		5,510			(3,796	)		643		(1,345	)		7,629
Minority interest expense		—		—			241			—		5,720			5,961
Net income (loss)		11,463		9,377			(6,712	)		1,171		(8,814	)		6,485
Total assets		146,457		64,181			193,229			106,043		(91,253	)		418,657
Investment in equity method investees		—		67			2,492			—		—			2,559
Capital expenditures		2,235		1,783			12,452			3,469		(402	)		19,537
Six months Ending March 31, 2003 (unaudited)
External revenues	$	72,537	$	1,588		$	68,398		$	—	$	—		$	142,523
Intersegment revenues		14,769		26,682			2,984			—		(44,435	)		—
Depreciation and amortization		621		780			2,873			931		—			5,205
Stock-based compensation expense		158		10			393			320		—			881
Interest expense		3		495			1,474			733		(1,734	)		971
Interest income		217		59			152			2,002		(1,734	)		696
Equity in (income) losses of investees		—		—			5			—		—			5
Income tax expense		6,175		3,577			(2,286	)		722		(102	)		8,086
Minority interest expense		—		—			83			—		5,246			5,329
Net income (loss)		10,513		5,643			(3,962	)		924		(5,214	)		7,904
Total assets		121,425		48,052			141,956			105,675		(36,206	)		380,902
Investment in equity method investees		—		—			2,110			—		—			2,110
Capital expenditures		4,082		1,057			9,265			5,107		—			19,511

Sales were distributed to the following locations:


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2004			2003			2004			2003
	(unaudited)						(unaudited)
United States		85.7	%		66.9	%		83.5	%		74.5	%
Foreign		14.3			33.1			16.5			25.5

		100.0	%		100.0	%		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. Subsequent Events

Effective May 1, 2004, CTI and CPS entered into a Sales Agency and Services Agreement (the Agreement) with Siemens, 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 will be marketed and sold under the Siemens brand. In connection with this arrangement, Siemens will reimburse CTI for all directly related sales, marketing and account management expenses, up to $10 million annually.

Each sales order executed but not filled prior to May 1, 2004 will be concluded by Siemens or CTI, whichever originally accepted the customer’s order. Other pending sales not yet subject to a purchase order will be considered on a case-by-case basis and transitioned to Siemens to the extent consistent with Siemens’ standards for acceptance and to the extent acceptable to each customer.

Service contracts for CPS products 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 will remain free to pursue independently sales of service contracts for scanners in the installed base in the United States, of CPS-manufactured PET and PET/CT scanners.

During the term of the Agreement, CTI will cease its sales and service of PET and PET/CT scanners in international markets, except in Korea and Japan. All existing scanner service contracts in international markets other than Korea and Japan will be assigned to Siemens. During the term of the Agreement, CTI has agreed not to enter or re-enter any international market with respect to the sale or service of PET or PET/CT scanners, except that CTI may continue to pursue its existing business model in Korea and may retain its existing distribution agreement in Japan. In exchange for the assignment of the international service contracts and the covenant not to compete, and as compensation for the cost of closing certain international operations, Siemens will pay CTI the sum of $2.2 million in May 2004.

Under the Agreement, Siemens will serve 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 has agreed that it will offer exclusively CTI cyclotrons, PETNET radiopharmaceuticals and CPS 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 agreed to reduce the transfer prices for CT components and LSO detector materials, respectively, sold to CPS. These price reductions will be 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 in the first quarter of fiscal 2005.

The initial term of the 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 Agreement is terminated by Siemens for any reason, CTI has the right to resume distribution of PET and PET/CT scanners in competition with Siemens.

Siemens also executed a license agreement with CTI’s Mirada Solutions subsidiary, under which Siemens will pay Mirada a license fee to install Mirada’s image-fusion software on every workstation sold worldwide with a Siemens branded PET or PET/CT scanner.

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, radiopharmaceutical manufacturing and distribution, 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 and net income 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 close on the exercise of its option to purchase a controlling interest in CPS. This strategy contemplates the following initiatives: (1) expansion of our radiopharmaceutical distribution network to meet market needs; (2) direct distribution of PET scanners by CTI; (3) development of new proprietary radiopharmaceuticals; (4) growth of our service contract business; and (5) addition of new products and services.

Segments

Effective October 1, 2003 we operate in three segments for financial reporting purposes: CPS; Detector Materials, and CTI Solutions. CTI Solutions reflects the combination of the former PETNET and CTI Services segments which previously were reported separately. All comparative financial information for fiscal year 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. Under this distribution agreement, CPS received and recognized revenue in an amount equal to the price to the customer and we paid Siemens a fee to cover its selling, marketing, and distribution costs. These fees were reported as costs of revenues and selling expenses in our consolidated statements of operations. Under this agreement, CPS set the price to the end customer, had ultimate liability to the end customer for product performance, and retained credit risk associated with sales to end customers.

In April 2001 we implemented a multiple distributor strategy for CPS by commencing direct distribution through our CTI Solutions segment and 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. Following our implementation of the multiple distributor strategy, CPS began receiving and recording revenue from sales made

through third-party distributors in an amount equal to the price to the distributor and ceased paying fees to distributors to cover their selling, marketing and distribution costs. Under these agreements, CPS sets the price to distributors who set their own price to the end customer. CPS does not bear credit risk associated with sales made by the distributor to end customers.

The scanners manufactured by CPS have historically ranged in customer price from $800,000 to $2.4 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 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.

CTI Solutions

Our CTI Solutions segment includes CTI’s direct distribution of PET scanners manufactured by CPS; the manufacture, sale and installation of cyclotrons, Mirada MVS workstations, calibration sources; and CTI’s product service division. The CTI Solutions segment also consists of our business of developing, manufacturing and distributing radiopharmaceuticals as well as providing certain PET related services such as reimbursement education, radiation safety consulting, licensure assistance and marketing assistance. CTI Solutions conducts the radiopharmaceutical related business through our PETNET subsidiary.

We currently operate 41 PETNET radiopharmacies in the U.S. and 1 radiopharmacy in the United Kingdom. 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 42 radiopharmacies include four radiopharmacies we do not consolidate, as the Company does not have control over significant operating decisions.

Components of Revenues and Expenses

Revenues

Our revenue is derived primarily from sales of PET products and services. Revenue for scanners, detector materials, radiopharmaceuticals, calibration sources and spare parts is 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 EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, revenue for cyclotron systems is recognized upon shipment of the equipment 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, detector materials, calibration sources and spare parts are manufactured at our facilities in Knoxville and Rockford, Tennessee. Our radiopharmaceuticals are manufactured at 42 PETNET 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 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.

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						Six Months Ended
	March 31,						March 31,
	2004			2003			2004			2003
	(unaudited)						(unaudited)
Revenues:
CPS	$	69.9		$	51.6		$	125.4		$	87.3
Detector Materials		15.5			15.0			27.6			28.3
CTI Solutions		47.2			41.6			84.9			71.3
Intercompany eliminations		(26.3	)		(26.3	)		(57.5	)		(44.4	)

Total		106.3			81.9			180.4			142.5

Cost of revenues:
CPS		48.7			33.5			86.6			56.3
Detector Materials		5.8			8.6			10.2			16.8
CTI Solutions		36.5			32.5			65.1			53.3
Intercompany eliminations		(25.9	)		(25.3	)		(53.1	)		(44.4	)

Total		65.1			49.3			108.8			82.0

Selling, general and administrative expenses:
CPS		4.2			2.6			8.8			5.1
Detector Materials		1.1			0.9			1.8			1.3
CTI Solutions		11.2			9.1			22.0			18.1
Corporate		(0.3	)		(0.2	)		(0.7	)		0.1

Total		16.2			12.4			31.9			24.6

Research and development expenses:
CPS		5.2			4.9			11.8			9.1
Detector Materials		0.1			0.2			0.4			0.5
CTI Solutions		3.4			2.4			6.5			4.5
Corporate		(0.1	)		—			(0.2	)		—

Total		8.6			7.5			18.5			14.1

Stock-based compensation:
CPS		0.1			0.1			0.2			0.2
CTI Solutions		0.2			0.1			0.5			0.4
Corporate		0.3			0.1			0.4			0.3

Total		0.6			0.3			1.1			0.9

Income (loss) from operations:
CPS		11.7			10.5			18.0			16.6
Detector Materials		8.5			5.3			15.2			9.7
CTI Solutions		(4.1	)		(2.5	)		(9.2	)		(5.0	)
Corporate		(0.3	)		(0.9	)		(3.9	)		(0.4	)

Total	$	15.8		$	12.4		$	20.1		$	20.9

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						Six Months Ended
	March 31,						March 31,
	2004			2003			2004			2003
	(unaudited)						(unaudited)
CPS:
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenues		69.7			64.9			69.1			64.5
Selling, general and administrative		6.0			5.0			7.0			5.9
Research and development		7.4			9.5			9.4			10.4
Stock-based compensation		0.2			0.2			0.2			0.2
Income from operations		16.7			20.4			14.3			19.0
Detector Materials:
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenues		37.4			57.4			37.0			59.3
Selling, general and administrative		7.1			6.0			6.5			4.6
Research and development		0.7			1.3			1.4			1.8
Income from operations		54.8			35.3			55.1			34.3
CTI Solutions:
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenues		77.3			78.1			76.6			74.7
Selling, general and administrative		23.7			21.9			25.9			25.4
Research and development		7.2			5.8			7.7			6.3
Stock-based compensation		0.4			0.2			0.6			0.6
Income (loss) from operations		(8.6	)		(6.0	)		(10.8	)		(7.0	)

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						Six Months Ended
	March 31,						March 31,
	2004			2003			2004			2003
	(unaudited)						(unaudited)
Revenues:
CPS		65.7	%		63.0	%		69.5	%		61.3	%
Detector Materials		14.6			18.3			15.3			19.8
CTI Solutions		44.4			50.8			47.1			50.0
Intercompany eliminations		(24.7	)		(32.1	)		(31.9	)		(31.1	)

Total		100.0	%		100.0	%		100.0	%		100.0	%

Income (loss) from operations:
CPS		74.0	%		84.7	%		89.6	%		79.4
Detector Materials		53.8			42.7			75.6			46.4
CTI Solutions		(25.9	)		(20.2	)		(45.8	)		(23.9	)
Corporate		(1.9	)		(7.2	)		(19.4	)		(1.9	)

Total		100.0	%		100.0	%		100.0	%		100.0	%

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

Revenues

Net revenues for the three months ended March 31, 2004 were $106.3 million, an increase of $24.4 million, or 29.8%, from $81.9 million for the three months ended March 31, 2003.

CPS. Revenues for the three months ended March 31, 2004 were $69.9 million, an increase of $18.3 million, or 35.5%, from $51.6 million for the three months ended March 31, 2003. The increase in revenues was driven by an increase in average unit prices and an increase in unit sales of scanners. The increase in average unit prices was due to a shift in sales mix from PET to PET/CT units. Intersegment revenues accounted for 13.3% and 21.2% of total CPS revenues for the three months ended March 31, 2004 and 2003, respectively. The decrease in intersegment revenues resulted from reduced sales to CTI Solutions under the multiple distributor arrangement.

Detector Materials. Revenues for the three months ended March 31, 2004 were $15.5 million, an increase of $0.5 million, or 3.3%, from $15.0 million for the three months ended March 31, 2003. The increase in revenues was primarily attributable to the shift in sales mix from BGO to LSO detector materials which carry higher sales prices. Intersegment sales accounted for 98.6% and 92.7% of total detector materials revenues for the three months ended March 31, 2004 and 2003, respectively.

CTI Solutions. Revenues for the three months ended March 31, 2004 were $47.2 million, an increase of $5.6 million, or 13.5%, from $41.6 million for the three months ended March 31, 2003. The increase in revenues was due to an increase in average unit prices resulting from the shift in sales mix from PET to higher priced PET/CT units as well as growth of FDG dose shipments driven by the continued increase in PET utilization. CTI Solutions delivered approximately 60.2% more doses, excluding doses sold to hosts and doses sold by unconsolidated radiopharmacies, during the three months ended March 31, 2004 compared to the three months ended March 31, 2003. The impact on revenue resulting from the increase in doses delivered was partially offset by a decrease in average revenue per dose.

Intercompany Eliminations. Intercompany revenues that were eliminated in consolidation were $26.3 million for the three months ended March 31, 2004 and 2003.

Cost of Revenues

Cost of revenues for the three months ended March 31, 2004 was $65.1 million, an increase of $15.8 million, or 32.0%, from $49.3 million for the three months ended March 31, 2003. Cost of revenues for the three months ended March 31, 2004 was 61.2% of revenues compared to 60.2% for the three months ended March 31, 2003.

CPS. Cost of revenues for the three months ended March 31, 2004 was $48.7 million, an increase of $15.2 million, or 45.4%, from $33.5 million for the three months ended March 31, 2003. Cost of revenues for the three months ended March 31, 2004 increased to 69.7% of revenues compared to 64.9% of revenues for the three months ended March 31, 2003 due to the increase in sales mix from PET to PET/CT units which carry higher manufacturing costs as a percentage of the sales price.

Detector Materials. Cost of revenues for the three months ended March 31, 2004 was $5.8 million, a decrease of $2.8 million, or 32.6%, from $8.6 million for the three months ended March 31, 2003. Cost of revenues for the three months ended March 31, 2004 decreased to 37.4% of revenues as compared to 57.4% of revenues for the three months ended March 31, 2003. The decrease in cost of revenues as a percentage of revenues was due to the shift in sales mix from BGO to LSO detector materials which carry higher sales prices, in conjunction with increasing efficiency and production improvements.

CTI Solutions. Cost of revenues for the three months ended March 31, 2004 was $36.5 million, an increase of $4.0 million, or 12.3%, from $32.5 million for the three months end March 31, 2003. Cost of revenues for the three months ended March 31, 2004 was 77.3% of revenues compared to 78.1% of revenues for the three months ended March 31, 2003. The decrease in cost of revenues as a percentage of revenues was due to the increase in FDG revenues resulting from the significant increases in external doses compared to the prior year, and increased utilization of productive capacity.

Intercompany Eliminations. Intercompany cost of revenues that were eliminated in consolidation for the three months ended March 31, 2004 were $25.9 million, an increase of $0.6 million, or 2.4%, from $25.3 million for the three months ended March 31, 2003. Cost of revenues eliminated for the three months ended March 31, 2004 were 24.4% of revenues compared to 30.9% of revenues for three months ended March 31, 2003. The decrease in intercompany eliminations as a percentage of revenues primarily results from fewer purchases of scanners by CTI Solutions from CPS for direct distribution sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended March 31, 2004 were $16.2 million, an increase of $3.8 million, or 30.6%, from $12.4 million for the three months ended March 31, 2003. Selling, general and administrative expenses for the three months ended March 31, 2004 were 15.2% of revenues compared to 15.1% of revenues for the three months ended March 31, 2003.

CPS. Selling, general and administrative expenses for the three months ended March 31, 2004 were $4.2 million, an increase of $1.6 million, or 61.5%, from $2.6 million for the three months ended March 31, 2003. Selling, general and administrative expenses for the three months ended March 31, 2004 were 6.0% of revenues compared to 5.0% of revenues for the three months ended March 31, 2003. The increase is primarily attributable to promotional expenses related to the product launch of LSO Hi-REZ PET/CT scanners.

Detector Materials. Selling, general and administrative expenses for the three months ended March 31, 2004 were $1.1 million, an increase of $0.2 million, or 22.2%, from $0.9 million for the three months ended March 31, 2003. As a percentage of revenues, selling, general and administrative expenses were 7.1% and 6.0% for the three months ended March 31, 2004 and 2003, respectively.

CTI Solutions. Selling, general and administrative expenses for the three months ended March 31, 2004 were $11.2 million, an increase of $2.1 million, or 23.1%, from $9.1 million for the three months ended March 31, 2003 due to increased sales and administrative personnel. As a percentage of revenues, selling, general and administrative expenses for the three months ended March 31, 2004 were 23.7% compared to 21.9% for the three months ended March 31, 2003.

Research and Development Expenses

Research and development expenses for the three months ended March 31, 2004 were $8.6 million, an increase of $1.1 million, or 14.7%, from $7.5 million for the three months ended March 31, 2003. Research and development expenses for the three months ended March 31, 2004 were 8.1% of revenues compared to 9.2% for the three months ended March 31, 2003.

CPS. Research and development expenses for the three months ended March 31, 2004 were $5.2 million, an increase of $0.3 million, or 6.1%, from $4.9 million for the three months ended March 31, 2003. Research and development expenses for the three months ended March 31, 2004 were 7.4% of revenues compared to 9.5% for the three months ended March 31, 2003. The increase in the amount of the expenses incurred resulted from additional investments in new scanner technology, such as LSO Hi-REZ PET/CT scanners. The decrease in the expenses as a percentage of revenues arose because of the significant increase in revenues and a substantial portion of the costs associated with the LSO Hi-REZ development being incurred in the first quarter of 2004.

Detector Materials. Research and development expenses for the three months ended March 31, 2004 were $0.1 million, a decrease of $0.1 million, or 50.0%, from $0.2 million for the three months ended March 31, 2003. Research and development expenses for the three months ended March 31, 2004 were 0.7% of revenues compared to 1.3% for the three months ended March 31, 2003. The decrease occurred due to the timing of underlying projects.

CTI Solutions. Research and development expenses for the three months ended March 31, 2004 were $3.4 million, an increase of $1.0 million, or 41.7%, from $2.4 million for the three months ended March 31, 2003. Research and development expenses for the three months ended March 31, 2004 were 7.2% of revenues compared to 5.8% for the three months ended March 31, 2003. The increase was primarily due to the software development activities of Mirada Solutions Limited following its acquisition in August 2003 and increased spending on new molecular probe technology.

Stock-based Compensation Expense

Stock-based compensation expense for the three months ended March 31, 2004 was $0.6 million, an increase of $0.3 million, or 100.0% from $0.3 million for the three months ended March 31, 2003, and reflects the amortization of unearned compensation arising from the issuance of stock options with exercise prices below the fair market value of our common stock on the grant dates. Stock-based compensation expense for the three months ended March 31, 2004 increased to 0.6% of revenues compared to 0.4% for the three months ended March 31, 2003, as the prior year amount was reduced by forfeitures of stock options held by terminated employees.

Income (Loss) from Operations

Income from operations for the three months ended March 31, 2004 was $15.8 million, an increase of $3.4 million, or 27.4%, from $12.4 million for the three months ended March 31, 2003. Income from operations for the three months ended March 31, 2004 was 14.9% of revenues compared to 15.1% for the three months ended March 31, 2003.

CPS. Income from operations for the three months ended March 31, 2004 was $11.7 million, an increase of $1.2 million, or 11.4%, from $10.5 million for the three months ended March 31, 2003. Income from operations for the three months ended March 31, 2004 was 16.7% of revenues compared to 20.4% for the three months ended March 31, 2003. This decrease in operating profit margins results primarily from increased PET/CT sales which carry lower gross margins as well as higher promotional expenses.

Detector Materials. Income from operations for the three months ended March 31, 2004 was $8.5 million, an increase of $3.2 million, or 60.4%, from $5.3 million for the three months ended March 31, 2003. Income from operations for the three months ended March 31, 2004 was 54.8% of revenues compared to 35.3% for the three months ended March 31, 2003. The increase was primarily due to higher gross margins from the shift in sales mix from BGO to LSO detector materials, in conjunction with increased operating efficiencies and production improvements.

CTI Solutions. There was a loss from operations for the three months ended March 31, 2004 of $4.1 million, an increase of $1.6 million, or 64.0% from the loss of $2.5 million for the three months ended March 31, 2003. The loss from operations was primarily due to our continuing efforts to develop our business as a direct distributor of PET and PET/CT scanners.

Corporate. Loss from operations for the three months ended March 31, 2004 was $0.3 million, a decrease of $0.6 million, or 66.7%, from a loss from operations of $0.9 million for the three months ended March 31, 2003. The majority of this fluctuation 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 CTI Solutions at each period end.

Interest Expense, Net

Interest expense for the three months ended March 31, 2004 was $0.3 million, an increase of $0.1 million, or 50.0%, from $0.2 million for the three months ended March 31, 2003. The increase resulted from stable interest expense attributable to capital leases offset by lower interest income due to lower interest rates earned on cash balances and a reduced average cash position as an increased portion of the funds from our initial public offering have been deployed.

Other Income

Other income for the three months ended March 31, 2004, was $0.1 million, a decrease of $0.1 million, or 50.0%, from $0.2 million for the three months ended March 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 March 31, 2004 was $5.9 million, an increase of $1.3 million, or 28.3%, from $4.6 million for the three months ended March 31, 2003. The effective tax rate for the three months ended March 31, 2004 was 38.1%. The effective tax rate for the three-month period ended March 31, 2003 was 37.0%. The increase in the effective tax rate is due primarily to start-up operating losses in foreign subsidiaries.

Minority Interests

The minority interest expense for the three months ended March 31, 2004 was $3.9 million, an increase of $0.6 million, or 18.2%, from $3.3 million for the three months ended March 31, 2003. Minority interest expense primarily consists of Siemens’ 49.9% share of the net income of CPS.

Six Months Ended March 31, 2004 Compared to Six Months Ended March 31, 2003

Revenues

Net revenues for the six months ended March 31, 2004 were $180.4 million, an increase of $37.9 million, or 26.6%, from $142.5 million for the six months ended March 31, 2003.

CPS. Revenues for the six months ended March 31, 2004 were $125.4 million, an increase of $38.1 million, or 43.6%, from $87.3 million for the six months ended March 31, 2003. The increase in revenues was driven by an increase in average unit prices and an increase in unit sales of scanners. The increase in average unit prices was due to a shift in sales mix from PET to PET/CT units. Intersegment revenues accounted for 21.7% and 16.9% of total CPS revenues for the six months ended March 31, 2004 and 2003, respectively. The increase in intersegment revenues resulted from increased sales to CTI Solutions under the multiple distributor arrangement.

Detector Materials. Revenues for the six months ended March 31, 2004 were $27.6 million, a decrease of $0.7 million, or 2.5%, from $28.3 million for the six months ended March 31, 2003. The decrease in revenues was primarily attributable to the timing of CPS scanner production and detector material inventory levels and to decreased third party sales. These decreases were offset by higher sales prices resulting from the shift in sales mix from BGO to LSO detector materials. Intersegment sales accounted for 99.1% and 94.4% of total detector materials revenues for the six months ended March 31, 2004 and 2003, respectively.

CTI Solutions. Revenues for the six months ended March 31, 2004 were $84.9 million, an increase of $13.6 million, or 19.1%, from $71.3 million for the six months ended March 31, 2003. The increase in revenues was due to an increase in average unit prices resulting from the shift in sales mix from PET to higher priced PET/CT units as well as growth of FDG dose shipments driven by the continued increase in PET utilization. CTI Solutions delivered approximately 55.5% more doses, excluding doses sold to hosts and doses sold by unconsolidated radiopharmacies, during the six months ended March 31, 2004 compared to the six months ended March 31, 2003. The impact on revenue resulting from the increase in doses delivered was partially offset by a decrease in average revenue per dose.

Intercompany Eliminations. Intercompany revenues that were eliminated in consolidation for the six months ended March 31, 2004 were $57.5 million, an increase of $13.1 million, or 29.5%, from $44.4 million in the six months ended March 31, 2003. The increase in revenue eliminations was due to increased purchases by CTI Solutions of PET and PET/CT scanners and related products from CPS due to the increase in sales activities and growth in backlog or orders.

Cost of Revenues

Cost of revenues for the six months ended March 31, 2004 was $108.8 million, an increase of $26.8 million, or 32.7%, from $82.0 million for the six months ended March 31, 2003. Cost of revenues for the six months ended March 31, 2004 was 60.3% of revenues compared to 57.5% for the six months ended March 31, 2003.

CPS. Cost of revenues for the six months ended March 31, 2004 was $86.6 million, an increase of $30.3 million, or 53.8%, from $56.3 million for the six months ended March 31, 2003. Cost of revenues for the six months ended March 31, 2004 increased to 69.1% of revenues compared to 64.5% of revenues for the six months ended March 31, 2003 due to the change in sales mix from PET to PET/CT units which carry higher manufacturing costs as a percentage of the sales price.

Detector Materials. Cost of revenues for the six months ended March 31, 2004 was $10.2 million, a decrease of $6.6 million, or 39.3%, from $16.8 million for the six months ended March 31, 2003. Cost of revenues for the six months ended March 31, 2004 decreased to 37.0% of revenues as compared to 59.3% of revenues for the six months ended March 31, 2003. The decrease in cost of revenues as a percentage of revenues was due to the shift in sales mix from BGO to LSO detector materials which carry higher sales prices, and increasing efficiency and production improvements.

CTI Solutions. Cost of revenues for the six months ended March 31, 2004 was $65.1 million, an increase of $11.8 million, or 22.1%, from $53.3 million for the six months end March 31, 2003. Cost of revenues for the six months ended March 31, 2004 was 76.6% of revenues compared to 74.7% of revenues for the six months ended March 31, 2003. The increase in cost of revenues as a percentage of revenues results from the sales mix including a larger portion of direct distribution scanner sales which have a lower gross margin than sales of FDG doses, cyclotrons, and service contracts.

Intercompany Eliminations. Intercompany cost of revenues that were eliminated in consolidation for the six months ended March 31, 2004 were $53.1 million, an increase of $8.7 million, or 19.6%, from $44.4 million for the six months ended March 31, 2003. Cost of revenues eliminated for the six months ended March 31, 2004 were 29.4% of revenues compared to 31.2% of revenues for six months ended March 31, 2003. The decrease in intercompany eliminations as a percentage of revenues primarily results from increased third party revenue from FDG dose sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the six months ended March 31, 2004 were $31.9 million, an increase of $7.3 million, or 29.7%, from $24.6 million for the six months ended March 31, 2003. Selling, general and administrative expenses for the six months ended March 31, 2004 were 17.7% of revenues compared to 17.3% of revenues for the six months ended March 31, 2003.

CPS. Selling, general and administrative expenses for the six months ended March 31, 2004 were $8.8 million, an increase of $3.7 million, or 72.5%, from $5.1 million for the six months ended March 31, 2003. Selling, general and administrative expenses for the six months ended March 31, 2004 were 7.0% of revenues compared to 5.9% of revenues for the six months ended March 31, 2003. The increase is primarily attributable to promotional expenses related to new product launches, including LSO Hi-REZ PET/CT scanners.

Detector Materials. Selling, general and administrative expenses for the six months ended March 31, 2004 were $1.8 million, an increase of $0.5 million, or 38.5%, from $1.3 million for the six months ended March 31, 2003. As a percentage of revenues, selling, general and administrative expenses were 6.5% and 4.6% for the six months ended March 31, 2004 and 2003, respectively.

CTI Solutions. Selling, general and administrative expenses for the six months ended March 31, 2004 were $22.0 million, an increase of $3.9 million, or 21.5%, from $18.1 million for the six months ended March 31, 2003. The increase is attributable to increased promotional expenses related to new product launches. As a percentage of revenues, selling, general and administrative expenses for the six months ended March 31, 2004 were 25.9% compared to 25.4% for the six months ended March 31, 2003. The increase is attributable to increased promotional expenses related to new product launches and our efforts to develop international distribution and service businesses.

Research and Development Expenses

Research and development expenses for the six months ended March 31, 2004 were $18.5 million, an increase of $4.4 million, or 31.2%, from $14.1 million for the six months ended March 31, 2003. Research and development expenses for the six months ended March 31, 2004 were 10.3% of revenues compared to 9.9% for the six months ended March 31, 2003.

CPS. Research and development expenses for the six months ended March 31, 2004 were $11.8 million, an increase of $2.7 million, or 29.7% from $9.1 million for the six months ended March 31, 2003. Research and development expenses for the six months ended March 31, 2004 were 9.4% of revenues compared to 10.4% for the six months ended March 31, 2003. The increase resulted from additional investments in new scanner technologies, such as our LSO Hi-REZ PET/CT scanners.

Detector Materials. Research and development expenses for the six months ended March 31, 2004 were $0.4 million, a decrease of $0.1 million, or 20.0%, from $0.5 million for the six months ended March 31, 2003. Research and development expenses for the six months ended March 31, 2004 were 1.4% of revenues compared to 1.8% for the six months ended March 31, 2003.

CTI Solutions. Research and development expenses for the six months ended March 31, 2004 were $6.5 million, an increase of $2.0 million, or 44.4%, from $4.5 million for the six months ended March 31, 2003. Research and development expenses for the six months ended March 31, 2004 were 7.7% of revenues compared to 6.3% for the six months ended March 31, 2003. The increase was primarily due to the software development activities of Mirada Solutions Limited following its acquisition in August 2004 and increased spending on new molecular probe technology.

Stock-based Compensation Expense

Stock-based compensation expense for the six months ended March 31, 2004 was $1.1 million, an increase of $0.2 million, or 22.2% from $0.9 million for the six months ended March 31, 2003, and reflects the amortization of unearned compensation arising from the issuance of stock options with exercise prices below the fair market value of our common stock on the grant dates. Stock-based compensation expense for the six months ended March 31, 2004 and 2003 was 0.6% of revenues. Stock-based compensation was less in 2003 due to forfeiture of stock options held by terminated employees.

Income (Loss) from Operations

Income from operations for the six months ended March 31, 2004 was $20.1 million, a decrease of $0.8 million, or 3.8%, from $20.9 million for the six months ended March 31, 2003. Income from operations for the six months ended March 31, 2004 was 11.1% of revenues compared to 14.7% for the six months ended March 31, 2003.

CPS. Income from operations for the six months ended March 31, 2004 was $18.0 million, an increase of $1.4 million, or 8.4%, from $16.6 million for the six months ended March 31, 2003. Income from operations for the six months ended March 31, 2004 was 14.3% of revenues compared to 19.0% for the six months ended March 31, 2003. This decrease in operating profit margins results primarily from increased PET/CT sales which carry lower gross margins and higher promotional expenses during the six months ended March 31, 2004.

Detector Materials. Income from operations for the six months ended March 31, 2004 was $15.2 million, an increase of $5.5 million, or 56.7%, from $9.7 million for the six months ended March 31, 2003. The increase was primarily due to higher gross margins from the shift in sales mix from BGO to LSO detector materials, in conjunction with increased operating efficiencies and production improvements. Income from operations for the six months ended March 31, 2004 was 55.1% of revenues compared to 34.3% for the six months ended March 31, 2003.

CTI Solutions. There was a loss from operations for the six months ended March 31, 2004 of $9.2 million, an increase of $4.2 million, or 84.0% from the loss of $5.0 million for the six months ended March 31, 2003. The loss from operations was primarily due to our continuing efforts to develop our business as a direct distributor of PET and PET/CT scanners.

Corporate. Loss from operations for the six months ended March 31, 2004 was $3.9 million, an increase of $3.5 million, from a loss from operations of $0.4 million for the six months ended March 31, 2003. The majority of this fluctuation 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 CTI Solutions at each period end.

Interest Expense, Net

Interest expense for the six months ended March 31, 2004 was $0.8 million, an increase of $0.5 million, from $0.3 million for the six months ended March 31, 2003. The increase resulted from stable interest expense attributable to capital leases partially offset by lower interest income due to decreased interest rates on cash balances and a reduced average cash position as an increased portion of the funds from our initial public offering have been deployed.

Other Income

Other income for the six months ended March 31, 2004, was $0.8 million, an increase of $0.1 million, or 14.3%, from $0.7 million for the six months ended March 31, 2003. The increase is primarily attributable to increases in income from equity investees.

Provision for Income Taxes

The income tax provision for the six months ended March 31, 2004 was $7.6 million, a decrease of $0.5 million, or 6.2%, from $8.1 million for the six months ended March 31, 2003. The effective tax rate for the six months ended March 31, 2004 was 38.0%, while the effective tax rate for the six month period ended March 31, 2003 was 37.9%.

Minority Interests

The minority interest expense for the six months ended March 31, 2004 was $6.0 million, an increase of $0.7 million, or 13.2% from $5.3 million for the six months ended March 31, 2003. Minority interest expense primarily consists of Siemens’ 49.9% share of the net income of CPS.

Liquidity and Capital Resources

In June 2002 we consummated our initial public offering of common stock and we received net proceeds of approximately $171.4 million. Historically, our principal sources of liquidity had been borrowings under credit facilities, capital leases and the issuance of redeemable preferred stock. Our principal liquidity requirements are to meet the working capital and capital expenditure needs of our expanding business.

Our working capital and capital expenditure needs have increased in order to support the growth in our business and due to the seasonality of our revenues. For example, from September 30, 2003 to March 31, 2004, our inventories increased from $70.9 million to $90.9 million while our total accounts receivable decreased from $114.7 million to $80.4 million, both due to the seasonal nature of our business. Our property and equipment (net) increased from $107.3 million to $119.3 million during this same period.

On September 30, 2002 we entered into an amended and restated credit agreement with a syndicate of banks agented by SunTrust Bank. 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.

The credit agreement makes available to us up to $125 million in revolving loans, with a $10 million sub-limit for letters of credit. 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). As of March 31, 2004 no balance was outstanding under the credit agreement.

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 $0.9 at March 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 guarantees 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).

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% on the first $25 million of transactions and 5.0% once $50 million in transactions is achieved, of the principal balance of all leases DLL executes on the Company’s behalf. At March 31, 2004, the Company had recorded a reserve of $0.2 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.

In August 2003 our primary financing source for the sales of PET scanners, DVI Financial Services, Inc. (DVI), entered into bankruptcy. As a result, in September 2003, we entered into a new financing program with DLL. During the period following DVI entering into bankruptcy and execution of the DLL agreement, we provided direct financing to four of our customers for a total of $9.0 million. By March 31, 2004 all four leases had been sold to DLL and payment had been received in full.

We anticipate that our current cash and cash equivalents balances and our 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 as they come due. The Company may from time to time evaluate the benefits of raising additional debt or equity capital.

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

Six months ended March 31, 2004 compared to six months ended March 31, 2003

Net cash provided by operating activities was $27.7 million and $1.4 million for the six months ended March 31, 2004 and 2003, respectively. The increase in net cash provided by operating activities was primarily due to collections on accounts receivable, net of cash used to build inventory balances.

Net cash used in investing activities during the six months ended March 31, 2004 and 2003 was $11.4 million and $16.1 million, respectively. The decrease in cash used for investing activities was due to cash received for the sale of four lease receivables to DLL, offset by increased capital expenditures.

Net cash used by financing activities during the six months ended March 31, 2004 was $9.9 million compared to net cash provided of $5.4 million in 2003. The decrease in cash from financing activities is primarily due to settling vendor invoices for material purchased to support previous quarter sales. Further, proceeds from the exercise of stock options decreased from the prior year.

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. Actual results may differ from these estimates under different assumptions or conditions.

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

Revenue Recognition

The Company records revenues in accordance with the guidance of the SEC’s Staff Accounting Bulletin No. 104 (SAB 104), which supersedes SAB 101 in order to encompass EITF Issue 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21). 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.

and associated training services and are sometimes employed by CTI to do so). The Company determines the value of the equipment and installation and training services based on sales of the equipment both with and without installation and training. The Company derives its revenues from sales of scanners, calibration sources, spare parts, detector materials, cyclotrons, radiopharmaceuticals and the provision of services on equipment sold, including site planning and installation, repair and maintenance, training, technical support and assistance with licensing. Revenues derived from the sale of scanners, calibration sources, spare parts, and detector materials are recognized upon either shipment or arrival at destination depending on shipment terms.

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. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Due to our adoption of the provisions of EITF 00-21 the Company can now, for cyclotron arrangements entered into after July 1, 2003, separate cyclotron equipment from cyclotron installation services and recognize revenue for cyclotron equipment upon shipment and for cyclotron installation as services are performed. Prior to the implementation of EITF 00-21, the Company recognized revenue for all cyclotron sales in accordance with SAB 101 and did not recognize revenue for cyclotron system sales until installation was complete and customer acceptance was obtained, as functionality was deemed essential for cyclotrons. In accordance with transition provisions of EITF 00-21, revenue recognition for any cyclotron system sales, for which contracts were entered into prior to July 1, 2003 will continue to be accounted for under SAB 104 and revenue recognition will be deferred until installation is complete and customer acceptance is obtained.

Valuation of Goodwill

On October 1, 2001, we adopted Statement of Financial Accounting Standards 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. The annual impairment test was conducted and it did not result in any impairment charges. While we no longer record monthly amortization expense for goodwill, future events and changes in circumstances may require us to record an impairment charge in any given period. Significant judgment is involved in determining whether and to what extent any impairment has occurred.

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. The Company determines accounting for these investments in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46(R) (FIN 46(R)), Statement of Financial Accounting Standard (SFAS) No. 94 and Accounting Principles Board (APB) Opinion No. 18 and, where appropriate, evaluates its and the minority shareholders’ participating rights in accordance with Emerging Issues Task Force (EITF) Issue 96-16 to determine whether consolidation or equity method accounting is appropriate in each case.

by FIN 46(R), the Company will continue 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.

Recent Accounting Pronouncements

Consolidation of Variable Interest Entities

On January 17, 2003, the FASB issued FIN 46(R), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51 Consolidated Financial Statements. FIN 46(R) expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is any legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. Previously, one company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46(R) changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The adoption of FIN 46(R) did result in the identification of the Company as a primary beneficiary in one variable interest entity as defined by FIN 46(R). However, as the variable interest entity was already included in our consolidated financial statements the adoption of FIN 46(R) did not have a significant impact on the Company’s financial statements.

Revenue Recognition

On December 17, 2003, the Staff of the Securities and Exchange Commission (SEC) issued SAB 104, Revenue Recognition, which supersedes SAB 101, Revenue Recognition in Financial Statements. SAB 104’s primary purpose is to supplement accounting guidance contained in SAB 101 related to multiple element arrangements, superseded as a result of the issuance of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (EITF 00-21). The guidance contained in SAB 104 reflects the issuance of EITF 00-21, but the revenue recognition principles remaining largely unchanged. As the Company has already incorporated EITF 00-21 and SAB 101, into its revenue recognition policies, the adoption of SAB 104 did not have a significant impact on the Company’s financial statements.

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 in connection with the service and support of the PET and PET/CT scanners manufactured by CPS. The intense and increasing competition in the molecular imaging equipment market have caused and may continue to cause downward pressure on the pricing of our molecular imaging equipment. In our radiopharmaceutical business, we compete with for-profit corporations, such as Cardinal Health, Inc. (which acquired Syncor International Corporation) 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 has 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.

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 may be 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. In connection with one of these routine adjustments, CMS has proposed to slightly increase the reimbursement rates for the use of a PET scanners and the administration of FDG. In the future, Medicare reimbursement rates for these and other PET applications may be subject to reevaluation by CMS and could be subject to further adjustments.

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 we expect it to grow.

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 and six month periods ending March 31, 2004 and 2003, approximately 57.0% and 63.0%, and 54.4% and 61.3%, 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 March 31, 2004, the cumulative total number of units sold by CPS under this agreement was 769 and, at such date, CPS would need to have sold a cumulative total of 1,055 units to achieve the required cumulative sales level for the option to be exercisable. After 2003, the cumulative unit sales requirement will continue to increase by 74 units each year thereafter. It is impossible to state definitively when the option will become exercisable. However, based upon our current forecasts, we believe that the minimum sales volume will by the end of fiscal year 2005. Once these sales volumes are achieved, 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.

In the event Siemens acquires 100% of CPS, we would continue to have a right to distribute PET and PET/CT products manufactured by CPS until at least 2010 pursuant to the terms of a distribution agreement between us and CPS. 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 March 31, 2004, approximately 35.0% of our total assets were 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.

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 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 months ended March 31, 2004, sales through Siemens constituted 50.2% of our consolidated revenues. If we fail to sell a large volume of our scanners through 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 CTI to cease its direct distribution of PET and PET/CT scanners, with the exception of certain rights retained in Korea and Japan. In compliance with this agreement, CTI has ceased its direct distribution of CPS’ scanner products and has terminated its sub-distribution agreements outside of the U.S. as required, yet retained those agreements as permitted in Korea and Japan. Following this change, our dependence on our third-party distributors, especially Siemens, will increase.

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;

• Respond effectively to demands of aging equipment and issues of technology obsolescence;

• 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 March 31, 2004, we have thirty-two (32) issued U.S. patents and forty (40) 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 Solutions Limited. 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, which is expected in October 2008. 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, nineteen (19) 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 (FDA), 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 requirements, labeling and promotional requirements and medical device adverse event reporting requirements. Our failure to satisfy these requirements could result in, among other things, warning letters, fines, injunctions, civil penalties, repairs, replacements, refunds, recalls or seizures of products, total or partial suspension of production, 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 an 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) clearance. The FDA requires every manufacturer to make this determination, but the FDA 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 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 PETNET 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 new drug applications (NDAs) or abbreviated new drug applications (ANDAs) and 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 an 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 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 has 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 predict when the FDA will finalize these regulations, but we expect that this will take place before the end of calendar year 2004. If so, the FDA authority and the proposed approval procedures and current good manufacturing practice requirements would likely not take effect until calendar year 2006 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 proposed current good manufacturing practice requirements for PET drug products, we cannot predict with certainty the precise effects that these requirements might have on our business, financial condition, and results of operations.

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

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

Our scanners and radiopharmaceutical business require the use of chemicals and 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 chemical and radioactive materials comply in all material respects with the standards prescribed by law and regulation and although we maintain insurance coverage for these risks, we cannot completely eliminate the risks 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 substantially in the foreseeable future as we:

• 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;

• The timing, market acceptance and development costs of new product introductions and product enhancements 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; and

• The loss of key sales personnel or distributors.

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 relationship with a third party financing source, De Lange Landen (DLL), who offers financing services to our customers. Our business, operations and financial condition could be adversely impacted if DLL 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 14.3% and 33.1%, and 16.5% and 25.5%, respectively, of sales in the three month and six month periods ending March 31, 2004 and 2003. Our sales in the U.S. have grown rapidly as a result of a significant expansion in the U.S. market for PET products and services and our expanded product line. 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, 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. In some cases, components may go out of production and cannot be effectively replaced. 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 efforts to develop 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 whom 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 31.5% of our common stock as of March 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 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 dictate 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 could be favorable to our investors.

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 may be volatile.

The market price for the common stock may 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 in value, and these 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 disease;

• 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, our industrial revenue bonds, mortgage loan and a building construction loan. These borrowings bear interest at variable rates. Based on our outstanding borrowings during the three month period ended March 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 March 31, 2004 we had cash and cash equivalents of $56.1 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 14.3% and 33.1% and 16.5% and 25.5%, respectively, of total revenues for the three month and six month periods ended March 31, 2004. The Company is exposed to foreign exchange rate fluctuations as the financial results of its international subsidiaries are translated into U.S. dollars in consolidation and as U.S. dollar denominated long-term debt in our international subsidiaries is revalued. As exchange rates vary, these results when translated may vary from expectations and adversely impact overall expected profitability. A 10% increase in the value of the U.S. dollar relative to other currencies would result in transaction losses and increase long-term debt by approximately $0.3 million. Due to the long-term nature of the foreign currency debt there would be no immediate cash flow impact.

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 March 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 September 19, 2002, General Electric filed a complaint against two former employees of General Electric who are now employed by CTI in the United States District Court, Eastern District of Wisconsin. The complaint alleged threatened or actual misappropriation of trade secrets, breach of contract and unfair competition. CTI was not named as a defendant in that action. The defendants answered the complaint and denied liability. On September 23, 2003, the District Court in Wisconsin granted General Electric’s motion for voluntary dismissal without prejudice, which afforded General Electric an opportunity to refile the action in another United States District Court and potentially include additional defendants in addition to the two former employees. On November 24, 2003, General Electric refiled this action in the United States District Court for the Eastern District of Tennessee, Knoxville Division, against the two employees, CTI and PETNET. The defendants filed their motion for dismissal of GE’s claims on December 15, 2003. Given the uncertainties inherent in the litigation process, we are unable to predict the ultimate outcome of this suit; however, we intend to deny the allegations and vigorously defend this action.

ITEM 2. Changes in 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 March 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 $19.6 million was used for the acquisition of our subsidiary Mirada Solutions Limited 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

CTI’s annual meeting of stockholders (the “Annual Meeting”) was held on April 6, 2004. At the Annual Meeting, CTI’s stockholders of record on March 2, 2004 were asked to take action to (a) elect three Class II directors, Michael Phelps, Ph.D., Wolf-Ekkehard Blanz, Ph.D., and Hamilton Jordan, each to serve on the Board of Directors until the Company’s annual meeting of stockholders in 2007 or until their successors have been duly elected and qualified (“Proposal One”); (b) ratify the reappointment of PricewaterhouseCoopers LLP as CTI’s independent public auditors (“Proposal Two”); and (c) approve certain amendments to the Company’s 2002 Long Term Incentive Plan to increase from 3,000,000 to 5,000,000 the number of shares of common stock available for issuance as awards under this plan, including an increase in the number of shares of restricted stock available as grants under this plan from 300,000 to 600,000 shares.

A total of 39,799,585 shares, or approximately 88.9% of CTI’s 44,792,733 issued and outstanding shares entitled to vote at the Annual Meeting as of the record date, were present in person or by proxy at the Annual Meeting.

With respect to Proposal One, a plurality of the votes cast in favor of each nominee was required for the nominees’ election as Class II director. Each of Dr. Phelps, Dr. Blanz, and Mr. Jordan received the required plurality of the votes, and each was elected as a director. With respect to each of Proposals Two and Three, a majority of the shares present and entitled to vote was necessary for the passage of such proposal, and both Proposal Two and Proposal Three were approved by such a majority.

The breakdown of the votes cast by the stockholders at the Annual Meeting was as follows:


			WITHHELD/
	FOR		AGAINST		ABSTAIN
Proposal One:
Dr. Phelps		35,600,583		4,199,002		N/A
Dr. Blanz		35,933,477		3,866,108		N/A
Mr. Jordan		37,967,309		1,832,276		N/A
Proposal Two:		39,630,590		160,018		8,977
Proposal Three:		29,627,720		3,733,150		18,860

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

* In accordance with Release No. 34-47551, this exhibit is hereby furnished to the SEC as an accompanying document and is not to be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended.

(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 March 31, 2004, as follows:

(1) Current Report on Form 8-K filed with the Commission on January 22, 2004 correcting a non-material typesetting error to a table originally appearing in the Company’s Annual Report or Form 10-K filed with the Commission on December 23, 2003; and

(2) Current Report on Form 8-K furnished to the Commission on February 3, 2004, announcing the Company’s financial results for the first quarter of its fiscal year ending September 30, 2004.


	Page
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS		3
PART I Financial Information
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets at March 31, 2004 and September 30, 2003		4
Consolidated Statements of Operations for the Three Months and Six Months Ended March 31, 2004 and 2003		5
Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2004 and 2003		6
Notes to 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		48
Item 4. Controls and Procedures		49
PART II Other Information
Item 1. Legal Proceedings		50
Item 2. Changes in Securities and Use of Proceeds		50
Item 3. Defaults Upon Senior Securities		51
Item 4. Submission of Matters to a Vote of Security Holders		51
Item 5. Other Information		52
Item 6. Exhibits and Reports on Form 8-K		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


		CTI Molecular Imaging, Inc.

		/s/ David N. Gill

		David N. Gill
		Chief Financial Officer and Senior Vice President

		May 7, 2004

	•		our expectations regarding financial condition or results of operations for periods after March 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.

•		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.

•		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;

•		Respond effectively to demands of aging equipment and issues of technology obsolescence;

•		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.

•		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.

•		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.

•		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;

•		The timing, market acceptance and development costs of new product introductions and product enhancements 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; and

•		The loss of key sales personnel or distributors.

•		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.

•		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).

•		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.”

•		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 disease;

•		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.

a)		Modification of Constituent Instruments: None

b)		Modification of Stockholder’s Rights: None

c)		Sales of Unregistered Securities: None

(1)		Current Report on Form 8-K filed with the Commission on January 22, 2004 correcting a non-material typesetting error to a table originally appearing in the Company’s Annual Report or Form 10-K filed with the Commission on December 23, 2003; and

(2)		Current Report on Form 8-K furnished to the Commission on February 3, 2004, announcing the Company’s financial results for the first quarter of its fiscal year ending September 30, 2004.