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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission File Number: 000-49867

CTI Molecular Imaging, Inc.

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value

      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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

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

      The aggregate market value of common stock held by non-affiliates of the registrant was $462,601,992 as of March 31, 2004, based upon the last sale price of such stock as reported on the Nasdaq National Market on that day (assuming for purposes of this calculation, without conceding, that all executive officers and directors are affiliates).

      There were 46,925,900 shares of common stock outstanding at December 1, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

      Parts of the registrant’s proxy statement for its 2005 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

CTI MOLECULAR IMAGING, INC.

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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 September 30, 2004;
	•	our critical accounting policies;
	•	the timing of the exercisability of the Siemens option to purchase an additional ownership interest in CTI PET Systems 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 II, Item 7 of this report under the sub-heading “Risk Factors.”

      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.

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PART I

      For convenience in this annual report, “CTI,” “we,” “us,” and “the Company” refer to CTI Molecular Imaging, Inc. and our consolidated subsidiaries, taken as a whole.

Overview

      We are a leading manufacturer of positron emission tomography imaging equipment and related molecular imaging 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 images the biology of disorders at the molecular level often before anatomical changes are visible. This allows physicians to diagnose and treat a broad range of diseases earlier and more accurately than other imaging technologies that focus on anatomic abnormalities. We provide the most comprehensive product line for PET, including scanners, cyclotrons, microPET® animal scanners, radiopharmaceuticals, detector materials, medical image analysis applications, and support services. Our business model emphasizes our focus on PET, our ability to provide a “total solution” for our customers, our proprietary technology rights and our proven track record of technological innovation.

      PET scans allow physicians to view metabolic activity on a non-invasive basis using minute quantities of injected radioactive molecules. Procedures conducted with PET technology provide information that is not available from traditional imaging technologies such as X-ray, computed tomography (CT), ultrasound and magnetic resonance imaging (MRI), where changes in body structure or anatomy must occur before an abnormality can be detected. Unlike X-ray, CT, ultrasound and MRI, PET evaluates biological and biochemical processes that precede anatomical changes or lesions from disease, thereby enabling earlier detection of diseases such as cancer and neurological disorders. PET also offers advantages in the treatment of disease due to its ability to monitor the effects of therapy at the molecular level. Our combined PET/CT scanner, which we introduced commercially in November 2001, was selected by TIME Magazine as the medical science “Invention of the Year” in 2000. This scanner combines PET and CT technologies into one device that reveals both metabolic processes and anatomical details within the body to improve image quality and localization of abnormalities as well as to guide biopsies, radiation therapy and surgical treatments.

      We believe the market for PET products and services will continue to grow for the following reasons:

	•	the increasing number of PET procedures for which Medicare and private insurance reimbursement is available;
	•	increasing recognition by physicians of the clinical advantages of PET and an increasing number of PET providers;
	•	the expansion of PET applications beyond the diagnosis of disease and into the monitoring of disease therapy;
	•	the discovery of additional clinical applications for PET;
	•	the aging of the population and the resultant increasing number of patients with cancer, cardiac disease, neurological disorders and other diseases for which PET scans are performed;
	•	technological innovations involving PET that shorten scan times and improve imaging capabilities, such as the current generation of LSO-based scanners and the combined PET/CT scanner; and
	•	the increasing availability of the radiopharmaceuticals used in PET, as well as the development of new radiopharmaceuticals that extend PET technology to new applications.

      We believe we are well positioned to benefit from the anticipated growth in the PET market due to our approach of offering health care providers a comprehensive line of the products and services necessary to incorporate the benefits of PET into their clinical settings. We manufacture and distribute a broad line

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Industry Background

      The basis of PET imaging is the labeling of small, biologically important molecules, such as glucose, amino acids, pharmaceuticals or even water, with positron-emitting radionuclides that are injected into patients. These injected materials are referred to as radiopharmaceuticals. The radionuclides undergo radioactive decay, whereby their nuclei emit positrons that travel a very short distance in tissue before colliding with electrons, converting their total mass into detectable forms of energy. In the modern PET scanner, thousands of small detectors are configured to surround the patient’s body. Computer reconstruction of the data acquired by these detectors permits a visual depiction of a metabolic process within cells of the organ systems of the body.

      In common applications relating to cancer, a few milliliters of a water-based solution containing a minute amount of sugar tagged with the radionuclide fluorine-18, known as F-18-fluorodeoxyglucose, or FDG, is injected into a patient. FDG is delivered throughout the body via the blood stream, and like natural sugar in the blood, FDG is taken into normal cells of organs as well as cancerous cells. Because many types of cancer cells use sugar and grow much faster than normal cells, they consume FDG at a much higher rate than normal cells. The PET scanner produces an image of the consumption of FDG in cells of the organs and tissues throughout the body. Like many diseases, cancer is a metabolic abnormality. PET’s ability to image the metabolic process enables an earlier and more accurate diagnosis of the disease and monitoring of the effectiveness of therapy.

      Other promising applications for PET include cardiac disease and neurological disorders. In cardiology, PET images can be used to assess coronary artery disease (CAD) and left ventricular dysfunction. Physicians can use PET images to determine the presence and extent of heart disease and to assist in determining whether invasive procedures are necessary and will benefit the patient. In addition to examining blood flow to the heart, PET is used for patients with heart disease to determine whether cells of the heart are dead or alive. The use of PET prior to angioplasty and bypass surgery to assess the viability of heart tissue and the likelihood of a successful outcome could have significant cost advantages to payors by eliminating expensive, unnecessary revascularization procedures. PET is also used to research neurological disorders such as Alzheimer’s disease, Parkinson’s disease and epilepsy.

      The effective use of a PET scanner depends on a readily available supply of radiopharmaceuticals, which are very short lived, making local availability essential. The radionuclides used to tag most clinically important radiopharmaceuticals are produced using a sophisticated piece of electronic equipment called a cyclotron, which requires specially trained technicians and a licensed special purpose facility. Historically, institutions performing PET scans required an on-site cyclotron to produce radiopharmaceuticals on demand. PET customers now have an alternative to installing and operating cyclotrons on-site by obtaining local distribution of radiopharmaceuticals from specialized pharmacy providers. We expect the market for radiopharmaceuticals to grow as the adoption and utilization of PET continues to grow and as new and more effective radiopharmaceuticals are developed for additional applications of PET technology.

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      The most common medical imaging technologies in the U.S. today are X-ray, CT, ultrasound and MRI. These imaging technologies have several advantages over PET, namely they represent the current standard of patient care, provide clear anatomical images (in the case of CT and MRI), generally are reimbursed, are fast (in the case of X-ray and CT) and today’s radiologists are very competent in reading these types of images. In comparison to CT and MRI, PET has some disadvantages including the lack of reimbursement for several types of cancer and the steep physician learning curve associated with PET. The poor accuracy of FDG in certain cancers such as prostate cancer is another limitation of PET. However, we do not believe that PET and MRI compete with one another as MRI is primarily used for diagnosing musco-skeletal injuries. Furthermore, we believe that PET and CT are complementary, as evidenced by the development of the combined PET/CT scanner.

      PET is fundamentally different from X-rays, CT, ultrasound and MRI technologies. With X-rays, CT, ultrasound and MRI, an abnormality must manifest itself as a change in body structure or anatomy, such as the development of a sizeable tumor, before it can be detected. PET, on the other hand, can, in many cases, identify diseases earlier and more specifically than X-rays, CT, ultrasound or MRI by detecting abnormalities in cellular activity that precede anatomical change. In addition, unlike other imaging technologies, which merely confirm the presence of a mass, PET often enables physicians to distinguish between benign and malignant disorders or between living and dead tissue. PET can also be more effective in monitoring the treatment of disease. For example, treating cancer with chemotherapy leads to changes in cellular activity, including a decline in the consumption of sugar and FDG, that are observable by PET long before structural changes can be measured by X-rays, CT, MRI or ultrasound. Accordingly, PET can enable a physician to evaluate the efficacy of a prescribed treatment regimen, perhaps leading to a modification in treatment, before such an evaluation could be made using X-rays, CT, MRI or ultrasound.

      One of the principal reasons for growth in the PET market is the increasing number of PET applications being approved for reimbursement by third-party payors, such as Medicare, national and local private insurers and HMOs. Reimbursement is critical to increasing the adoption rate of PET by clinicians. Through active educational efforts, industry participants and associations, such as the Academy for Molecular Imaging, the Society of Nuclear Medicine and the Radiological Society of North America as well as the National Institutes of Health, have been successful in increasing the awareness of PET’s benefits to patients, physicians and members of the payor community and in increasing the number of PET applications for which reimbursement is available. On July 1, 2001, the Center for Medicare and Medicaid Services (CMS), which administers Medicare and Medicaid, expanded its policy to cover PET scanning in six oncology applications, two cardiac applications and one neurological application. Effective October 1, 2002, CMS expanded coverage for breast cancer and heart disease. Effective October 1, 2003, CMS announced expansion of Medicare coverage for PET to include thyroid cancer and patients with potential cardiac disease. On June 5, 2004, CMS announced the expansion of Medicare coverage for PET to include a subset of patients with Alzheimer’s disease.

      The following table summarizes the PET applications that have been approved for reimbursement by CMS. As used in the following table, the term “staging” generally refers to the use of PET in the initial diagnosis process to verify the status of the disease. The term “restaging” generally refers to the use of PET following, and in some instances during, the treatment process to determine the status of the disease and the effectiveness of the treatment regimen.

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Source: Section 50-36 of the CMS Coverage Manual and CMS Decision Memoranda #CAG-00094A and #CAG 00098N. Information for 2004 and 2003 obtained from www.ami-imaging.org.

      As the foregoing table suggests, the majority of PET scans today are performed for oncology procedures. According to the U.S. Centers for Disease Control, cancer is the second leading cause of death in the U.S., with one in four deaths in the U.S. related to cancer. Incidence of cancer increases with age. The number of Americans aged 45-64 who will reach 65 over the next two decades increased by 34% during the past decade. We believe the volume of PET scans in the oncology market will continue to grow as the aging of the population drives a corresponding increase in the number of patients with cancer, as future discoveries bring additional oncology applications, and as expanding reimbursement of cancer indications makes PET more widely available to physicians and patients.

      We also expect new innovations involving PET. Research and development activities in the industry are focused on decreasing scan times, thereby increasing patient throughput capacity and improving patient comfort and image quality. For example, by using detectors made from lutetium oxyorthosilicate, or LSO, rather than the traditional detector material, bismuth germanate, or BGO, scan times for certain routine procedures have decreased from approximately thirty minutes to approximately ten minutes. Other research and development activities focused on improving image quality resulted in the commercial introduction of a combined PET/ CT scanner. The combination of PET and CT technologies in a single scanner results in better diagnostic and therapy monitoring capability than either technology alone and allows physicians to identify the location of biological abnormality with more precision. By pinpointing the location of malignant tumors and providing clearer images, we believe the combined PET/ CT eventually has the potential to change the practice of cancer treatment by, for example, facilitating concurrent tumor ablation or resection. We also believe that research and development activities focused on the development of new radiopharmaceuticals may allow PET technology to detect and monitor additional diseases which, in turn, could increase the number of recognized indications for PET.

Business Strategy

      Our business focuses on enabling diagnosis and therapy management for cancer, cardiac disease and neurological disorders using PET and molecular imaging technology. Our overall goal is to expand and integrate PET into standard clinical practice by delivering innovative “total solutions” that support adoption and use of PET technology. We intend to enhance our position as a leading provider of comprehensive PET products and services in order to capitalize on the rapidly growing molecular imaging market. To achieve this objective, we intend to pursue the following strategies:

      Increase Overall Utilization of PET Technology. We intend to stimulate increased utilization of PET procedures by:

	•	supporting efforts to increase the number and scope of PET procedures that are approved for reimbursement;
	•	educating physicians, patients, pharmaceutical companies and payors regarding the clinical advantages of PET;
	•	expanding the utilization of our PET technologies beyond diagnosis to a broader management of the treatment of disease; and
	•	developing new applications for PET technology by developing new radiopharmaceuticals, by supporting clinical trials that involve PET and by collaborating with pharmaceutical companies.

      Continue Offering Customers a Comprehensive Line of PET Products and Services. We offer a broad range of products and services that complement our sophisticated PET imaging equipment in order to:

	•	better compete with larger imaging equipment companies that have captive finance companies and a broader imaging product line but lack the full array of PET products and services that customers need to operate PET imaging centers;

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	•	offer products and services that are comprehensive yet individually tailored to meet the differing needs of a variety of customers in a variety of clinical settings;
	•	facilitate entry into the PET imaging business by offering new providers a comprehensive approach of products and services necessary to incorporate the benefits of PET into a clinical setting; and
	•	capture a greater share of PET-related expenditures as the market for PET imaging products and services continues to grow.

      Continue to Build Our Production and Distribution Network for Radiopharmaceuticals. We intend to further expand our existing network of radiopharmaceutical production and distribution facilities in order to:

	•	seize “first mover” advantage by being the first PET radiopharmacy in targeted markets and leveraging our access to lower cost, self-manufactured cyclotrons;
	•	continue to grow our recurring revenue streams; and
	•	extend the reach of the radiopharmacy network and leverage this greater scale to achieve operating efficiencies and improve delivery time and quality of service.

      Maintain Our Leadership in PET Scanner Technology Through Focused Research and Development. We have been a leading innovator of PET technology, and through CPS are dedicated to the continued development of PET scanners in order to:

	•	take advantage of our exclusive right to use LSO in molecular imaging products to advance the state-of-the-art in PET scanners;
	•	improve image quality for better diagnosis and treatment of patients;
	•	shorten scan times for increased patient comfort and throughput capacity; and
	•	expand clinical applications of PET technology.

      Develop New Proprietary Radiopharmaceuticals. We intend to focus significant research and development efforts on our radiopharmaceuticals business, including efforts to:

	•	develop new varieties of radiopharmaceuticals to be used as biomarkers to characterize the varied pathways of disease and extend the use of PET imaging to additional diseases; and
	•	explore new therapeutic applications for PET.

      Facilitate Pharmaceutical Development by Providing a Full Line of PET-Related Products and Services. We intend to focus increasing research and development efforts on our biomarker development business, including efforts to:

	•	collaborate with leading pharmaceutical companies and academic institutions to, among other things, improve their process for conducting drug development and clinical trials;
	•	obtain access to pharmaceutical compounds for use as molecular probes;
	•	expand research applications of PET technology; and
	•	utilize the technologies of our subsidiaries Concorde and Mirada, acquired in 2004 and 2003, respectively, to better leverage opportunities for our molecular imaging products with leading pharmaceutical companies and academic and research institutions.

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Our Products and Services

      Our products and services can be broadly classified into three principal categories:

	•	PET and PET/ CT scanners;
	•	detector material products; and
	•	Other PET products and services.

      For a discussion of segment financial information, see “Segments” in note 13 of the notes to our consolidated financial statements appearing elsewhere in this annual report.

      Our subsidiary, CPS, manages the development, manufacturing and distribution of the ECAT® line of PET and PET/ CT scanners. The ECAT® scanner line performs simultaneous acquisition, image reconstruction, processing, and data analysis, which improves patient throughput and delivers prompt results. The scanners produced by CPS range in price from $0.6 million to $2.3 million and offer customers a range of throughput times, resolution and image quality. With the variety in pricing and function, we are able to meet the needs of small and mid-sized imaging centers, as well as larger facilities that require more extensive equipment for clinical research purposes.

      We are the only manufacturer of lutetium oxyorthosilicate, or LSO, as a detector material for use in our scanners. LSO is a lutetium based scintillator material, the chemical compound of which was patented by Schlumberger Technology Corporation. By using LSO as a detector material in our products, our scanners provide improved performance and diagnostic accuracy by decreasing patient scan times and increasing image quality. We have exclusive rights to the development and manufacturing of LSO as a detector material. We acquired these exclusive rights from Schlumberger in February 1995. The exclusive rights terminate upon the expiration of Schlumberger’s patents for LSO, which are currently scheduled to expire in October 2008. While LSO is the only lutetium based scintillator material currently used in the PET industry, it may be possible for others to produce a lutetium based detector that does not contain LSO without violating the Schlumberger patent and, therefore, our exclusive license. Previously we manufactured bismuth germanate, or BGO, a detector material, which is still used in competitive scanners.

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      Radiopharmaceuticals. We currently operate 41 radiopharmaceutical production and distribution centers, located in major metropolitan areas across the U.S., 1 radiopharmaceutical production and distribution center in the United Kingdom, and 1 radiopharmaceutical production and distribution center in South Korea. Of our 43 radiopharmacies, we operate 14 cyclotrons owned by others, or hosts, pursuant to contracts. Our radiopharmacies principally produce and distribute FDG, which is used in oncology, cardiology and neurology applications. These radiopharmacies can also manufacture and distribute research biomarkers under license. Our radiopharmacies allow customers to obtain a cost effective source of radiopharmaceuticals without having to purchase and operate their own cyclotron. In addition, our nationwide network of distribution centers provides our customers with assurance that their radiopharmaceutical requirements will be satisfied in a timely manner that reduces scanner downtime and facilitates patient scheduling. We also provide various PET-related services including reimbursement education, radiation safety consulting, licensure assistance and marketing assistance. We believe that the demand for radiopharmaceuticals will follow the future growth of the PET market. To meet this demand, we expect to continue to expand our network of radiopharmacies.

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      Cyclotron Systems. We manufacture cyclotrons for the production of radiopharmaceuticals by our own radiopharmacies and for sale to hospitals and imaging centers that choose to manufacture radiopharmaceuticals. Our cyclotrons provide a cost-effective, easy-to-operate, self-shielded, and automated system that produces positron-emitting radionuclides and compounds used in making radiopharmaceuticals such as FDG. We developed these systems to improve efficiency and lower cost while maintaining high levels of performance, improved production capacity and automated operation. Our cyclotrons combine high beam quality and shielding with efficiencies in space requirements, building modifications and operating costs. Currently, we offer cyclotron models for hospital use, research use, and high-yield commercial use.

      Mirada Medical Image Analysis Applications. Through Mirada, we develop and supply computer workstations and software designed to improve the quality of care delivered by our customers to their patients, with innovative, unique and productive tools for the creation, display and analysis of molecular images. Mirada’s products include:

	•	Reveal-MVS, a high-performance computer workstation for review, analysis, and image fusion of PET and PET/ CT images, available in customized versions for clinical and pre-clinical markets;
	•	Fusion7DTM, an industry-leading image fusion software package, available as part of the Reveal-MVS system or for integration in a wide range of OEM imaging systems and PACS platforms;
	•	RTistTM, an extension to the Reveal-MVS and Fusion7DTM products that provides interconnectivity and communication with radiation therapy systems, enabling PET imaging to play a major role in treatment delivery; and
	•	SceniumTM, advanced quantification for PET neurological imaging, with particular capabilities for assessment of Alzheimer’s disease.

      Animal Scanners. Through Concorde, we develop and manufacture microPET® animal scanners, which are PET scanners for animals used in laboratory research. The research includes the use of PET imaging of laboratory animals in the drug development process. Concorde’s products include:

	•	Focus 120, small laboratory animal scanners; and
	•	Focus 220, primate animal scanners.

      Reveal Network Solutions. We have introduced an internet-hosting service called Reveal Network Solutions to connect physicians, radiopharmacies, patients, and PET providers. Reveal Network Solutions facilitates sharing relevant information including scheduling imaging procedures and researching important information about PET and related reimbursement rates.

      Additional Products and Services. Establishing, operating and maintaining a facility to conduct molecular imaging procedures requires more than purchasing a molecular imaging scanner. Our customers face challenges ranging from designing their facility to educating referring physicians and imaging technologists in the operation of the scanner. Our extensive experience in the molecular imaging industry allows us to help our customers through this process by offering a broad range of services. These include:

	•	Preventive maintenance and repair services;
	•	Site planning and installation services;
	•	Radioactive materials licensing;
	•	Technologist recruiting and training;
	•	Physician training;
	•	Technical support; and
	•	Calibration sources.

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Research & Development

      Our founders are recognized leaders in the development of PET technology. Our President and Chief Executive Officer and director, Ronald Nutt, Ph.D., has been credited with co-developing the combined PET/ CT and our director, Michael Phelps, Ph.D., one of the original inventors of the PET scanner, is a leading academic figure in PET. We have been responsible for the development of many of the major commercial innovations in PET since our formation in 1983. The following table highlights some of these innovations:

      Our research and development team focuses on developing the next generation of PET technologies. In addition to our internal ideas, our research and development department collaborates with a network of leading physicians, academic imaging experts and, in the case of CPS, with our distributors. We incurred $33.4 million in 2004, $31.3 million in 2003 and $21.7 million in 2002 in research and development expenses, including clinical and regulatory expenses.

      To enhance our research capabilities, we have also entered into collaboration arrangements with a number of universities and research institutions. We have a collaboration agreement with UCLA for the development of new molecular imaging technology. This relationship has led to a number of breakthrough developments in molecular imaging, from imaging the expression of genes to the development of new experimental radiopharmaceuticals. Our image of Alzheimer’s-related plaques using a new radiopharmaceutical was selected as the image of the year in 2001 by the Society of Nuclear Medicine. CPS also worked with Dr. David Townsend at the University of Geneva, now with the University of Tennessee, who was named the “Distinguished Clinical Scientist of the Year for 2004” by the Academy of Molecular Imaging, to develop the PET/ CT, which was recognized by TIME Magazine as the medical science “Invention of the Year” in 2000. Further, CPS worked with the Max Planck Institute in Germany to develop the first large field of view clinical scanner in 1990 and, more recently, a 2mm brain scanner used for neurological research. These collaboration arrangements have increased our access to world-class physicians and scientists and have given us a platform to expand our name recognition in the scientific and medical communities and to increase understanding among physicians of the benefits of PET.

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      Our role as a leader in the area of research and development is exemplified by the academic and research institutions that use our products. Today, our products are used by many of the leading medical, pharmaceutical and scientific institutions including The Cleveland Clinic, Columbia Presbyterian, Emory University, Washington University in St. Louis, Baylor University, UCLA, Massachusetts General Hospital, MD Anderson Cancer Center, Hospital San Raffaele in Milan, Italy, DKFZ German Cancer Research Center in Heidelberg, Germany, Peking Union Medical College in Beijing, China, Max Planck Institute in Köln, Germany, and Service Hospitalier Frederic Joliot in Orsay, France.

Products Under Development

      CPS develops dedicated PET scanners that use our advanced LSO-based detector materials. These scanners provide substantially higher patient throughput while providing improved image quality and upgradeable performance. CPS also develops PET/ CT scanners that incorporate advanced LSO-based detector systems. Future PET/ CT scanners are expected to better integrate PET and CT technologies to further decrease body scan time while improving image quality.

      We are also expending significant resources in the development of the next generation of commercially available radiopharmaceuticals. Through this development process, we hope to expand the number of PET indications by, among other things, creating new proprietary radiopharmaceuticals that will allow PET to diagnose and manage an increasing number of diseases and to produce a closer alignment between molecular imaging of disease with PET radiopharmaceuticals and the treatment of disease with pharmaceuticals. Currently, we are working on the development of new radiopharmaceuticals to enhance the ability of PET to detect disorders such as inflammation, breast cancer, Parkinson’s disease and Alzheimer’s disease.

      In order to further enhance our role as a leader in developing new PET technology and radiopharmaceuticals, we have established a collaborative research and development facility with the UCLA School of Medicine. We refer to this facility as the LA Tech Center. One of the goals of the LA Tech Center’s research is to establish new biomarkers that will eventually allow medical personnel to probe the various pathways of disease, using methods similar to those used today by in vitro laboratory techniques. Another primary goal of the LA Tech Center is to expand the use of PET technology to accelerate the drug development process. We believe PET has a number of advantages over other imaging modalities that will allow pharmaceutical companies to use PET to more quickly identify whether their developmental drugs are reaching their intended targets and achieving the desired therapeutic results. We anticipate that the use of PET by pharmaceutical companies could help to improve their success rate in clinical trials and speed up the drug development process. In addition, we expect that an increase in the number and type of pharmaceuticals available to PET providers, will increase the rate of PET adoption.

Our Relationship with Siemens

      In 1987 we entered into a joint venture agreement with Siemens Medical Solutions USA, Inc., a wholly owned subsidiary of Siemens AG, pursuant to which Siemens acquired 49.9% of the outstanding capital stock of our subsidiary, CPS. The cash consideration paid by Siemens for its 49.9% interest was paid directly to the individual shareholders of CPS. The amount of the consideration, and the determination of the ownership percentage acquired by Siemens, was negotiated at arm’s length between Siemens and the shareholders of CPS. Neither Siemens nor any of its affiliates has any ongoing financial obligations, commitments or guarantees with respect to CPS related to the formation or operation of the joint venture. We entered into the joint venture agreement in order to provide us with access to Siemens’ global distribution network and to include our scanners in its product line.

      Put/ Call Provision. The joint venture agreement contains, among other things, a put/call provision pursuant to which Siemens has the right to acquire from us for cash up to that number of shares of CPS common stock necessary to bring Siemens’ aggregate ownership interest in CPS to 80%. We refer to this as the call right. The call right becomes exercisable upon CPS exceeding certain PET scanner unit sales

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      The exercisability of the put/call right 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 September 30, 2004, the cumulative total number of units sold by CPS was 852 and CPS would need to have sold a cumulative total of 1,055 units to achieve the required cumulative sales level for the put/call right to be exercisable. The cumulative unit sales requirement increases by 74 units each year. It is impossible to definitively state when the put/call right will become exercisable by either party. However, based upon our current forecasts, we do not expect this target level to be reached before the second half of fiscal year 2006. Siemens cannot exercise its option until the end of the fiscal year in which this target level is reached. Assuming that sales volumes are met in 2006 and further assuming the exercise of the one-year deferral right, the sale of CPS is not expected to occur before 2007.

      Upon exercise of either the put or the call, the joint venture agreement provides that the parties will attempt to negotiate the price to be paid for the CPS shares. In the event the parties are unable to agree upon the price within 60 days, the price will be determined through an appraisal process with each party obtaining a valuation of the CPS shares by an independent professional experienced in the valuation of closely held corporations similar to CPS. If the valuations that are obtained are within 20% of each other, the price to be paid for the CPS shares will be the average of the two valuations. If the difference between the valuations is more than 20%, the two appraisers will select another independent appraiser to provide a third valuation. In this case, the price to be paid for the CPS shares will be the average of the two valuations that are the closest to each other.

      If the put/call right is exercised and Siemens’ aggregate ownership interest in CPS increases to 80%, Siemens will then be able to effect a merger of CPS with another Siemens-controlled entity and acquire the remaining 20% from us. Siemens will only be required to pay us either a negotiated price for the remaining 20% or, if we and Siemens are unable to agree, the fair value of the shares as determined in accordance with applicable provisions of the Tennessee Business Corporation Act. In the event Siemens acquires a controlling interest in CPS, CTI will no longer include CPS in its consolidated financial statements.

      Use of Proceeds from Sale. If the put/call right is exercised, we will have broad discretion with respect to the use of the proceeds received from Siemens in connection with our sale of the shares of CPS. We will evaluate appropriate alternatives as we approach the cumulative totals. Possible uses of the proceeds include strategic acquisitions, investment in product development and repurchase of a portion of our outstanding shares.

      Distributions. The joint venture agreement does not provide for any mandatory dividends or distributions by CPS to us or to Siemens. Since the formation of the joint venture, CPS has not paid any dividends or made any distributions on its capital stock. Payment of future dividends or distributions, if any, on the capital stock of CPS would be at the discretion of the CPS board of directors.

      Non-Competition Agreement. The joint venture agreement contains covenants not to compete which will prohibit us from participating in or owning an interest in any business that develops, sells or manufactures products that compete with the products offered by CPS. This non-compete provision will remain in effect for a period of three years following the sale of our shares of CPS pursuant to the exercise of the put/call right. Siemens is subject to a substantially similar covenant not to compete, which will also remain in effect following the exercise of the put/call right.

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      Ownership of Intellectual Property and Other Assets. Following an exercise of the put/call right, Siemens will acquire control of CPS and will therefore control the rights to the patents and other intellectual property then held by CPS. These patents cover various electronics, detector technologies and algorithms incorporated into our ECAT® scanners. We would not retain any right to use this patented technology following a sale except to the extent of any then existing licenses or other agreements between us and CPS. Siemens would also acquire control of the other tangible and intangible property owned by CPS, including the assets used to manufacture and develop ECAT® scanners. However, the patents and other technology held or licensed by us, such as the license for the use of LSO and the patents for our cyclotron technology, would not be affected by an exercise of the put/call right.

      LSO Supply Arrangements. During the term of an existing sublicense agreement between us and CPS, we are obligated to sell LSO-based products to CPS on terms more favorable than we sell such products to any other party. However, we are not restricted from selling LSO to a competitor of CPS. This sublicense automatically terminates upon the termination of our current LSO license, which expires in October 2008.

      Governance of CPS and CTI. The joint venture agreement grants various rights to Siemens regarding the governance of CPS, including the right to:

	•	designate two members of the five member board of directors of CPS (we also have the right to designate two members of the CPS board);
	•	select the fifth director of CPS from a list of candidates that we submit to Siemens; and
	•	nominate one individual to serve as either the chairman of the board of directors or the president of CPS with the appointment to the specific office to be at the discretion of the board.

      We have also agreed that for so long as we and Siemens each own more than 20% of the outstanding shares of CPS, our board of directors will nominate a representative of Siemens, chosen by Siemens, to serve as a member of our board of directors. Currently, Dr. Wolf-Ekkehard Blanz is the nominee selected by Siemens to serve on our board of directors.

      The joint venture agreement also contains provisions for the orderly and prompt resolution of disputes among the parties. In the seventeen years since the formation of the joint venture, the parties have only elected to avail themselves of the dispute resolution procedures twice. Most recently, the process was used in 2001 to address a contract interpretation issue with respect to the implementation of a multiple distributor strategy. A favorable resolution was reached that led to the expansion of our sales and marketing force for the distribution of products manufactured by CPS. Additionally, this process resulted in the signing of a number of new long-term contracts with Siemens and increased joint projects with Siemens on several new initiatives, including the development of more advanced PET/ CT capabilities.

      Intercompany Services between CPS and CTI. We have entered into an administrative services agreement with CPS pursuant to which we provide certain administrative services to CPS. Currently we provide CPS with human resources services, information technology services, facilities support and maintenance services, regulatory services and various other corporate services. We also allow employees of CPS to participate in our employee benefit programs, including our stock option plan and 401(k) savings plan.

      Siemens served as our exclusive distributor of ECAT® scanners from 1987 to 1997. From 1997 until 2001, Siemens and CPS served as the only distributors of ECAT® scanners. In 2001, CPS adopted a multiple distributor strategy in order to expand its distribution channels. In November 2001 CPS added Hitachi Medical Systems America, Inc. as a third-party distributor of CPS’ products and in October 2003 CPS added Toshiba Medical Systems Corporation as a third-party distributor of CPS’ products in Japan.

      From 2001 to 2004, CTI served as a direct distributor of CPS’ products, as part of CPS’ multiple distributor strategy. These arrangements were amended by the execution of a Sales Agency and Services

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      Service contracts entered into in connection with scanner sales in the United States after May 1, 2004 are divided equally between CTI and Siemens in terms of revenue. Siemens and CTI are free to independently pursue sales of service contracts to the installed base of CPS scanner customers. Each CTI sales order executed but not filled prior to May 1, 2004 will be concluded by CTI.

      During the two-year term of the Agency Agreement, CTI agreed to cease its sales and service of PET and PET/ CT scanners in international markets, except in South Korea and Japan. All existing scanner service contracts in international markets other than South Korea and Japan were assigned to Siemens. During the term of the Agency Agreement, CTI has agreed not to enter or re-enter any international market to sell or service PET or PET/ CT scanners, except that CTI may continue to pursue its existing business in South Korea and may retain its existing distribution agreement in Japan. In exchange for the assignment of the international service contracts, the covenant not to compete in the United States and international markets other than South Korea and Japan, certain price reductions for detector materials including on international scanner sales, and as compensation for the cost of closing certain international operations, Siemens paid CTI $2.2 million. CTI recognized $1.1 million as revenue during the year ended September 30, 2004, in association with the assignment of international service contracts. The remaining amount is being amortized over the two-year term of the agreement concurrent with our LSO price reduction and non-compete commitments. During the year ended September 30, 2004 $0.2 million of this remaining amount was amortized into earnings.

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

      The parties also agreed to certain changes in transfer prices charged to and received from CPS. Siemens and CTI agreed to reduce the transfer prices for CT components and LSO detector materials, respectively, sold to CPS. These price reductions are being passed on, dollar-for-dollar, in the form of lower transfer prices on scanners sold by CPS to Siemens. CPS agreed to a second round of transfer price reductions on scanners sold to Siemens, which are expected to become effective in December 2004.

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

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

      Following the exercise of the put/call right, if the Agency Agreement is terminated or not renewed by Siemens, CTI will have the right to distribute PET products manufactured by CPS through at least 2010

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      Pursuant to the terms of our revolving credit facility, CPS is allowed to borrow up to $55.0 million under the credit facility to finance its operations. At September 30, 2004, CPS had no outstanding balance under the credit facility. CPS pays its pro rata portion of all fees and commissions under this credit facility. Our subsidiaries guarantee all obligations under the credit facility, except that the guarantee by CPS is limited to $55.0 million and does not include any advances under the credit facility that are loaned (on an intercompany basis) to our PETNET subsidiary. The credit facility and the obligations of our subsidiary guarantors under the credit facility 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 of CPS is principally limited to the accounts receivable and inventory of CPS.

      In addition to the relationships previously discussed, we have entered into various other commercial arrangements with Siemens. For example, Siemens and CPS have an agreement pursuant to which Siemens supplies CPS with CT scanners for the purpose of manufacturing a combined PET/ CT scanner. Siemens also provides us with replacement parts, training and other support for the CT scanners incorporated into the combined PET/ CT systems. CPS also has a license to use Siemens’ syngo® software which is an important component of the operating system for the PET/ CT.

Competition

      The primary competitive factors in the PET equipment market are quality, technical capability, breadth of product line, distribution capabilities, price, the ability to offer vendor financing, and the ability to provide quality service and support. Our principal competition in the market for PET scanners comes from divisions or subsidiaries of much larger corporations such as GE Healthcare (formerly known as GE Medical Systems) and Philips Medical Systems. GE Healthcare markets and sells a combined PET/ CT, which is the main competitor to the PET/ CT manufactured by CPS. We also compete with Siemens in certain locations in connection with the sale and distribution of the PET scanners manufactured by CPS, as well as for service and support business. Our competitors also include academic institutions and other public and private research organizations that conduct research, seek patent protection and establish arrangements for commercializing products that compete with our products. We are not as large a company as our primary competitors in the PET equipment market, GE Healthcare and Philips Medical Systems. These two competitors have substantially greater access to capital and the ability to bundle PET sales with the sale of other medical devices in their respective product lines. However, they both have more limited PET product lines than CTI. Because we offer a comprehensive line of PET related products and services that complement our PET scanners, we believe we have some competitive advantages over these and other competitors with more limited PET product lines. We also believe that our position as a technological leader in the PET industry helps us to compete in the market for PET scanners.

      We believe the primary competitive factors in the radiopharmaceutical market are national distribution capabilities, reliability of delivery, price, the ability to develop new radiopharmaceuticals and the ability to obtain proprietary rights to any newly developed radiopharmaceuticals and cyclotron technology. In the radiopharmaceutical market, we have three principal groups of competitors. The first group consists of national radiopharmacy companies such as Amersham (acquired by GE Healthcare), Tyco, Cardinal Health and Ion Beam Applications (and its subsidiary, Eastern Isotopes). The second group consists of independent regional radiopharmacy companies such as Pharmalogic. The third group of competitors consists of large academic institutions. Setting up a radiopharmacy is capital intensive, involving a significant up-front investment. In addition, the first entrant in a given geographic market often

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      In the cyclotron business, the primary competitive factors are distribution capabilities, effective shielding design, quality, production capacity and automated production capability. We believe our position as a leader in developing cyclotron technology combined with our comprehensive product line will help us to compete in the cyclotron market.

Sales and Marketing

      Our sales and marketing efforts are focused on two primary segments of the PET market. The first segment includes hospitals, universities and other research institutions. The second segment includes customers such as freestanding imaging centers and cancer treatment centers, often owned by physicians and other entrepreneurs, who we believe are particularly well suited to benefit from our ability to offer a complete, integrated line of PET products and services. In order to effectively target each of these segments, CPS has a multiple distributor strategy for scanners. Through CPS’ distribution arrangement with Siemens and our Agency Agreement with Siemens, we are able to leverage Siemens’ large sales and marketing force to sell scanners to hospitals and research institutions.

      Our marketing and sales strategy emphasizes our comprehensive line of PET-related products and services, including PET scanners, radiopharmaceuticals, cyclotrons, microPET® animal scanners, medical image analysis applications, and services such as physician training and facility planning and design. Unlike many of our competitors who focus on limited aspects of the PET market, our sales and marketing team is able to present CTI as a comprehensive provider for all PET related needs. To implement this strategy, which we call the “total solutions” approach, sales personnel from each of our business segments work together with prospective customers to develop a customized package of products and services.

      Our success in assisting the Thompson Cancer Center, a Knoxville, Tennessee based cancer center, offers a good example of our “total solutions” approach. Through the combined efforts of a multi-disciplinary team, we designed and implemented a comprehensive, customized solution for the development and operation of the Thompson Cancer Center’s new PET center. Our service organization assisted the center with the design and installation of the facility. Upon completion of the design and construction phase, the center acquired an ECAT® scanner manufactured by CPS and today CTI Solutions provides the center with all of its PET related radiopharmaceutical requirements.

      For fiscal years 2004, 2003 and 2002, our revenues from U.S. sales were $302.9 million, $278.0 million and $197.7 million, respectively. For fiscal years 2004, 2003 and 2002, our revenues from sales outside the U.S. were $98.9 million, $84.3 million and $60.7 million, respectively, and substantially all of our long-lived assets, were located in the United States. Sales to Siemens represented approximately 49.3% of our consolidated revenues for the fiscal year ended September 30, 2004. We have no other single third-party customer that accounts for more than 10% of our sales.

Customer Service and Support

      Due to the anticipated continuing growth in our business, we continue to expand our customer service and support staff. We maintain a network of approximately 130 service engineers and customer support specialists who provide installation, warranty, repair, training and support services for our products. We generate service revenue by providing service to customers on a time-and-materials basis and through comprehensive service contracts and the sale of parts.

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      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. We offer a variety of post-warranty equipment service agreements that permit customers to contract for the level of equipment maintenance they require.

      We believe customer service and support are an integral part of our competitive strategy. Service capability, availability and responsiveness play an important role in marketing and selling medical equipment and systems, particularly as the technological complexity of the products increases. Nevertheless, many hospitals use their own biomedical engineering departments or independent service organizations to service equipment after the warranty period expires. Therefore, we cannot depend on the conversion of all customers to service contracts after the expiration of warranty periods.

Intellectual Property

      Our future growth and ability to compete in the molecular imaging market are substantially dependent on internally developed technologies. We seek to protect our technology through a combination of copyright, patent, trademark, trade secret and other intellectual property laws. As of September 30, 2004, we held 34 U.S. patents and have 41 patent applications pending, which are generally related to our PET scanners, cyclotrons and radiopharmaceutical production. We believe it could take up to four years, and possibly longer, for our pending U.S. patent applications to result in issued patents. Certain technologies already patented in the U.S. are either patented or subject to pending patents in Europe, Canada and Japan. We have received trademark registrations for “CTI”, “ECAT”, “REVEAL”, “MetaTrace”, “CPS Innovations”, “microPET”, and our logo. As we develop brand names in the future we will seek trademark protection where appropriate. We rely on trade secrets and other unpatented proprietary information, which we attempt to protect by entering into confidentiality agreements with certain employees, consultants, suppliers, distributors, and other partners. We also seek to control access to and distribution of our documentation and other proprietary information.

      In addition to developing our own technology, we have entered into several license agreements to use third-party technology. For example, we have an exclusive worldwide license from Schlumberger Technology Corporation to use the LSO technology. This license expires upon the expiration of the LSO patents, which are expected to expire in October 2008. We have sublicensed to CPS and to Concorde the right to use the LSO technology until such time as the License Agreement between CTI and Schlumberger has expired.

Manufacturing

      CPS assembles our ECAT® scanners and a full line of PET/ CT tomographs, and we assemble cyclotrons and microPET® animal scanners, from components manufactured by us and components supplied to us by suppliers to whom we have outsourced portions of our manufacturing process. For our ECAT® scanners and microPET® animal scanners, the most significant internal manufacturing process involves the production of detector materials, which includes several proprietary processes. Outsourced components are either standard products or are manufactured according to our specifications. Typically, outsourced components that are manufactured according to our specifications are tested by the outsource manufacturer using test systems designed and supplied by our engineers and manufacturing staff. Each major outsourced component has an assigned outsource manager from our manufacturing staff. We use ongoing periodic inspection to help us monitor whether our outsource manufacturers are continuing to meet our quality standards. We believe that outsourcing enables us to reduce fixed costs and capital expenditures while also providing us with the flexibility to increase production capacity.

      A number of components used in our existing products, as well as products under development, are purchased from single sources. For example, we purchase a substantial portion of the raw material used to manufacture our LSO detector material from a single source. We now hold more inventories of this critical raw material to enable us to continue production in the event of a disruption in supply. Although we have taken actions to alleviate our dependence on our single source of supply by holding these

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      Our facility and quality system is inspected by TÜV Essen, which is an independent auditing firm responsible for granting accreditations of European Union medical devices and quality assurance systems. Our facility and CAN/ CSA ISO 13485:1998 quality assurance systems have been found by TÜV Essen to conform to the requirements of ISO-9001: 2000, ISO 13485: 1996, and the European Union Medical Device Directive.

Government Regulation

      Our business is subject to many governmental and regulatory requirements relating to health care matters. We believe our current arrangements and practices are in material compliance with applicable statutes and regulations. However, we have not received or requested legal opinions from counsel or from any federal or state regulatory authority to this effect, and many aspects of our business operations, including radiopharmaceutical manufacturing, have not been the subject of federal or state regulatory interpretation. As a result, we cannot assure you that our current or prior practices or arrangements will not be found to be in compliance with applicable laws and regulations, and any such noncompliance could result in a material adverse effect to us.

      We are subject to licensing and regulation under multiple federal and state laws, including laws relating to the use and handling of radioactive materials and laws relating to the operation of pharmacies. We also are required to register with the appropriate state agencies our radioactive sealed sources and each cyclotron that we own and operate. In addition, some states require us to obtain a reciprocity license before delivering products or servicing machines utilizing radioactive materials in those states. The pharmacists operating in the radiopharmacy sites must be licensed, and many states require imaging technologists that operate PET systems to be licensed. We believe our operations are in material compliance with applicable federal and state licensure laws and regulations. Nevertheless, there can be no assurance that our current or past operations would be deemed to be in compliance with applicable laws and regulations, and any noncompliance could result in a material adverse effect on us.

      In some states, a certificate of need or similar regulatory approval is required prior to the acquisition of high-cost capital items or services, including diagnostic imaging systems or provision of diagnostic imaging services by our clients. Certificate of need regulations may limit or preclude our clients from providing diagnostic imaging services or systems. At present, a number of states in which we sell PET systems have certificate of need laws that restrict the supply of PET systems and other types of advanced medical equipment. Certificate of need laws were enacted to contain rising health care costs, prevent the unnecessary duplication of health resources, and increase patient access to health services. In practice, certificate of need laws have prevented hospitals and other providers who have been unable to obtain a certificate of need from acquiring new machines or offering new services. A significant increase in the number of states regulating our business through certificate of need or similar programs could adversely affect us.

      Numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies, strictly regulate our products and research and development activities. The Federal Food, Drug, and Cosmetic Act, the regulations promulgated under this act, and other federal and state

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      Devices. Generally, before we can market a new medical device, we must obtain marketing clearance through 510(k) premarket notification. The FDA will typically grant a 510(k) clearance if we can establish that the device is substantially equivalent to a predicate device. 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. We have obtained 510(k) clearance covering our PET scanners for use in a broad range of PET imaging applications for the purpose of determining various metabolic (molecular) and physiologic functions in humans.

      The FDA generally requires premarket approval for a Class III medical device (life supporting, life sustaining, etc.) or one that that does not have a predicate device. The FDA will typically grant a premarket approval if a sponsor provides valid scientific evidence that establishes the safety and effectiveness of the device. We do not anticipate that a premarket approval will be required for any of the PET scanners we develop in the foreseeable future.

      If human clinical trials of a device are required for a 510(k) submission and the device presents a significant risk to the patient in the trial, the sponsor of the trial, usually the manufacturer or the distributor of the device, must file an investigational device exemption application prior to commencing human clinical trials. The investigational device exemption application must be supported by data, typically including the results of animal and/or laboratory testing. If the investigational device exemption is allowed to go forward by the FDA and one or more appropriate institutional review boards, human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as detailed in the investigational device exemption. If the device presents an insignificant risk to the patient, a sponsor may begin the clinical trial after obtaining approval for the study by the institutional review boards alone. Submission of an investigational device exemption does not give assurance that the FDA will allow the investigational device exemption to progress and if allowed to progress there can be no assurance the FDA will determine that the data derived from the studies supports the substantial equivalence of the device or warrants the continuation of the clinical trials. An investigational device exemption supplement must be submitted to the FDA before a sponsor or investigator may make a change to the investigational plan that may affect its scientific soundness, study indication or the rights, safety or welfare of human subjects.

      In addition to granting marketing clearances for our products, the FDA and international regulatory authorities periodically inspect our facilities and operations. We must comply with the host of regulatory requirements that apply to medical devices marketed in the U.S. and internationally. These requirements include labeling regulations, Quality System Regulation manufacturing requirements, medical device reporting regulations that require a manufacturer to report to the FDA serious adverse events involving its products, and the FDA’s general prohibitions against promoting products for unapproved or off-label uses. The FDA periodically inspects device and drug manufacturing facilities in the U.S. or manufacturers of product to be marketed in the U.S. in order to assure compliance with applicable regulations.

      Cyclotrons. We believe that our cyclotrons constitute manufacturing equipment, rather than medical devices as defined under the Food, Drug and Cosmetic Act (i.e., they are not intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease, or intended to affect the structure or any function of the human body), and thus are not subject to regulation as medical devices. The FDA has not disputed our position regarding the regulatory status of our cyclotrons after agency inspections of our facilities and operations over the past several years.

      Radiopharmaceuticals. Our PET radiopharmaceutical imaging products currently are produced and sold through our network of radiopharmacies. In the United States, our radiopharmacies operate under applicable state pharmacy licenses and compound PET products in response to the prescription order of a licensed practitioner. The Food and Drug Administration Modernization Act of 1997 (the 1997 Act) authorized the production of PET products that conform to the United States Pharmacopoeia

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      FDA generally requires sponsors to submit a new drug application prior to marketing a drug to demonstrate that the drug is safe and effective for its intended uses. FDA will approve the new drug application only if the drug’s safety and effectiveness has been demonstrated by substantial evidence composed of extensive, controlled clinical data, or by references to such data, and the sponsor has shown adequate manufacturing and controls. A sponsor may also submit an abbreviated new drug application, which does not require safety and effectiveness data, but generally requires a demonstration that the drug is “bioequivalent” to an already approved drug. Under the 1997 Act, FDA currently cannot require the submission of a new drug application or abbreviated new drug application for any compounded PET product that conforms to the PET compounding standards and the official monographs of the USP until two years after the agency adopts appropriate new drug approval procedures and current good manufacturing practice requirements for these products.

      On March 10, 2000, FDA published a Federal Register notice announcing that the agency concluded that certain commonly used PET products (e.g., FDG injection) are safe and effective for certain indications when produced under conditions specified in approved new drug applications and abbreviated new drug applications. In that notice, FDA invited producers of these products to voluntarily submit applications for marketing approval and set out the approval procedures and type of application required for these PET products. FDA stated that the agency has not yet addressed the procedures for approval of other PET products and of new indications for approved PET drug products.

      The language of the 1997 Act and FDA pronouncements within the March 10, 2000 notice strongly suggested that any FDA regulations pertaining to marketing approval for PET products would apply to the compounded PET products produced in our state-licensed radiopharmacies. Within two years after FDA’s new drug approval procedures and current good manufacturing practice requirements for PET products published, we would be able to submit to the FDA a new drug application or abbreviated new drug application for our PET products which would request FDA approval for a labeled (i.e., promoted) indication, including any indications related to the monitoring of disease.

      We believe, however, that the costs and time associated with obtaining FDA approval for FDG will not have a material impact on our business, financial condition, or results of operations; however, any failure to comply with applicable current good manufacturing practice requirements could delay FDA approval. We could incur significant costs and time to obtain FDA approval for any new PET product or for any new indication for an approved PET product. Such additional costs and expenditure of time in obtaining any required FDA approval could have a material adverse effect on our business, financial condition, and results of operations.

      On April 1, 2002, FDA published draft good manufacturing practice requirements for PET products. FDA states that it has determined that the production of a PET product would include all operations to the point of release of a finished dosage form (including unit dose containers, multiple containers, and pharmacy bulk packages), and these activities would be subject to current good manufacturing practice.

      Until FDA adopts final current good manufacturing practice requirements for PET products, it is uncertain whether any such requirements will have a material impact on our radiopharmaceutical business. However, we may incur significant costs in establishing and maintaining procedures and in improving certain facilities to comply with these requirements. Our failure to comply with agency requirements could result in voluntary company recalls of product or FDA enforcement actions. These actions include, but are not limited to, product seizure, notice of violation or warning letters, fines, injunction and injunction consent decrees, FDA refusal to grant approval of any required new drug applications or abbreviated new drug applications, FDA withdrawal of approved applications, and criminal prosecution. Any such enforcement actions could have a material adverse effect on our business, financial condition, and results of operations.

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      Finally, the 1997 Act established certain restrictions on pharmacy compounding that include, among other things, the prohibition of a pharmacy from advertising or promoting the compounding of any particular drug, class of drug, or type of drug. An April 2002 decision of the U.S. Supreme Court in the lawsuit Thompson v. Western States Medical Center, in which we were not a party, held that the prohibition on promotion and advertising violates the free speech guarantees of the First Amendment. The U.S. Supreme Court was not asked to rule on the appellate court decision that the advertising restriction invalidates the entire pharmacy compounding section of the 1997 Act. Notwithstanding this advertising decision of the U.S. Supreme Court, FDA has clearly evidenced its desire to regulate the practice of pharmacy compounding, and in June 2002 reissued a Compliance Policy Guide that describes the FDA’s short-term policy on pharmacy compounding. FDA is currently considering the long-term implications of the U.S. Supreme Court decision. Any other regulatory limitations not related to advertising restrictions could adversely impact the operations of our radiopharmacies with respect to the compounding of PET drug products in general or of specific PET radiopharmaceuticals.

      In order to market our products in European and other foreign countries, we must obtain required regulatory approvals and comply with extensive regulations governing product safety, quality and manufacturing processes. These regulations vary significantly from country to country and with respect to the nature of the particular medical device. The time required to obtain these foreign approvals to market our products may be longer or shorter than that required in the U.S., and requirements for licensing may differ from FDA requirements.

      In order to market our products in the member countries of the European Union, we are required to comply with the Medical Devices Directive and obtain CE mark certification. CE mark certification is an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. Under the Medical Devices Directives, all medical devices must qualify for CE marking.

      All of our products sold internationally are subject to appropriate foreign regulatory approvals, like CE marking for the European Union. Our products are manufactured in facilities certified to be in compliance with quality system regulations including ISO 9001: 2000 and ISO 13485: 1996 and CAN/ CSA ISO 13485: 1996 certified facilities.

      We must also obtain European marketing approval for our radiopharmaceuticals sold in Europe. We have obtained approval in the United Kingdom from the Medicines and Health Care Products Registry Agency (MHRA) to produce and distribute FDG in England from our Mount Vernon facility under a “Specials License”. In the future, we will submit a Common Technical Document (CTD) to support full product marketing authorization of FDG in the United Kingdom. Subsequently, through the process of mutual recognition of the UK Marketing Authorization, we will gain marketing authorization of FDG in other European Union nations. Additional costs and expenditures of time in obtaining any required European or other international approvals could have a material adverse effect on our business, financial condition, and results of operations.

      Our scanners, cyclotrons, and radiopharmaceutical business require the use of radioactive materials, and our cyclotrons are utilized to produce radioactive materials. While the radioactive materials utilized in our radiopharmaceuticals have relatively short half-lives, meaning it quickly breaks 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 hazardous materials comply in all material respects with the standards prescribed by law and

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      In the U.S., as well as in foreign countries, government-funded or private insurance programs, commonly known as third-party payors, pay the cost of a significant portion of the patient’s medical expenses. A uniform policy of coverage and reimbursement does not exist among all these payors. Therefore, reimbursement for an item or service can be quite different from payor to payor. We believe that reimbursement is an important factor in the success of any medical device. Consequently, we seek to obtain third-party payor coverage and reimbursement for all of our products and services.

      In order to receive reimbursement from government funded insurance programs such as Medicare and Medicaid and to market our products in the U.S., we must first obtain FDA clearances and approvals. Reimbursement also depends on our ability to demonstrate the short-term and long-term clinical and cost-effectiveness of our products from the results we obtain from clinical experience. We present these results at major scientific and medical meetings and publish them in respected, peer-reviewed medical journals.

      All third-party reimbursement programs, whether government funded or insured commercially, whether inside the U.S. or outside, are developing increasingly sophisticated methods of controlling health care costs through prospective reimbursement and capitation programs, prior authorization of procedures, group purchasing, redesign of benefits, requiring second opinions prior to major surgery, careful review of bills, encouragement of healthier lifestyles and exploration of more cost-effective methods of delivering health care. In August 2000, CMS implemented the Hospital Outpatient Prospective Payment System (HOPPS) in an effort to control costs to the Medicare program. HOPPS applies to items and services furnished in hospital outpatient departments and other facilities that are considered to be “provider-based.” Under this new system, items and services are grouped into ambulatory payment classifications (APC), with most ambulatory payment classifications having a pre-determined payment rate based on historical cost and charge data. The hospitals bill for items and services using Healthcare Common Procedure Coding System codes, and these codes are used to determine the ambulatory payment classifications that are paid for the billed items and services. In order to accommodate new technologies, additional payments are made for “new technology” services and for drugs, biologicals and devices that are eligible for “pass-through” payments. “New technology” services are paid as part of special cost-based ambulatory payment classifications while CMS collects sufficient data to determine the appropriate ambulatory payment classification for the service. Separate payments are made for pass-through items for two to three years, after which they will be incorporated into ambulatory payment classifications.

      Under HOPPS, PET services currently are treated as “new technology” services. It is not certain how much longer this status will apply. Pursuant to a recent adjustment to HOPPS made by CMS, some of the radiopharmaceuticals we sell currently are no longer eligible for pass-through payments. Instead, CMS has incorporated these products into ambulatory payment classifications. It is expected that CMS will continue to refine HOPPS as it collects more data on various reimbursable items and services. We cannot predict what impact the forthcoming changes in payments under HOPPS for our products and services will have on the demand for such products from hospitals and provider-based entities.

      In addition, non-governmental third-party payors, such as commercial health maintenance organizations, preferred provider organizations and other insurers, may similarly impose varying requirements and limitations on reimbursement for our products or for services utilizing our products, thereby affecting the demand for our products from health care providers.

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      Currently, we are working with the Academy of Molecular Imaging to form a European organization which, among other things, will work to increase the level of reimbursement for PET applications in the European market.

      On April 16, 2003, CMS announced that it affirmed its prior non-coverage decision of the application of PET to Alzheimer’s disease, saying that the clinical benefit of PET has not yet been demonstrated. However, CMS announced two special efforts to help determine the potential of PET for Alzheimer’s disease. A demonstration will be designed to evaluate the appropriate role of PET in patients with suspected dementia and CMS will work with the National Institutes of Heath to convene a multidisciplinary expert meeting with geriatricians, neurologists, radiologists, PET experts and patient advocates to fully explore the value of PET for Alzheimer’s disease. The CMS decision was consistent with our expectation that gaining reimbursement approval for Alzheimer’s disease will take some time. On August 14, 2003, a new and more restrictive coverage request for the use of PET in the diagnosis of mild to moderate Alzheimer’s disease was filed with CMS. On October 7, 2003, CMS formally accepted this request and on June 5, 2004 announced a national coverage decision to provide Medicare coverage of PET scans to aid physicians in the early diagnosis of Alzheimer’s and to help differentiate Alzheimer’s from other neurological disorders. The coverage decision authorized Medicare payment for PET scans when certain criteria are met.

      On November 1, 2004, CMS announced a proposal to expand coverage for PET scans as part of a broader initiative to improve care for cancer patients. In the draft decision memo, the CMS proposes to expand coverage of PET scans for cervical cancer “for the detection of pre-treatment metastases in newly diagnosed cervical cancer subsequent to negative conventional imaging” and proposes to issue a national coverage determination (NCD) for this indication.

      On November 3, 2004, CMS announced that effective January 1, 2005 that it will lower the technical fee for the use of a PET scanner from $1,450 to $1,150 and the payment rate for the administration of FDG from $324 to $221. The reimbursement rate changes only apply to hospital based-outpatient PET procedures, and not to PET scans covered by private insurance or by Medicare under the physician fee schedule, which is set on a state-by-state basis by regional Medicare intermediaries. However, over time it is anticipated that the other payors will also lower current reimbursement rates for PET procedures.

      The federal health care program’s Anti-Kickback Law prohibits persons from knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, in cash or in kind, in exchange for or to induce either: (i) the referral of an individual, or (ii) the purchasing, leasing, ordering, or arranging for, or recommending the purchase, lease or order of, any service or item for which payment may be made by Medicare, Medicaid or certain other federal health care programs. The definition of “remuneration” has been broadly interpreted to include gifts, discounts, the furnishing of free supplies, services, or equipment, commercially unreasonable credit arrangements, payments of cash and waivers of payments. The statute itself has been broadly interpreted to mean that if any one purpose of a payment arrangement is to induce referrals of federal health care program covered business, the statute has been violated. The penalties for violating the Anti-Kickback Law can be severe. These sanctions include criminal penalties and civil sanctions, including fines and imprisonment.

      The Anti-Kickback Law is broad, and it prohibits many arrangements and practices that are lawful in businesses outside of the health care industry. Recognizing that the Anti-Kickback Law is broad and may technically prohibit many innocuous or beneficial arrangements within the health care industry, the U.S. Department of Health and Human Services (HHS) has issued a series of regulations, known as the “safe harbors.” These regulations set forth certain safe harbors which, if all applicable requirements are met, can protect health care providers and other parties from being prosecuted under the Anti-Kickback Law. Although full compliance with all applicable safe harbors can provide protection against prosecution under the Anti-Kickback Law, the failure of a transaction or arrangement to fit within one or more safe harbors does not necessarily mean that the transaction or arrangement is illegal or that prosecution under

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      Many states have adopted laws similar to the Anti-Kickback Law. Some of these state prohibitions apply to referrals for health care items and services reimbursed by any source, not only the Medicare and Medicaid Programs. Some of these state prohibitions may be more restrictive than the Anti-Kickback Law in material respects, and the federal safe harbors may not apply.

      These federal and state laws constrain the sales, marketing and other promotional activities of manufacturers of medical devices, such as us, by limiting the kinds of financial arrangements (including sales programs) we may have with hospitals, physicians, imaging centers, and other potential purchasers of medical devices. We have in place formal policies related to compliant marketing practices. These laws are also implicated by a manufacturer’s compensation or ownership arrangements with customers (or physicians in a position to recommend the purchase of a manufacturer’s products). We have various types of compensation arrangements with customers and physicians, including consulting agreements, research and development agreements, and lease agreements. Furthermore, we have certain joint venture arrangements with customers to establish and operate our radiopharmacies. We believe that these various arrangements have been structured to comply with federal and state anti-kickback laws. For example, we believe the various compensation arrangements, which we have with customers, provide for fair market value compensation for services and/or space furnished to us. Additionally, we believe that the radiopharmaceutical joint venture arrangements require at-risk investments and provide for returns on investment, which are proportional to the level of investment. Given the breadth of the federal and state anti-kickback laws, however, there can be no assurance that federal or state regulatory authorities will determine that all of our arrangements comply with these laws. We have attempted to structure our business arrangements to comply with the Anti-Kickback Law and similar state laws, but there can be no assurances to this effect. We have not requested advisory opinions from the OIG or any other governmental entity.

      Other federal and state laws prohibit individuals or entities from presenting, or causing to be presented, claims for payment to third-party payors (including Medicare and Medicaid) that are false or fraudulent or are for items or services not provided as claimed. Violations of these laws can result in substantial criminal and civil penalties. Although we do not submit claims on our own behalf to third-party payors, we may provide some billing and reimbursement advice to purchasers of our products. If our advice resulted in a customer submitting a false or fraudulent claim that would be considered a violation of these laws. Since we cannot assure that the government will regard any billing errors that may be made by a customer relying on our advice as inadvertent, these laws are potentially applicable to us.

      Both federal and state government agencies are continuing heightened and coordinated civil and criminal enforcement efforts. The federal government has increased funding to fight health care fraud, and it is coordinating its enforcement efforts among various agencies, such as the United States Department of Justice, the OIG, and state Medicaid fraud control units. We believe that the health care industry (and the pharmaceutical and medical device industries, in particular) will continue to be subject to increasing government scrutiny and investigations.

      Congress has also passed significant prohibitions against certain physician referrals of patients for health care services. The Stark Law prohibits a physician from making referrals for particular health care services (called designated health services) to entities with which the physician, or an immediate family

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      The Stark Law also prohibits the entity receiving the referral from seeking payment under the Medicare and Medicaid programs for services rendered pursuant to a prohibited referral.

      The term “financial relationship” is defined very broadly to include most types of direct or indirect ownership or compensation relationships. We have various compensation arrangements with physicians, including consulting agreements, research and development agreements, and lease agreements. Also, we have a number of joint venture arrangements to establish and operate radiopharmacies. In connection with these different arrangements certain physicians have financial relationships with us under the Stark Law. Accordingly, these physicians would not be able to refer patients to us for designated health services unless a Stark Law exception applies.

      The definition of “designated health services” includes (among other things) “radiology services, including magnetic resonance imaging, computerized axial tomography and ultrasound services.” The Stark II Phase II regulations exclude from the definition of covered designated health services “nuclear medicine procedures.” The regulations also provided a specific list of reimbursement codes included in this DHS category. This list currently does not include the common reimbursement codes for nuclear medicine services. Therefore, we believe that the exclusion for “nuclear medicine procedures” currently covers the equipment and services we provide. However, the regulatory exclusion and DHS Code List are subject to change.

      HHS issued the Stark II Phase II interim final regulations on March 26, 2004, and made “no changes to the treatment of nuclear medicine procedures under the DHS definitions” noted above. However, the preamble discussion accompanying the regulations notes that several commenters had requested that nuclear medicine not be excluded from the definition of DHS and indicates that HHS will continue to consider the application of the Stark Law to nuclear medicine. If the nuclear medicine exclusion were removed and reimbursement codes associated with nuclear medicine were included in the Code List, then our nuclear medicine services and supplies would be included under the definition of designated health services and would be subject to the Stark Law unless an exception applies.

      Additionally, the definition of “designated health services” includes (among other things) “inpatient and outpatient hospital services” which are subject to the Stark Law. The Stark II Phase I preamble notes that even though certain services may be excluded from the designated health services category noted above, any services meeting the definition of “inpatient and outpatient hospital services” also may be considered a designated health service subject to the referral prohibition contained in the Stark Law. In connection with certain of our joint ventures with hospitals, it is possible that those ventures would involve “inpatient or outpatient hospital services.” While we believe we have structured those ventures appropriately so that the Stark law prohibitions would not affect referrals by physicians to those ventures, we cannot provide assurance that those relationships would not be determined to be affected by the Stark Law.

      If the Stark Law applies to the relationships between referring physicians and us, there are exceptions to the Stark Law which, if certain requirements are met, would permit those physicians to refer patients to us for designated health services. We believe that our compensation and joint venture arrangements with physicians who refer to us would meet or could be restructured to meet the requirements for an exception under the Stark Law.

      If an entity violates the Stark Law, it could be subject to civil penalties of up to $15,000 per prohibited claim and may be excluded from participation in Medicare and Medicaid. If the Stark Law applies to the relationships between us and our referring physicians and no exceptions under the Stark Law are available, then we will be required to restructure these relationships or refuse to accept referrals for designated health services from these physicians. If we were found to have submitted claims to Medicare for services provided pursuant to a referral prohibited by the Stark Law, then we would be required to

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      Many states have physician relationship and referral statutes that are similar to the Stark Law. We believe we are in substantial compliance with applicable state laws on physician relationships and referrals. However, any finding that we are not in compliance with these state laws could require us to change our operations and could have a negative impact on us.

      The Health Insurance Portability and Accountability Act of 1996 (HIPAA) established several requirements regarding the privacy, security and transmission of health information. HHS has issued several sets of regulations under HIPAA that apply directly to health care providers who conduct certain health claims transactions electronically, and to health plans, and health care clearinghouses, as well as indirectly, in certain instances, to those who provide services on behalf of these entities which involve the receipt or disclosure of health information. Our employee health plan will be subject to the HIPAA regulations.

      Pursuant to HIPAA, HHS issued final privacy regulations establishing comprehensive federal standards relating to the use and disclosure of protected health information. These regulations, among other things, establish limits on the use and disclosure of protected health information, provide for patients’ rights to access, request amendments, and receive an accounting of certain disclosures of protected health information, and require covered health entities to implement certain safeguards to protect identifiable health information. The federal privacy regulations do not supersede state privacy laws that are more stringent, requiring compliance by a covered entity with state laws in addition to the federal regulations.

      Covered entities are required to be in compliance with the HIPAA security regulations by April 21, 2005. The security regulations establish the minimum standard for the protection of individual health information that is stored or transmitted electronically. The regulations provide administrative procedures, physical safeguards, and technical mechanisms that may be implemented to satisfy the regulations. Violations of the privacy and security regulations are punishable by civil and criminal penalties. State laws may impose similar sanctions.

      HHS also issued final electronic transaction standards for the processing of health claims, which establish uniform standards relating to data reporting, formatting, and coding that covered entities must use in conducting certain health care transactions electronically. Outside of our health plan, we do not believe we are subject to the electronic transaction standards since we do not otherwise conduct any of the covered transactions. Violations of the electronic transactions standards are punishable by civil penalties.

      Although we may be considered a health care provider under the HIPAA regulations, we do not conduct any of the covered health care transactions electronically and, therefore, we believe that we are not a covered entity under the HIPAA regulations, outside of our health plan. However, we provide health care devices and services to many covered entities and in connection with some of those relationships, we have entered into business associate agreements under which we agree to provide certain protections for identifiable health information that we receive from those covered entities. If we were determined to be a covered entity under those regulations, the HIPAA privacy, security and transaction standards regulations could result in significant financial obligations for us and would pose increased regulatory risk. At this time, we are not able to determine the full consequences of the HIPAA regulations for our business or the total cost of complying with these regulations if we were determined to be a covered entity. However, the HIPAA regulations could have a significant impact on us operationally and financially.

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Employees

      As of September 30, 2004, we employed directly and through our subsidiaries 963 people. Of these 963 people, 219 work in CPS, 59 work in Detector Materials, 542 work in CTI Solutions (radiopharmaceuticals, scanner service, cyclotrons, microPET® animal scanners, and other businesses), and the remaining 143 work in various administrative functions supporting all of these businesses. None of our employees is subject to a collective bargaining agreement. We consider our relationships with our employees to be good.

Available Information

      Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through our website (www.ctimi.com) under the “Investor Relations” caption free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). All filings are also available electronically at www.sec.gov or by mail at SEC Headquarters, Office of Investor Education and Assistance, 450 Fifth Street, NW, Washington DC 20549. We are not including the information on our website as a part of, nor incorporating it by reference into, this Form 10-K.

      We currently own 201,000 square feet of office, research and development, manufacturing and warehouse space in Knoxville, Tennessee, and 63,000 square feet of production space in Rockford, Tennessee. We have entered into a lease for approximately 22,000 square feet of additional office space and 10,000 square feet of warehouse space in Knoxville, Tennessee. Except for the space located in Rockford, Tennessee, which is used primarily by our Detector Materials segment, each of the foregoing facilities is used in part by each of our financial reporting segments.

      CPS leases office, research and development, manufacturing and warehouse space in Knoxville, Tennessee from CTI under a lease agreement which runs through December 31, 2012. CPS owns approximately 21,000 square feet of office and warehouse space located in Rockford, Tennessee.

      We currently lease space for 33 radiopharmacies throughout the U.S., primarily located in major metropolitan areas. Four of these leased properties are locations for future radiopharmacies. We operate 14 of our radiopharmacies in facilities that are owned by other parties and for which our use of the facilities is governed by our commercial agreements with those parties rather than separate facility leases. In addition, we have radiopharmacies located in the United Kingdom and South Korea.

      CTI Solutions has offices in Europe that house sales and service personnel who provide support for cyclotrons, microPET® animal scanners, sources, and medical image analysis applications sold in Europe. Our CTI Solutions segment uses these facilities.

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

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      Crystal Photonics, Inc. (CPI) filed for arbitration against CTI under the rules of the American Arbitration Association, alleging wrongful termination of a Crystal Production and Technology Transfer Agreement between CTI and CPI and asserting unauthorized use and wrongful transfer to third parties of CPI’s technology and failure to purchase LSO crystal materials manufactured by CPI. CTI asserted counterclaims to recover certain overpayments under the agreement. After an arbitration hearing was conducted, the arbitrator issued an award on August 25, 2004 in favor of CPI on its claims and against CTI on its counterclaims. CTI’s motion for reconsideration of this award was denied on September 14, 2004 and CTI was required by the arbitrator to pay an aggregate of approximately $4.2 million to CPI for damages and purchases of LSO products.

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

      No matter was submitted to a vote of security holders during the fiscal quarter ended September 30, 2004.

PART II

Price Range of Common Stock

      The Company’s Common Stock has been traded on the Nasdaq National Market (Nasdaq symbol: CTMI) since June 21, 2002. The following table sets forth the high and low sales prices as reported on the Nasdaq National Market for quarter ends during our 2004 and 2003 fiscal years.

Holders

      The number of record holders of the Company’s Common Stock at December 1, 2004 was 140, excluding beneficial owners of shares registered in nominee or street name.

Dividend Policy

      The Company has not paid any cash dividends on its common stock since its inception and does not intend to pay any such dividends in the foreseeable future. Pursuant to the terms of our existing credit facility, we are restricted from paying dividends. See Item 7 of this annual report under the sub-heading “Liquidity and Capital Resources.”

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Securities Authorized for Issuance Under Equity Compensation Plans

      The following table summarizes our equity compensation plans as of September 30, 2004:

(1)	Includes up to 212,485 shares that may be granted as awards of restricted stock, performance shares or unrestricted stock under the 2002 Long-Term Incentive Plan.
(2)	Includes warrants to acquire 76,000 shares issued in connection with the execution of a consulting agreement and 342,362 options issued outside of our 1998 Amended and Restated Incentive Stock Option Plan to certain non-employee advisors and consultants. See “Stock Options, Warrants and Restricted Stock” in note 9 of the notes to our consolidated financial statements appearing elsewhere in this annual report

Sales of Unregistered Securities

      During the year ended September 30, 2004, we did not sell any unregistered securities except, as disclosed in our Quarterly Report on Form 10-Q for our fiscal quarter ended June 30, 2004. We issued on June 30, 2004 an aggregate of 1,480,465 shares of our common stock to Concorde Microsystems, Inc., a Tennessee corporation (CMSI) as part of the consideration for the purchase of substantially all of the business, assets, and liabilities of CMSI. The acquired business, assets, and liabilities were contributed to our subsidiary Concorde, which was organized to continue the operation of the acquired business. The shares issued to CMSI were issued in reliance on the exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended, because the issuance did not involve any public offering.

Use of Offering 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 September 30, 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 $40.1 million was used for the acquisitions of CMSI’s assets, in June 2004 and Mirada in August 2003. The balance of the net offering proceeds have been invested in highly liquid instruments, such as commercial paper and U.S. government obligations, with an average maturity of twelve months or less.

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Issuer Purchases of Equity Securities

      We made no repurchases of our equity securities within the quarter ended September 30, 2004.

      You should read the following selected consolidated financial data in conjunction with “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8: Financial Statements and Supplementary Data”. We have derived the selected financial data set forth below from our audited financial statements and related notes.

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      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 “Risk Factors.” See also the “Cautionary Notice Regarding Forward-Looking Statements” set forth at the beginning of this report.

      You should read the following discussion and analysis in conjunction with “Item 6 — Selected Financial Data” and “Item 8 — Financial Statements and Supplementary Data” appearing elsewhere in 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, neurological disorders and cardiac disease. 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 PET and PET/ CT scanners, cyclotrons, microPET® animal scanners, detector materials, radiopharmaceuticals, medical imaging analysis applications 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 a significant portion of our gross revenues and net income being derived from such other segments by the second half of fiscal year 2006, which is when we presently anticipate that Siemens Medical Solutions USA, Inc. (Siemens), a wholly owned subsidiary of Siemens AG, could first announce its intentions to exercise 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) development of new proprietary radiopharmaceuticals; (3) acquisition of complimentary PET-related products and services; and (4) growth of our service contract business.

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

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

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

     Segments

      Effective October 1, 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 years 2003 and 2002 have been retroactively reclassified to reflect the new reporting structure.

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

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

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

      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.

      Our CTI Solutions segment includes CTI’s direct distribution of PET and PET/ CT scanners manufactured by CPS; the manufacture, sale and installation of cyclotrons, microPET® animal scanners, medical image analysis applications, 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.

      We currently operate 41 radiopharmacies in the U.S., 1 radiopharmacy in the United Kingdom and 1 radiopharmacy in South Korea. Fourteen of these radiopharmacies operate cyclotrons owned by other parties, or hosts, pursuant to contracts. These host contracts vary but typically require us to provide radiopharmaceuticals to the host at below market prices while also allowing us to use the host’s facility to manufacture and distribute radiopharmaceuticals commercially to third parties. In addition, we typically compensate the host for the use of the cyclotron.

Components of Revenues and Expenses

      Our revenue is derived primarily from sales of PET and PET/ CT products and services. Revenues for scanners, detector materials, radiopharmaceuticals, microPET® animal scanners, calibration sources and spare parts are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable. Delivery is considered to have occurred upon either shipment or arrival at destination depending on shipping terms. Amounts attributable to the installation of scanners are deferred and recognized upon completion of installation. Most of the revenue for detector materials is from sales to CPS and, therefore, is eliminated in consolidation for financial reporting purposes. Effective July 1, 2003, in conjunction with the implementation of Emerging Issues

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      Our scanners, cyclotrons, microPET® animal scanners, detector materials, calibration sources and spare parts are manufactured at our facilities in Knoxville and Rockford, Tennessee. Our radiopharmaceuticals are manufactured at 43 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.

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

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

New Agreement with Siemens

      Effective May 1, 2004, CTI and CPS entered into a Sales Agency and Services Agreement with Siemens (the Agency Agreement), pursuant to which Siemens appointed CTI as Siemens’ non-exclusive sales representative to solicit purchases of CPS-manufactured PET and PET/ CT scanners throughout the United States, on terms and conditions and at prices determined by Siemens and subject to acceptance by Siemens. CPS products sold by CTI as Siemens’ sales representative are marketed and sold under the Siemens brand. In connection with this arrangement, Siemens reimburses CTI for all directly related sales and marketing expenses, up to $10.0 million annually. During the year ended September 30, 2004, CTI recorded $4.0 million of revenue for the reimbursement of sales and marketing expenses.

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

      During the term of the Agency Agreement, CTI agreed to cease its sales and service of PET and PET/ CT scanners in international markets, except in South Korea and Japan. All existing scanner service contracts in international markets other than South Korea and Japan were assigned to Siemens. During the term of the Agency Agreement, CTI has agreed not to enter or re-enter any international market to sell or service PET or PET/ CT scanners, except that CTI may continue to pursue its existing business model in South Korea and may retain its existing distribution agreement in Japan. In exchange for the assignment of the international service contracts, the covenant not to compete in the United States and international markets other than South Korea and Japan, certain price reductions for detector materials including on international scanner sales, and as compensation for the cost of closing certain international

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

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

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

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

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.

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      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.

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

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      Revenues for the year ended September 30, 2004 were $401.7 million, an increase of $39.4 million, or 10.9%, from $362.3 million in 2003.

      CPS. Revenues for the year ended September 30, 2004 were $266.8 million, an increase of $19.1 million, or 7.7%, from $247.7 million in 2003. The increase in revenues was driven primarily by a 27.5% increase in average scanner sales price due to the continued shift in sales mix from PET to PET/ CT scanners. During the years ended September 30, 2004 and 2003 PET/ CT scanner sales were 80.0% and 44.1%, respectively, of total unit sales. This increase was offset by a 13.4% decrease in units sold and a decrease in service revenues. Intersegment revenues accounted for 21.5% and 30.6% of total CPS revenues for the years ended September 30, 2004 and 2003, respectively. The decrease in intersegment revenues resulted from reduced sales to CTI Solutions after execution of the Agency Agreement with Siemens.

      Detector Materials. Revenues for the year ended September 30, 2004 were $47.1 million, a decrease of $8.1 million, or 14.7%, from $55.2 million in 2003. The decrease in revenues is primarily due to reduced scanner demand and reduced transfer pricing to CPS in accordance with the Agency Agreement. Intersegment revenues accounted for 98.6% and 94.8% of total detector material revenues for the years ended September 30, 2004 and 2003, respectively. The increase in intercompany revenues as a percent of revenues is due to the acquisition of Concorde in June 2004; until being acquired, Concorde was the primary third-party customer of the Detector Materials segment.

      CTI Solutions. Revenues for the year ended September 30, 2004 were $196.2 million, an increase of $3.4 million, or 1.8%, from $192.8 million in 2003. The increase in revenues was due to increased FDG dose shipments, a full year of Mirada (acquired in August 2003) revenues in 2004, sales of microPET® animal scanners after the acquisition of Concorde (acquired in June 2004), and the $4.0 million expense reimbursement under the Agency Agreement. Driven by increased PET utilization, FDG dose shipments increased by 51.8% in 2004 over 2003; this increase was partially offset by a 14.8% decline in the average revenue per dose during the same time period. Due to the implementation of the Agency Agreement, sales increased $5.6 million from sales and marketing services provided to Siemens and increased sales of image-fusion software to Siemens. These increases were offset during 2004 by a 32-unit decline in direct distribution sales of PET and PET/ CT scanners by CTI Solutions. Scanner unit sales on a direct basis decreased as the Company ceased booking new scanner orders after May 1, 2004 following the execution of the Agency Agreement. Intersegment revenues accounted for 2.4% and 2.8% of total CTI Solutions revenues for the years ended September 30, 2004 and 2003, respectively.

      Intercompany Eliminations. Intercompany revenues that were eliminated in consolidation for the year ended September 30, 2004 were $108.4 million, a decrease of $25.0 million, or 18.7%, from $133.4 million in 2003. The decrease in revenue eliminations was primarily due to decreased sales of PET and PET/ CT scanners to CTI Solutions from CPS as well as decreased sales of detector materials to CPS. The decreased sale of detector materials to CPS was attributable to reduced scanner demand and lower prices on detector materials sold to CPS after the implementation of the Agency Agreement.

      Cost of revenues for the year ended September 30, 2004 was $242.8 million, an increase of $23.7 million, or 10.8%, from $219.1 million for 2003. Cost of revenues for the year ended September 30, 2004 was 60.4% of revenues compared to 60.5% for 2003.

      CPS. Cost of revenues for the year ended September 30, 2004 was $180.9 million, an increase of $13.0 million, or 7.7%, from $167.9 million for 2003. Cost of revenues for the years ended September 30, 2004 and 2003 were 67.8% of revenues. The increase in total cost of revenues was driven by the shift in sales mix from PET to PET/ CT scanners. Cost of revenues remained consistent as a percentage of revenues despite the continuing shift in sales mix towards PET/ CT scanners, which have historically

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      Detector Materials. Cost of revenues for the year ended September 30, 2004 was $22.9 million, a decrease of $3.2 million, or 12.3%, from $26.1 million for 2003. The decrease in cost of revenues was due to the corresponding decrease in sales to CPS as scanner shipments slowed during the second half of fiscal year 2004. This volume related decrease was offset by a $4.2 million one-time charge for an arbitration order with a former supplier. Cost of revenues for the year ended September 30, 2004 increased to 48.6% of revenues compared to 47.3% of revenues for 2003. The increase in cost of revenues as a percentage of revenues was due to the arbitration order as well as a reduction in transfer prices to CPS after the execution of the Agency Agreement.

      CTI Solutions. Cost of revenues for the year ended September 30, 2004 was $148.2 million, a decrease of $7.2 million, or 4.6%, from $155.4 million for 2003. The decrease in cost of revenues was due primarily to the decrease in scanners sold on a direct basis offset by increased FDG production costs on higher sales volume. Cost of revenues for the year ended September 30, 2004 decreased to 75.5% of revenues compared to 80.6% of revenues for 2003. The decrease in cost of revenues as a percentage of revenues results from a shift in sales mix from direct distribution of PET and PET/ CT scanners to other products and services with higher gross margins, such as FDG doses, medical image analysis application sales, sales and marketing services provided to Siemens, and the sale of microPET® animal scanners after the acquisition of Concorde.

      Intercompany Eliminations. Intercompany cost of revenues that were eliminated in consolidation for the year ended September 30, 2004 were $109.2 million, a decrease of $21.1 million, or 16.2%, from $130.3 million in 2003. Cost of revenues eliminated for the year ended September 30, 2004 decreased to 27.2% of revenues compared to 36.0% of revenues for 2003. The decrease in cost of revenue eliminations was primarily due to decreased direct sales of PET and PET/ CT scanners by CTI Solutions, which were purchased from CPS, as well as decreased sales of detector materials to CPS due to the decline in scanner units manufactured and sold by CPS and reduced transfer pricing of detector materials to CPS in accordance with the Agency Agreement.

      Selling, general and administrative expenses for the year ended September 30, 2004 were $65.0 million, an increase of $12.8 million, or 24.5%, from $52.2 million for 2003. Selling, general and administrative expenses for the year ended September 30, 2004 increased to 16.2% of revenues compared to 14.4% of revenues for 2003.

      CPS. Selling, general and administrative expenses for the year ended September 30, 2004 were $15.0 million, an increase of $3.2 million, or 27.1%, from $11.8 million in 2003. Selling, general and administrative expenses for 2004 were 5.6% of revenues compared to 4.8% in 2003. The increase is primarily attributable to promotional expenses related to product launches, and increased administrative costs from the implementation of a new management information system.

      Detector Materials. Selling, general and administrative expenses for the year ended September 30, 2004 were $3.6 million, an increase of $1.3 million, or 56.5%, from $2.3 million for 2003. As a percentage of revenues, selling, general and administrative expenses were 7.7% and 4.2% for 2004 and 2003, respectively. The increase is primarily attributable to increased facility costs due to expansion in the latter half of 2003, and increased administrative costs from the implementation of a new management information system.