CTI MOLECULAR IMAGING, INC.

(Address, including zip code, and telephone number, including area code, of the registrant’s principal executive offices)

Approximate date of commencement of proposed sale to public: As soon as practicable after the Registration Statement becomes effective.

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The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

We are selling 10,000,000 shares of our common stock and the selling stockholders are selling 720,000 shares of our common stock. We will not receive any of the proceeds from the shares sold by selling stockholders.

Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $16.00 and $18.00 per share. We have applied to list our common stock on The Nasdaq Stock Market’s National Market under the symbol CTMI.

The underwriters have an option to purchase a maximum of 1,608,000 additional shares from us and from certain selling stockholders to cover over-allotments of shares.

Investing in our common stock involves risk. See “Risk Factors” on page 7.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

Until , 2002 (25 days after the commencement of the offering) all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

The following is a brief summary of selected contents of this prospectus. It does not contain all the information that may be important to you. You should read this entire prospectus, including our financial statements and the related notes, before making an investment decision. You should also carefully consider the information set forth under “Risk Factors.” For convenience in this prospectus, “CTI,” “we,” “us,” and “the Company” refer to CTI Molecular Imaging, Inc. and our consolidated subsidiaries, taken as a whole.

We are a leading manufacturer of positron emission tomography imaging equipment and related products used in the detection and treatment of cancer, cardiac disease and neurological disorders. Positron emission tomography, or PET, is a medical imaging technology that images the biology of disorders at the molecular level often before anatomic changes are visible or in some cases even before symptoms appear. This enables physicians to diagnose and treat a broad range of diseases earlier and more accurately than other medical imaging technologies that focus on anatomic abnormalities, or lesions. We also provide a comprehensive array of services that facilitate entry by health care providers into the business of PET imaging. We entered the PET business in 1983 and had consolidated revenues and net income of $124.0 million and $4.4 million, respectively, in fiscal 2000 and $188.9 million and $6.1 million, respectively, in fiscal 2001.

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 in minute amounts that do not disturb the normal biology of the patient. These injected materials, referred to as radiopharmaceuticals, migrate to metabolically active vital organs and diseased cells where they are detected by a PET scanner and converted into an image of the patient’s biologic activity. Due to their short half-lives, radiopharmaceuticals must be in readily available supply in order to make effective use of a PET scanner. Most clinically important radiopharmaceuticals are produced using a sophisticated piece of electronic equipment called a cyclotron. A user of PET can either acquire and operate a dedicated cyclotron or obtain radiopharmaceuticals from specialty pharmacy providers.

Our business model emphasizes our exclusive focus on PET, our proprietary technology rights, our proven track record of technological innovation, and our ability to provide customers a comprehensive line of integrated PET products and services. Our comprehensive line of integrated PET products and services, which we refer to as our “total solution,” includes:


	•	Scanners — Since our founding in 1983, we have been at the forefront of technological innovation involving PET scanners. For example, in 1992, we were the first to develop whole body imaging capability, which substantially increased PET applications for cancer detection. In 1998, we invented the combined PET/CT scanner and demonstrated the first clinical image using a PET/CT scanner. The PET/CT scanner, which combines PET and computed tomography, or CT, into one device, was named by TIME Magazine as the medical science “Invention of the Year” in 2000.

	•	Detector Materials — We have exclusive worldwide rights until October 2008 to produce lutetium oxyorthosilicate, or LSO, for use as a detector material in PET scanners. Detector materials, such as LSO and bismuth germanate, or BGO, are used to detect the emission of positrons by the radiopharmaceuticals injected into patients prior to undergoing a PET scan. We expect our next generation of LSO-based PET scanners to dramatically reduce the length of time it takes to perform a PET scan, thereby significantly improving patient comfort and image quality. We are also a leading manufacturer of BGO, the most commonly used detector material in the current generation of PET scanners.

	•	PETNet Radiopharmaceuticals — We operate the largest nationwide network of facilities that produce and distribute the highly specialized radiopharmaceuticals used in PET imaging. Through this network, we offer PET customers an alternative to installing and operating their own cyclotrons by allowing them to obtain local distribution of radiopharmaceuticals from one of 32 PETNet


		radiopharmacies located in major metropolitan areas. We are also pursuing the development of new radiopharmaceuticals to expand the utilization of PET scanners to new applications.

	•	Cyclotrons — We manufacture cyclotrons for the production of radiopharmaceuticals at our PETNet radiopharmacies and for sale to hospitals and imaging centers that choose to manufacture radiopharmaceuticals for themselves. In 2001, we introduced a new high performance cyclotron with 50% more production capacity than our previous model, while maintaining our cost-effective self-shielded design.

	•	Support Services — We provide our customers a variety of valuable services including marketing support, site planning, installation services, technical support and repair and maintenance for users of PET technology.

We believe our ability to provide customers a “total solution” positions us to benefit significantly from the expected growth in demand for PET products and related services. A 2001 market analysis prepared by Frost & Sullivan, a marketing consulting firm, estimates that from 2000 to 2007 the U.S. installed base of dedicated PET scanners will grow at a compound annual growth rate of 38.7%, and the number of units shipped in the U.S. will grow at a compound annual growth rate of 22.0%. We expect this growth to be driven by:


	•	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 growing 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 next generation of LSO-based scanner 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.

Our overall goal is to expand and integrate PET into standard clinical practice by delivering an innovative “total solution” that supports the adoption and use of PET technology. We intend to enhance our position as the leading provider of integrated PET products and services and thereby capitalize on the anticipated growth of the molecular imaging market. To achieve this objective, we intend to pursue the following strategies:


	•	increase overall utilization of PET technology by supporting efforts to expand reimbursement coverage of PET procedures, educating the medical community and patients regarding the clinical advantages of PET and developing new applications for PET technology;

	•	continue offering customers a comprehensive line of integrated PET products and services to enhance our competitive advantage and to facilitate the entry of new providers into the PET imaging business;

	•	expand our direct sales force and distribution network by adding sales representatives in major U.S. markets and by pursuing a multiple distributor strategy for our PET scanners;


	•	continue to selectively build our network of PETNet radiopharmacies in markets where we are the “first mover” and can achieve operating efficiencies and provide superior customer service;

	•	maintain our technological leadership through research and development focused on next generation PET scanners that utilize our exclusive LSO detector material technology to improve image quality and shorten scan times; and

	•	develop new proprietary radiopharmaceuticals to expand the application of PET scanners to additional diseases and clinical procedures.

In 1987, we entered into an agreement with Siemens Medical Solutions USA, Inc. in connection with the formation of CTI PET Systems, our subsidiary that develops and manufactures PET scanners. Our relationship with Siemens has provided us with important competitive advantages including access to its global distribution network and the ability to include our scanners in its product line. Pursuant to our agreement with Siemens, we own 50.1% of the outstanding capital stock of CTI PET Systems and Siemens owns the remaining 49.9%. The agreement also gives Siemens the right to designate two members of the five member board of directors of CTI PET Systems (we also have the right to designate two members) and the right to select the fifth director from a list of candidates that we submit to Siemens. We have also agreed that for so long as we and Siemens each own more than 20% of the outstanding capital stock of CTI PET Systems, our board of directors will nominate a representative of Siemens, chosen by Siemens, to serve as a member of our board of directors. Under our agreement with Siemens, Siemens has the right, when CTI PET Systems exceeds a cumulative unit sales threshold, to purchase from us for cash shares of CTI PET Systems common stock sufficient to bring Siemens’ aggregate ownership interest to 80% at a price to be negotiated at the time of exercise or, if the parties are unable to agree, through an appraisal process. Upon exercise of Siemens’ purchase right, we have a one-time right to defer the purchase for one year. We also have a corresponding right to require Siemens to purchase the same number of shares of CTI PET Systems common stock, with Siemens also having a one-year deferral right. For a more complete description of our relationship with Siemens, please refer to the information presented under the caption “Our Relationship with Siemens” in the section of this prospectus entitled “Business.”

In January 2002, Seiko Instruments, Inc. and S.I.E. Netherlands B.V., an affiliate of Seiko Instruments, Inc., agreed to sell an aggregate of 2,536,109 shares of our outstanding common stock back to us for approximately $11.9 million. We consummated this purchase on May 13, 2002.

Our principal executive offices are located at 810 Innovation Drive, Knoxville, Tennessee 37932, and our telephone number is (865) 218-2000. Our Internet address is www.cti-pet.com. The information contained on our website is not a part of this prospectus.

The number of shares of common stock to be outstanding after this offering is based on 32,016,926 shares outstanding as of May 14, 2002 and gives effect to our repurchase of 1,191,965 shares of outstanding common stock upon completion of this offering. The number of shares to be outstanding after this offering excludes:


	•	76,000 shares issuable upon exercise of outstanding warrants at an exercise price of $6.56 per share;

	•	4,957,728 shares issuable upon exercise of outstanding stock options at a weighted average exercise price of $3.70 per share;

	•	a number of shares equal to $750,000 divided by the initial public offering price per share, which are issuable upon the exercise of outstanding stock options held by two independent directors who recently joined our board of directors; and

	•	3,960,000 shares available for future issuance under our equity incentive plans.


	•	assumes the underwriters do not exercise their over-allotment option;

	•	gives effect to the conversion of our outstanding shares of convertible redeemable preferred stock into 1,280,000 shares of common stock, which will occur upon the closing of this offering;

	•	gives effect to our reincorporation in the State of Delaware, which occurred effective June 1, 2002; and

	•	gives effect to a 1.6-for-one stock split with respect to our common stock, which occurred effective June 1, 2002.

The summary consolidated financial data presented below is derived from our consolidated financial statements included elsewhere in this prospectus. You should read this summary consolidated financial data together with our financial statements and the related notes and the section of this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The pro forma balance sheet data below gives effect to our repurchase of 2,536,109 shares of outstanding common stock on May 13, 2002 for approximately $11.9 million. The pro forma as adjusted consolidated balance sheet data presented below gives further effect to the conversion of our outstanding convertible redeemable preferred stock into common stock upon completion of this offering and reflects our sale of 10,000,000 shares of common stock in this offering at an assumed initial public offering price of $17.00 per share and our application of the estimated net proceeds therefrom in the manner described in the section of this prospectus entitled “Use of Proceeds.”

You should carefully consider the risks described below, together with all the other information included in this prospectus, before making a decision to buy our common stock. If any of the following risks actually materialize, our business, financial condition and results of operations could be harmed. In that case, the trading price of our common stock could decline, and you might lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties presently not known to us or that we currently deem immaterial may also harm our business.

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

The market for molecular imaging equipment and related products and services is intensely competitive and is affected significantly by new product introductions, aggressive pricing strategies of competitors and other marketing activities of industry participants. We compete directly with a number of other companies in the molecular imaging equipment market including GE Medical Systems and Philips Medical Systems. In our radiopharmaceutical business, we compete with for-profit corporations such as Amersham PLC, Syncor International Corporation and ION Beam Applications s.a. (and its subsidiary, Eastern Isotopes) as well as regional pharmacies and universities. The intense and increasing level of competition in the market for radiopharmaceuticals and the generic nature of the radiopharmaceuticals currently in production has caused and may continue to cause downward pressure on pricing. Many of our competitors are significantly larger than us and enjoy competitive advantages over us, including:


	•	significantly greater name recognition;

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

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

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

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

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

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

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

Medicare reimbursement rates are established by the U.S. Department for Health and Human Services’ Centers for Medicare and Medicaid Services (CMS), the government agency that administers Medicare and Medicaid. From time to time, CMS adjusts the reimbursement rates for medical procedures to reflect the costs incurred by health care providers to perform the procedures. In connection with one of these routine adjustments, which was not specific to our products, CMS recently decreased the reimbursement rate for certain common hospital outpatient PET procedures. Based on our experience, this adjustment decreased the average reimbursement rate for these procedures from $2,331 to $1,764. In the future, Medicare reimbursement rates for these and other PET applications may be subject to reevaluation by CMS and could be subject to further adjustments.

Today there is no standard reimbursement rate for PET procedures among private third-party payors such as indemnity insurers, health maintenance organizations and preferred provider organizations. In our experience, private payors typically reimburse health care providers for PET procedures at approximately the same rate as Medicare. However, the reimbursement rates offered by private payors are market driven and are therefore subject to market conditions. For example, in markets with significant competition among health care providers, the reimbursement rates can be driven downward due to competitive contracting between third-party payors and health care providers. The reimbursement rates offered by private payors for procedures conducted with our products could be negatively impacted by market conditions or by a decrease in Medicare reimbursement rates.

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

Proposals to reform the health care industry may adversely affect demand for our products.

The U.S. government has in the past, and may in the future, consider health care policies intended to curb rising health care costs. State governments, as well as a number of foreign governments, have also considered or adopted such policies. These policies include rationing of government-funded reimbursement for health care services and imposing price controls on medical products and services. Significant changes in the health care systems in the U.S. or elsewhere would likely have a significant impact on the demand for our products and services. We are unable to predict what health care reform legislation or regulation, if any, will be proposed or enacted in the U.S. or elsewhere, or what effect any such legislation or regulation would have on our business.

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

For the fiscal year ended September 30, 2001 and for the six months ended March 31, 2002, approximately 70.7% and 69.3%, respectively, of our consolidated revenues, and 57.3% and 55.6%, respectively, of our gross revenues before intercompany eliminations, were derived from the sale of PET equipment manufactured by our 50.1% owned subsidiary, CTI PET Systems. Siemens Medical Solutions USA, Inc. owns the remaining 49.9% of CTI PET Systems pursuant to a joint venture agreement that we entered into with Siemens in 1987. According to this joint venture agreement, Siemens has an option to acquire from us for cash up to an 80% interest in CTI PET Systems if and when CTI PET Systems achieves specified unit sales volumes. Siemens’ right to exercise this option is contingent upon CTI PET Systems 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 CTI PET Systems beginning on December 9, 1987. As of March 31, 2002, the cumulative total number of units sold by CTI PET Systems was 425. By the end of 2002, CTI PET Systems would need to have sold a cumulative total of 907 units to achieve the required cumulative sales level for the option to be exercisable. After 2002, the cumulative unit sales requirement increases by 74 units each year. It is impossible to state definitively when the option will become exercisable; however, we currently believe that

the specified sales volumes are not likely to be met before 2005. Once these sales volumes are achieved, we have the right to defer the exercise of the option for an additional year. If Siemens exercises its option and increases its ownership interest in CTI PET Systems to 80%, Siemens could use that controlling ownership interest to cause CTI PET Systems to engage in a transaction the effect of which would be a purchase by Siemens of our remaining 20% ownership interest in CTI PET Systems. Accordingly, the Siemens option effectively gives Siemens the ability to acquire 100% of CTI PET Systems.

In any event, we would continue to have a right to distribute PET and PET/CT products manufactured by CTI PET Systems until at least 2010 pursuant to the terms of a distribution agreement between us and CTI PET Systems. The joint venture agreement also contains cross covenants not to compete which prohibit the parties to the joint venture agreement from participating in or owning an interest in any business engaged in the manufacture, development or sale of products that compete with the products offered by CTI PET Systems currently and for a period of three years following the closing of the exercise of the Siemens’ option.

The exercise of the Siemens option would eliminate a large portion of our revenues, operations and assets, including some valuable employees and intellectual property assets relating to the manufacture and development of PET scanners. As of March 31, 2002, approximately 43% of our total assets were attributable to CTI PET Systems. Accordingly, if we fail to further diversify our business beyond that which is conducted by CTI PET Systems, or if we fail to deploy effectively the option exercise proceeds received from Siemens, the exercise of the Siemens option could have a material adverse effect on our business. In addition, the existence of the Siemens option, even if not exercised, could negatively impact the market price of our common stock and limit our ability to enter into transactions or business relationships with companies that have competitive PET products. Further, we cannot assure you that the proceeds received upon exercise of the option will adequately compensate us for the loss of control of CTI PET Systems.

If we cannot develop CTI as a recognized distributor of ECAT® scanners, we will be unable to compete effectively as a distributor of scanners.

Prior to April 2001, all of CTI PET Systems’ ECAT® scanners were sold with the name Siemens located on the face of the system. As a result, CTI is not recognized widely in the PET industry as a distributor of ECAT® scanners. Pursuant to our distribution agreement with CTI PET Systems, the CTI name and logo will now appear on the face of each ECAT® scanner sold directly by us. From April 1, 2001 through March 31, 2002, approximately 9% of the PET scanners sold by CTI PET Systems were sold by us in our capacity as a direct distributor. If we are unable to quickly develop awareness in the market of the CTI name, brand and logo, our ability to compete as a distributor of scanners will be limited and our revenues, financial condition and future growth will suffer.

If we fail to effectively expand our sales and marketing team, we will be unable to compete effectively as a distributor of scanners.

From 1987 through April 2001, Siemens was the exclusive distributor of scanners manufactured by CTI PET Systems. In April 2001, CTI PET Systems implemented a new multiple distributor strategy pursuant to which we began distributing CTI PET Systems’ products directly. In order for us to compete as a distributor, we must further develop and expand our sales and marketing efforts. Due to our limited resources and narrower diagnostic imaging product line, our sales and marketing team will be substantially smaller than those maintained by our competitors. Also, the products manufactured by CTI PET Systems require a complex marketing and sales effort targeted at health care professionals, hospitals and other participants in the health care industry. As a result, we will face significant challenges and risks in hiring, training, managing and retaining quality sales and marketing personnel. If we are unable to hire sufficient personnel to expand our sales and marketing team or if we are unable to deploy our limited resources to develop a competitive sales and marketing campaign, we may be unable to compete effectively as a distributor of scanners.

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

Our ability to reach our overall sales goals for scanners is dependent upon the sales and marketing efforts of our existing and future third-party distributors, including Siemens and Hitachi Medical Systems America. For example, for the year ended September 30, 2001 and the six months ended March 31, 2002, sales through Siemens constituted 63.9% and 53.0%, respectively, of our consolidated revenues. If we fail to sell a large volume of our scanners through distributors, we could experience a decline in overall sales. None of our current scanner distributors is obligated to continue selling, or commit the necessary resources to effectively market and sell, our scanner products. In our role as a direct distributor of our scanner products, we have entered into sub-distribution agreements with third parties to distribute our scanners outside of the U.S. If these sub-distributors fail to successfully distribute scanners outside of the U.S., or if we are unable to expand our direct distribution network, we may be unable to compete effectively in foreign markets.

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

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

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


	•	properly identify customer needs;

	•	prove feasibility of new products;

	•	limit the time required from proof of feasibility to routine production;

	•	limit the timing and cost of regulatory approvals;

	•	price our products competitively;

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

	•	manage customer acceptance and payment for products;

	•	limit customer demands for retrofits of both new and old products; and

	•	anticipate and compete successfully with competitors’ efforts.

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

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

We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, nondisclosure and confidentiality agreements, and other contractual restrictions to protect our proprietary technology and other intellectual property rights. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage based on our intellectual property. For example, our patents may be challenged, invalidated or circumvented by third parties. As of April 30, 2002 we have 24 issued U.S. patents and 17 patent applications pending before the U.S. Patent and Trademark Office. We also have patents issued and pending in Europe, Canada and Japan. We have no assurance that our patent applications will result in issued patents or that they will be issued in a form that will be advantageous to us. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by employees. Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. Litigation may be necessary to enforce our intellectual property rights, which could result in substantial costs to us and substantial diversion of management attention. If our intellectual property is not adequately protected, our competitors could use our intellectual property to enhance their products. This could harm our competitive position, decrease our market share or otherwise harm our business.

The prosecution and enforcement of copyrights and patents relating to software and other technology licensed or sold to us by third parties is not within our control, and without this software and technology, we may be unable to manufacture our products or maintain our technological advantage. For example, we license Siemens’ syngo^TM software which is an important component of our PET/CT systems. Also, we license the exclusive right to use lutetium oxyorthosilicate, or LSO, technology from the owner of the LSO patent until such time as the LSO patent expires in October 2008. If the third-party suppliers of this software and technology fail to protect their patents or copyrights or if this technology and software is found to infringe on the rights of another party, the functionality of our products could suffer and our ability to bring new and existing products to market could be delayed. In the case of LSO, the expiration of, or the failure to protect, the LSO patent could result in our competitors gaining access to the LSO technology for use in their molecular imaging products thereby eliminating one of our important competitive advantages.

Currently, 13 of our issued patents are held in the name of CTI PET Systems. If Siemens exercises its right to purchase a majority interest in CTI PET Systems, there is no guarantee that we will have the right to license or otherwise use the technology underlying these patents or other intellectual property that is proprietary to CTI PET Systems such as manufacturing know-how. Our inability to access or use this technology could harm our business and financial condition.

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

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


	•	costly litigation and damage awards;

	•	diversion of management attention and resources;

	•	product shipment delays or suspensions; and

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

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

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

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

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

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

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

Modifications to our marketed devices may require new FDA 510(k) clearance or require us to cease marketing or recall the modified devices until these clearances are obtained.

Any modification to an FDA-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new FDA 510(k) clearance. The FDA requires every manufacturer to make this determination, but the FDA can review any such decision. We may make additional modifications to our products after they have received clearance, and in appropriate

circumstances, determine that new clearance is unnecessary. The FDA may not agree with our decision not to seek new clearance. If the FDA requires that we seek 510(k) clearance for any modifications to a previously cleared product, we may be required to cease marketing or recall the modified device until we obtain this clearance. Also, in some circumstances, such as the FDA’s disagreement with our decision not to seek new clearance, we may be subject to significant regulatory fines or penalties.

Proposed FDA regulations could impact our radiopharmaceutical development and manufacturing procedures in the future.

Our PET drug products currently are manufactured and sold through our PETNet radiopharmacies, each of which operates under an applicable state pharmacy license and compounds PET drug products in response to the order of a licensed physician. The FDA traditionally has deferred regulation of the compounding of PET drugs and other radiopharmaceuticals in response to the order of a licensed physician to state and local authorities responsible for regulating the practices of medicine and pharmacy. FDA in the past generally has not subjected such compounded PET drug products to new drug approval procedures and current good manufacturing practice requirements.

The Food and Drug Administration Modernization Act of 1997 (the “1997 Act”), however, amended the Federal Food, Drug, and Cosmetic Act to provide a new framework for FDA regulation of PET drug products. The 1997 Act states that FDA can require new drug applications or abbreviated new drug applications and adherence to current good manufacturing practice requirements for PET drug products (under the Federal Food, Drug and Cosmetic Act) two years after the agency finalizes appropriate new drug approval procedures and current good manufacturing practice requirements. FDA has issued specific approval procedures for some PET drug products for specific indications for use, including F-18-fluorodeoxyglucose, or FDG, the PET drug product principally produced and distributed by our PETNet radiopharmacies. Because the 1997 Act prohibits FDA from requiring new drug applications or abbreviated new drug applications for PET drug products until two years after the agency finalizes appropriate new drug approval procedures and current good manufacturing practice requirements for PET drug products, the submissions and FDA approval of such applications before these time periods expire is voluntary. FDA has not yet addressed the procedures for approval of other PET drug products and of new indications for approved PET drug products. FDA has said, however, that it expects the standards for determining the safety and effectiveness set forth in FDA regulations for in vivo radiopharmaceuticals used for diagnosis and monitoring to apply to PET drug products. FDA has only recently issued preliminary draft proposed regulations for the current good manufacturing practice requirements.

Under the 1997 Act, FDA cannot require new drug application or abbreviated new drug application approval for any PET drug product that complies with the PET compounding standards and the official monographs of the United States Pharmacopoeia until two years after the issuance of final current good manufacturing practice regulations and appropriate procedures for the approval of the specific PET drug product, whichever occurs later. The public comment period for the preliminary draft proposed current good manufacturing practice regulations closes on June 5, 2002, after which FDA has said it intends to issue a proposed rule with an additional period for public comment before issuing the final current good manufacturing practice regulations for PET drugs. It is not possible to predict when FDA will finalize these regulations, but we expect that this will not take place before October 2002. If so, FDA authority and the proposed new drug approval procedures and current good manufacturing practice requirements would not take effect before October 2004.

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

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

Our scanners, cyclotrons and radiopharmaceutical business require the use of radioactive materials. While this radioactive material has a short half-life, meaning it quickly breaks down into inert, or non-radioactive substances, storage, use and disposal of these materials presents the risk of accidental environmental contamination and physical injury. 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 regulation, we cannot completely eliminate the risk of accidental contamination or injury from those hazardous materials. Although we currently maintain insurance coverage for these risks, in the event of an accident, we could be held liable for any damages that exceed the limits or fall outside the coverage of our insurance. We may not be able to continue maintaining insurance against these risks on acceptable terms, or at all. We could incur significant costs and diversion of management attention in order to comply with current or future environmental, health and safety laws and regulations.

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

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

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

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


	•	the budget cycles of our customers;

	•	the size and timing of specific sales and any collection delays or defaults related to those sales;

	•	changes in the relative contribution to our revenue from our various products;

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

	•	product and price competition;

	•	the timing, market acceptance and development costs of new product introductions and product enhancements by us or our competitors;

	•	the length of our sales cycle;

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

	•	a downturn in general economic conditions; and

	•	the loss of key sales personnel or distributors.

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

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

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

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

We are currently in the early stages of incorporating the new LSO detector material technology into our PET and PET/CT scanners. We will incur significant expenses over the next several years in order to further develop this new LSO detector material technology. In addition, we anticipate that our expenses will also increase substantially in the foreseeable future as we:


	•	continue to invest in research and development to enhance our products and develop new technologies;

	•	develop additional applications for our current technology;

	•	increase our marketing and selling activities;

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

	•	continue to expand our network of PETNet radiopharmacies in the U.S. and internationally;

	•	develop additional manufacturing capabilities and infrastructure; and

	•	hire additional management and other personnel to keep pace with our growth.

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

We conduct business globally. International sales accounted for approximately 57%, 25% and 23% of sales in fiscal years 1999, 2000 and 2001, respectively. International sales have decreased overall from $50.2 million in 1999 to $44.2 million in 2001, while U.S. sales have increased from $38.1 million to $144.7 million. During this period our sales in the U.S. have grown rapidly as a result of a significant expansion in the U.S. market for PET products and services and our expanded product line. We intend to expand our presence in international markets, and we cannot assure you that we will compete successfully in international markets or meet the service and support needs of foreign customers. Our future results could be harmed by a variety of factors, including:


	•	difficulties in enforcing agreements and collecting receivables through the legal systems of foreign countries;

	•	the longer payment cycles associated with many foreign customers;

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


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

	•	our ability to obtain U.S. export licenses and other required export or import licenses or approvals;

	•	changes in the political, regulatory or economic conditions in a country or region; and

	•	difficulties protecting our intellectual property in foreign countries.

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

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

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

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

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

We depend on certain key executives, the loss of whom could disrupt our operations, cause us to incur additional expenses and impede our ability to expand our operations.

Our success is dependent upon the efforts and abilities of our key management, particularly Terry Douglass, Ph.D., our Chairman and President, Ronald Nutt, Ph.D., our Senior Vice President and Technology Director and the President of CTI PET Systems, David Gill, our Senior Vice President and Chief Financial Officer, Mark Rhoads, the President and Chief Executive Officer of PETNet Pharmaceuticals, Inc., Fred Stuvek, Jr., our Senior Vice President of Marketing and Sales, and Michael Templin, the Vice President of Finance and Chief Financial Officer for CTI PET Systems. It would be costly, time consuming and difficult to find suitable replacements for these individuals. The need to find replacements, combined with the temporary loss of the services of these key executives, could also

materially disrupt our operations and impede our growth by diverting management attention away from our core business and growth strategies.

Our success will depend on our ability to attract and retain key personnel and scientific staff.

We believe our future success will depend upon our ability to successfully manage our growth, including attracting and retaining scientists, engineers, nuclear pharmacists and other highly skilled personnel. Our employees may terminate their employment with us at any time and are not subject to employment contracts. Hiring qualified management and technical personnel will be difficult due to the limited number of qualified candidates. Competition for these types of employees is intense in the molecular imaging field. We have in the past experienced difficulty in recruiting qualified personnel. If we fail to attract and retain personnel, particularly management, sales and marketing and technical personnel, we may not be able to execute on our business plan successfully.

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

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

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

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


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

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

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

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

If our operations are found to be in violation of any of the laws described above or any of the other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, to achieve compliance with applicable federal and state privacy, security, and electronic transaction laws, we may be required to modify our operations with respect to the handling of patient information. Implementing these modifications may prove costly. At this time, we are not able to determine the full consequences to us, including the total cost of compliance, of these various federal and state laws.

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

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

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

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

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

Our executive officers and directors and individuals or entities affiliated with them will beneficially own an aggregate of approximately 42% of our outstanding common stock immediately after this offering. Acting together, these stockholders would be able to significantly influence all matters that our stockholders vote upon, including the election of directors, business combinations and other significant corporate actions.

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

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


	•	a staggered board of directors;

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

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

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

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

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

If a significant number of shares of our common stock is sold into the market following the offering, the market value of our common stock could significantly decline, even if our business is doing well.

Many of our existing stockholders will have an opportunity to sell their stock following this offering. Also, many of our employees and directors may exercise their stock options in order to sell the underlying stock in the market following this offering. Wachovia Capital Partners, Inc. and First Union Merchant Banking 1999-II, LLC, who hold an aggregate of 2,534,598 shares of our common stock to be outstanding after this offering, have certain contractual registration rights that may allow them to require us to file a registration statement with the SEC registering such shares for public sale. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of shares of our common stock in the public market after the offering, the market price of our common stock could decline significantly. This may also impair our ability to raise capital through the sale of additional equity securities. Officers, directors and stockholders owning an aggregate of approximately 30 million shares of our common stock have agreed that they will not, without the prior consent of Credit Suisse First Boston Corporation, directly or indirectly sell any of those shares.

Our stock price may be volatile and your investment in our common stock could suffer a decline in value.

There is currently no public market for our common stock. An active trading market for our common stock may not develop. We will establish the initial public offering price through negotiations with the representatives of the underwriters. You should not view the price they and we establish as any indication of prices that will prevail in the trading market. You may be unable to resell your shares at or above the initial public offering price for a variety of reasons, including fluctuations in the market price of our common stock caused by changes in our operating performance or prospects. In addition, there has been

significant volatility in the market price and trading volume of securities of health care and technology companies which often is unrelated to the financial performance of those companies. These broad market fluctuations may negatively affect the market price of our common stock.

Purchasers in this offering will experience immediate and substantial dilution.

We expect the initial public offering price of our shares to be substantially higher than the net tangible book value per share of our outstanding common stock. Accordingly, investors purchasing shares of common stock in this offering will pay a per share price that substantially exceeds the per share value of our tangible assets minus our liabilities. Such investors will also contribute 80.4% of the total amount invested to date to fund us, but will own only 25.2% of the shares of common stock outstanding, assuming the sale of 10,000,000 shares of our common stock in this offering at an assumed initial public offering price of $17.00 per share. To the extent outstanding stock options or warrants are exercised, there will be further dilution to new investors.

Our management will have broad discretion to spend a large portion of the net proceeds of this offering and may do so in ways with which you do not agree.

We estimate the net proceeds to us from this offering to be approximately $155.7 million, after deducting underwriting discounts and commissions and estimated offering expenses. We have not determined specific uses for a large portion of these net proceeds. Our board of directors and management may apply these proceeds to uses that you may not consider desirable. The failure of management to apply these funds effectively could harm our business.

This prospectus 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 prospectus contains, among others, forward-looking statements about:


	•	our expectations regarding financial condition or results of operations for periods after March 31, 2002;

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

	•	our discussion of 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;

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

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

	•	the development 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; and

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

These forward-looking statements reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties. Many important factors, some of which are discussed elsewhere in this prospectus, could cause actual results or achievements to differ materially from any future results or achievements expressed or implied by 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 current expectations reflected in these forward-looking statements include, among others, the factors discussed under the heading “Risk Factors” beginning on page 7.

You should read this prospectus, and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

The forward-looking statements contained in this prospectus reflect our views and assumptions only as of the date of this prospectus. 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.

We estimate that the net proceeds to us from the sale of the 10,000,000 shares of common stock that we are offering will be approximately $155.7 million based on an assumed initial public offering price of $17.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses. If the underwriters’ over-allotment option is exercised in full, we estimate that we will receive net proceeds of approximately $172.2 million from the sale of 11,048,000 shares. We will not receive any proceeds from the sale of shares by selling stockholders.


	•	approximately $37.0 million to repay outstanding indebtedness under our credit facility;

	•	approximately $35.0 million to expand our manufacturing facilities, grow our PETNet distribution network, and purchase capital equipment;

	•	approximately $10.2 million to redeem all outstanding shares of our Series A Redeemable Preferred Stock, including accrued and unpaid dividends; and

	•	approximately $0.4 million to repurchase 1,191,965 shares of our outstanding common stock.

The remaining proceeds of approximately $73.1 million will be used for general corporate purposes. The amounts that we actually expend for these specified purposes may vary significantly depending on a number of factors, including changes in our business strategy, the amount of our future revenues and expenses, and our future cash flow. For example, if our future revenues or cash flow are less than we currently anticipate, we may need to support our ongoing business operations with proceeds of this offering that we would otherwise use to support growth and expansion. As a result, we will retain broad discretion in the allocation of the net proceeds of this offering and may spend such proceeds for any purpose, including purposes not presently contemplated.

Until we use the net proceeds of this offering for the above purposes, we intend to invest the funds in short-term, investment grade, interest-bearing securities. We cannot predict whether the proceeds invested will yield a favorable return. We may also temporarily repay other outstanding borrowings under our credit facility.

Our credit facility matures on March 14, 2004. Interest on outstanding borrowings under our credit facility accrues at a variable rate. As of March 31, 2002, the interest rate on amounts outstanding under our credit facility was 3.7%. The outstanding amount under our credit facility was used to refinance debt originally incurred to fund growth in working capital, such as increases in inventory and accounts receivable. The redemption date for our Series A Redeemable Preferred Stock is September 30, 2006. Our Series A Redeemable Preferred Stock accrues dividends at an annual rate of 9.0%.

An affiliate of Banc of America Securities LLC, one of the underwriters of this offering, is a lender under our credit facility with a 22.2% participation in the facility. Therefore, that affiliate will receive a corresponding percentage of any proceeds from this offering used to repay indebtedness under our credit facility.

We have never declared or paid any cash dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to support the development and growth of our business. Payment of future dividends, if any, will be at the discretion of our board of directors.


	•	on an actual basis;

	•	on a pro forma basis to give effect to our repurchase of 2,536,109 shares of outstanding common stock on May 13, 2002 for approximately $11.9 million; and

	•	on a pro forma as adjusted basis to give further effect to the conversion of our outstanding convertible preferred stock into common stock upon completion of this offering and to reflect our sale of 10,000,000 shares of common stock in this offering at an assumed initial public offering price of $17.00 per share and our application of the estimated net proceeds therefrom in the manner described under the heading “Use of Proceeds.”

You should read this table together with the information under the headings “Use of Proceeds,” “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Our Capital Stock,” and with our consolidated financial statements and related notes contained elsewhere in this prospectus.


	•	76,000 shares issuable upon exercise of outstanding warrants at an exercise price of $6.56 per share;

	•	4,957,728 shares issuable upon exercise of outstanding stock options at a weighted average price of $3.70 per share;

	•	a number of shares equal to $750,000 divided by the initial public offering price per share, which are issuable upon the exercise of outstanding stock options held by two independent directors who recently joined our board of directors; and

	•	3,960,000 shares available for future issuance under our equity incentive plans.

Our pro forma net tangible book value as of March 31, 2002 was approximately $14.7 million, or $0.48 per share. We have calculated this amount by subtracting our total liabilities from our total tangible assets and then dividing the difference by the total number of shares of common stock outstanding, after giving effect to the conversion of our outstanding convertible preferred stock into common stock upon completion of this offering, our repurchase of 2,536,109 shares of outstanding common stock on May 13, 2002 and our incurrence of an additional $11.9 million of indebtedness to finance such repurchase. After giving effect to our sale of 10,000,000 shares of common stock in this offering, at an assumed initial public offering price of $17.00 per share, and the application of the estimated net proceeds therefrom in the manner described under the heading “Use of Proceeds,” our pro forma as adjusted net tangible book value at March 31, 2002 would have been approximately $170.4 million, or $4.30 per share. This amount represents an immediate increase in pro forma net tangible book value of $3.82 per share to existing stockholders and an immediate dilution of $12.70 per share to new investors. The dilution to investors in this offering is illustrated in the following table:

The following table summarizes, on a pro forma as adjusted basis as of March 31, 2002, the total number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing stockholders and to be paid to us by new investors in this offering at an assumed initial public offering price of $17.00 per share:

If the underwriters exercise their over-allotment option in full, our existing stockholders would own 72.8% and our new investors would own 27.2% of the total number of shares of our common stock outstanding after this offering.

Sales by the selling stockholders in this offering will reduce the number of shares held by our existing stockholders to 28,919,305 or 73.0% (or 28,359,305 or 68.8% if the underwriters’ over-allotment option is exercised in full) of the total number of shares outstanding, and will increase the number of shares held by new investors to 10,720,000 shares or 27.0% (or 12,328,000 or 29.9% if the underwriters’ over-allotment option is exercised in full) of the total number of outstanding shares of common stock after the offering.

The preceding discussion and tables assume no exercise of outstanding stock options or warrants. As of March 31, 2002, there were:


	•	76,000 shares issuable upon exercise of outstanding warrants at an exercise price of $6.56 per share;

	•	4,957,728 shares issuable upon exercise of outstanding stock options at a weighted average exercise price of $3.70 per share;

	•	a number of shares equal to $750,000 divided by the initial public offering price per share, which are issuable upon the exercise of outstanding stock options held by two independent directors who recently joined our board of directors; and

	•	3,960,000 shares available for future issuance under our equity incentive plans.

The exercise of outstanding options or warrants would result in further dilution to investors in this offering.

You should read the following selected consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus. We have derived the selected financial data as of and for the fiscal years ended September 30, 1997, 1998, 1999, 2000 and 2001 from our audited financial statements. We have derived the selected financial data at March 31, 2002 and for the six months ended March 31, 2001 and 2002 from our unaudited financial statements, which, in our opinion, include all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of the information set out in this prospectus. The information below is not necessarily indicative of the results of future operations.

The following discussion should be read in conjunction with our consolidated financial statements and the related notes appearing elsewhere in this prospectus. This discussion contains forward-looking statements. Forward-looking statements 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 or implied by forward-looking statements. A number of these important factors are described in the section of this prospectus entitled “Risk Factors.”

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

Historically, the majority of our consolidated revenues, gross margin and net income have been attributable to our CTI PET Systems segment. Our strategy includes plans for growing our other segments over time with a goal of having greater than 50% of our gross revenues and net income being derived from such other segments by 2006, the expected year that Siemens’ could first close on the exercise of its option to purchase CTI PET Systems. This strategy contemplates the following initiatives: (1) expansion of our PETNet radiopharmaceutical distribution network to meet market needs; (2) the direct distribution by us of PET scanners; (3) development of new proprietary radiopharmaceuticals; (4) growing our service contract business; and (5) adding additional products and services.

We operate in three segments for financial reporting purposes: CTI PET Systems; PETNet; and detector materials. In addition, we have other PET-related products and services that are not classified as separate segments for financial reporting purposes.

Our CTI PET Systems segment includes the development, production and sale of PET and PET/ CT scanners. We conduct this business through our subsidiary, CTI PET Systems, Inc., which was formed in 1987 as a joint venture with Siemens Medical Solutions USA, Inc., a wholly owned subsidiary of Siemens, AG. We own 50.1% of CTI PET Systems and Siemens owns the remaining 49.9%.

From 1987 until April 2001, the products of CTI PET Systems were distributed exclusively by Siemens. Under this distribution agreement, CTI PET Systems received and recognized revenue in an amount equal to the price to the customer and we paid Siemens a fee to cover its selling, marketing and distribution costs. These fees were reported as cost of revenues and selling expenses in our consolidated statements of operations. Under this agreement, we set the price to the end customer, had ultimate liability to the end customer for product performance, and retained credit risk associated with sales to end customers.

In April 2001, we implemented a multiple distributor strategy for CTI PET Systems by commencing direct distribution and by pursuing additional third-party distributor agreements. In November 2001, we added Hitachi Medical Systems America, Inc. as a third-party distributor of CTI PET Systems’ products. Following our implementation of the multiple distributor strategy, we began receiving and recording

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

The scanners manufactured by CTI PET Systems typically range in customer price from $600,000 to $2.5 million and offer customers a broad range of throughput times, resolution and image quality.

Our PETNet segment consists of our business of developing, manufacturing and distributing radiopharmaceuticals and providing certain PET related services such as reimbursement education, radiation safety consulting, licensure assistance and marketing assistance. We conduct this business through our subsidiary, PETNet Pharmaceuticals, Inc. From PETNet’s formation in June 1996 until September 1999, we owned a minority interest, and, therefore, did not consolidate PETNet for financial reporting purposes. In fiscal year 1999, we increased our ownership interest in PETNet to 56% and began consolidating PETNet. On October 30, 2000, we increased our ownership of PETNet to 100%.

We currently operate 32 PETNet radiopharmacies around the country. Twelve of these radiopharmacies operate cyclotrons owned by other parties, or hosts, pursuant to contracts. These host contracts vary but typically require us to provide radiopharmaceuticals to the host at below market prices while also allowing us to use the host’s facility to manufacture and distribute radiopharmaceuticals commercially to third parties. In addition, we typically compensate the host for the use of the cyclotron. The 32 radiopharmacies PETNet operates also include three radiopharmacies we do not consolidate. PETNet owns 50.1% of these radiopharmacies.

As we expand the number of radiopharmacies, we will incur an increase in cost of revenues before achieving significant revenues in these markets due to the large component of fixed costs. Additionally, significant levels of marketing activity may be necessary in the new markets in order for us to build a customer base large enough to generate sufficient revenue to offset such fixed costs and marketing expenses.

Our detector materials segment includes our business of developing, manufacturing and selling detector materials for use in PET scanners. We conduct this business through a wholly owned subsidiary named Advanced Crystal Technology, Inc. and an unincorporated division called CTI Detector Materials. We acquired Advanced Crystal Technology, Inc. in July 1999.

Advanced Crystal Technology, Inc. manufactures bismuth germanate, or BGO, the primary detector material used in the current generation of PET scanners. Our CTI Detector Materials division has exclusive rights to the development and manufacturing of a next generation detector material called lutetium oxyorthosilicate, or LSO. We acquired these exclusive rights from Schlumberger Technology Corporation 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 business in order to meet an expected increase in demand for detector materials as the PET market continues to grow. During 2001, we expanded our LSO detector materials facility including the addition of crystal pullers, a machine used to manufacture LSO crystals. This facility has grown from 10 LSO crystal pullers at the end of fiscal year 2000 to 18 pullers by the end of fiscal year 2001, and we anticipate that it will grow to 30 pullers by the end of fiscal year 2002. We also have an agreement with a supplier who supplies up to half of our LSO requirements.



	•	CTI Molecular Imaging, Inc., our parent company;


	•	our cyclotron division;

	•	CTI Services, which makes and sells calibration sources;

	•	our equipment service division;

	•	our German subsidiary that services our products in Europe;

	•	our 50% ownership interest in a radiopharmacy joint venture in Turkey, which we do not consolidate; and

	•	our division that distributes PET scanners sold to it by CTI PET Systems, which was started in April 2001.

Our revenue is derived primarily from sales of PET products and services. Revenue for scanners, detector materials, radiopharmaceuticals, calibration sources and spare parts is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and 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 CTI PET Systems and, therefore, is eliminated in consolidation for financial reporting purposes. Revenue for cyclotron systems is recognized upon successful installation and customer acceptance. Installation is deemed essential to the functionality of the machines and we alone provide this service for our cyclotrons. Revenue for service contracts is recognized ratably over the period in which the service is provided.

Our scanners, cyclotrons, detector materials, calibration sources and spare parts are manufactured at our facilities in Knoxville and Rockford, Tennessee. Our radiopharmaceuticals are manufactured at 32 PETNet radiopharmacies around the U.S. We employ a network of PET field service engineers to service our installed base of scanners and cyclotrons.


	•	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; 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 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.

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.

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 and income (loss) from operations for all segments, expressed as a percentage of segment revenues.

Revenues for the six months ended March 31, 2002 were $102.8 million, an increase of $27.5 million, or 36.5%, from $75.3 million in 2001.

CTI PET Systems. Revenues for the six months ended March 31, 2002 were $71.2 million, an increase of $20.


Delaware	3844	62-1377363
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)


PROSPECTUS SUMMARY
RISK FACTORS
FORWARD-LOOKING STATEMENTS
USE OF PROCEEDS
DIVIDEND POLICY
CAPITALIZATION
DILUTION
SELECTED CONSOLIDATED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS
MANAGEMENT
CERTAIN TRANSACTIONS
PRINCIPAL AND SELLING STOCKHOLDERS
DESCRIPTION OF OUR CAPITAL STOCK
SHARES ELIGIBLE FOR FUTURE SALE
UNDERWRITING
NOTICE TO CANADIAN RESIDENTS
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND ADDITIONAL INFORMATION
CTI MOLECULAR IMAGING, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
CTI MOLECULAR IMAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
SIGNATURES
EXHIBIT INDEX
EX-1.1 UNDERWRITING AGREEMENT
EX-5.1 OPINION OF ALSTON & BIRD LLP
EX-23.2 CONSENT OF PRICEWATERHOUSECOOPERS LLP


	Page

PROSPECTUS SUMMARY		1
RISK FACTORS		7
FORWARD-LOOKING STATEMENTS		21
USE OF PROCEEDS		22
DIVIDEND POLICY		22
CAPITALIZATION		23
DILUTION		24
SELECTED CONSOLIDATED FINANCIAL DATA		25
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		27
BUSINESS		50
MANAGEMENT		75
CERTAIN TRANSACTIONS		86
MATERIAL FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF COMMON STOCK
PRINCIPAL AND SELLING STOCKHOLDERS		89
DESCRIPTION OF OUR CAPITAL STOCK		92
SHARES ELIGIBLE FOR FUTURE SALE		96
UNDERWRITING		101
NOTICE TO CANADIAN RESIDENTS		105
LEGAL MATTERS		107
EXPERTS		107
WHERE YOU CAN FIND ADDITIONAL INFORMATION		107
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS		F-1


Common stock offered by us		10,000,000 shares

Common stock offered by the selling stockholders		720,000 shares

Common stock to be outstanding after this offering		40,824,961 shares

Use of proceeds		To expand manufacturing facilities, grow our PETNet distribution network, purchase capital equipment, repay indebtedness, redeem outstanding preferred stock, repurchase outstanding common stock and for general corporate purposes

Proposed Nasdaq National Market symbol		CTMI



											Six Months Ended
		Year Ended September 30,									March 31,

		1999			2000			2001			2001			2002


											(unaudited)
Statements of Operations Data:
Revenues		$	88,247		$	124,026		$	188,877		$	75,313		$	102,815
Gross margin			35,536			55,654			78,628			32,033			41,853
Selling, general and administrative expenses(1)			15,430			21,751			29,433			12,120			15,682
Research and development expenses(1)			10,605			14,845			18,985			7,720			9,453
Stock-based compensation expense			—			503			538			425			8,236

Income from operations			9,501			18,555			29,672			11,768			8,482
Warrant liability mark to market expense(2)			—			3,174			3,921			3,921			8,902
Interest expense, net			1,029			2,300			3,767			2,095			2,296
Other (income) expense			490			375			(428	)		(291	)		(394	)

Income (loss) before income taxes and minority interest			7,982			12,706			22,412			6,043			(2,322	)
Provision for income taxes			1,465			3,875			9,930			4,192			4,602

Income (loss) before minority interest			6,517			8,831			12,482			1,851			(6,924	)
Minority interest expense			3,035			4,453			6,366			2,371			4,915

Net income (loss)		$	3,482		$	4,378		$	6,116		$	(520	)	$	(11,839	)

Dividends on and accretion of preferred stocks			—			1,904			2,053			982			1,552

Net income (loss) attributable to common stockholders		$	3,482		$	2,474		$	4,063		$	(1,502	)	$	(13,391	)

Earnings (loss) per common share:
	Basic	$	0.13		$	0.10		$	0.15		$	(0.05	)	$	(0.48	)
	Diluted	$	0.11		$	0.09		$	0.13		$	(0.05	)	$	(0.48	)
Weighted average shares outstanding:
	Basic		27,269,253			25,243,051			27,860,086			27,598,738			28,121,253
	Diluted		30,309,014			28,440,078			31,340,041			27,598,738			28,121,253

Other Operating Data (unaudited):
Scanners sold			40			61			88			32			49
Radiopharmaceutical doses sold(3)			12,700			29,100			64,600			24,900			53,650
Cash flows provided by (used in):
	Operating activities	$	107		$	(10,647	)	$	(10,884	)	$	(465	)	$	2,562
	Investing activities		(1,331	)		(7,879	)		(11,620	)		(6,682	)		(9,702	)
	Financing activities		6,584			14,774			22,777			5,999			6,874
Adjusted EBITDA(4)			11,261			22,465			35,103			14,272			20,174

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R. Gregory Brophy, Esq. Nils H. Okeson, Esq. Alston & Bird LLP One Atlantic Center 1201 West Peachtree Street Atlanta, Georgia 30309-3424 Phone: (404) 881-7000		Michael C. Williams, Esq. Joseph E. Gilligan, Esq. Hogan & Hartson L.L.P. Columbia Square 555 13th Street, NW Washington, D.C. 20004-1109 Phone: (202) 637-5600



	As of March 31, 2002

					Pro Forma
	Actual		Pro Forma		As Adjusted


	(unaudited)
Balance Sheet Data:
Cash and cash equivalents	$	1,444	$	1,444	$	109,549
Total assets		234,136		234,136		342,241
Long-term debt and capital lease obligations		91,595		103,483		66,483
Redeemable preferred stock		8,023		8,023		—
Convertible redeemable preferred stock		5,860		5,860		—
Stockholders’ equity		39,081		27,193		186,181



							Six Months
	Year Ended September 30,						Ended March 31,

	1999		2000		2001		2001		2002


							(unaudited)
Cost of revenues	$	—	$	—	$	—	$	—	$	18
Selling, general and administrative expenses		—		503		533		420		8,134
Research and development expenses		—		—		5		5		84

	$	—	$	503	$	538	$	425	$	8,236


(2)	We make periodic mark to market adjustments to reflect the fair value of warrants with put rights. All warrants with put rights were exercised on March 29, 2002 and the put feature was eliminated on March 31, 2002.
(3)	Excludes doses sold to hosts and doses sold by unconsolidated joint ventures. Hosts are the academic and healthcare institutions that own cyclotrons and have entered into contractual relationships with us allowing us to operate the cyclotrons and distribute FDG to the hosts as well as to third parties. Some of the host agreements allow for the hosts to pay a flat fee for the doses received from PETNet and therefore are not always delivered or billed on a per dose basis.
(4)	When we refer to adjusted EBITDA, we mean net earnings or loss before minority interest, interest expense (net), income taxes, depreciation, amortization and all non-cash charges. We have included adjusted EBITDA because we generally consider it to be a good indicator of our ability to generate cash flow in order to liquidate our liabilities and reinvest in our company. Adjusted EBITDA is not a measurement of financial performance under accounting principles generally accepted in the U.S. and should not be considered a substitute for net income or loss as a measure of performance, or to cash flow as a measure of liquidity. Investors should note that this calculation of adjusted EBITDA might differ from similarly titled measures for other companies. A reconciliation of net income under generally accepted accounting principles to adjusted EBITDA is as follows:



				March 31, 2002

										Pro Forma
				Actual			Pro Forma			As Adjusted


				(in thousands)
				(unaudited)
Cash and cash equivalents				$	1,444		$	1,444		$	109,549

Long-term debt and capital lease obligations					91,595			103,483			66,483

Preferred stock, $.01 par value, 10,000,000 shares authorized:
	Redeemable preferred stock, 400,000 shares issued and outstanding, actual and pro forma; and no shares issued and outstanding, pro forma as adjusted				8,023			8,023			—
	Convertible redeemable preferred stock, 200,000 shares issued and outstanding, actual and pro forma; and no shares issued and outstanding, pro forma as adjusted				5,860			5,860			—

Stockholders’ equity:
	Common stock, $.01 par value, 500,000,000 shares authorized; 32,727,379 shares issued and 32,087,379 outstanding, actual; 32,727,379 shares issued and 29,551,270 shares outstanding, pro forma; and 44,007,379 shares issued and 39,639,305 shares outstanding, pro forma as adjusted				327			327			435
	Additional paid in capital				47,784			47,784			207,064
	Retained earnings				(7,776	)		(7,776	)		(7,776	)
	Unearned compensation				(463	)		(463	)		(463	)
	Other comprehensive income — currency translation adjustment				(170	)		(170	)		(170	)
	Treasury stock, at cost, 640,000 shares, actual; 3,176,109 shares, pro forma; and 4,368,074 shares, pro forma as adjusted				(621	)		(12,509	)		(12,909	)

		Total stockholders’ equity			39,081			27,193			186,181

			Total capitalization	$	144,559		$	144,559		$	252,664


Assumed initial public offering price per share				$	17.00
	Pro forma net tangible book value per share as of March 31, 2002	$	0.48
	Increase in pro forma net tangible book value per share attributable to this offering (including the repurchase of 1,191,965 shares of outstanding common stock)	$	3.82
	Pro forma net tangible book value after the offering			$	4.30

Dilution per share to new investors in this offering				$	12.70



		Shares Purchased					Total Consideration					Average
												Price
		Number		Percent			Amount		Percent			Per Share

Existing stockholders			29,639,305		74.8	%	$	41,462,000		19.6	%	$	1.40
New investors			10,000,000		25.2			170,000,000		80.4			17.00

	Total		39,639,305		100.0	%	$	211,462,000		100.0	%	$	5.33



	As of September 30,										As of
											March 31,
	1997		1998		1999		2000		2001		2002

											(unaudited)
Balance Sheet Data:
Total assets	$	42,545	$	61,142	$	92,345	$	143,041	$	207,781	$	234,136
Long-term debt and capital leases		1,361		6,352		3,102		36,878		73,122		91,595
Redeemable preferred stock		680		—		7,084		7,397		7,740		8,023
Convertible redeemable preferred stock		—		—		3,542		4,230		5,040		5,860
Stockholders’ equity	$	8,143	$	7,981	$	11,217	$	8,110	$	24,157	$	39,081


(2)	We make periodic mark to market adjustments to reflect the fair value of warrants with put rights. All warrants with put rights were exercised on March 29, 2002 and the put feature was eliminated on March 31, 2002.
(3)	Prior to 1999, we held a minority interest in PETNet and accounted for our investment under the equity method. During 1999, our ownership increased to 56%. As such, we began to consolidate PETNet and no longer recognized equity in losses of PETNet.

(4)	If we had applied the non-amortization of goodwill provisions of Statement of Financial Accounting Standards 142 in the years ended September 30, 1999, 2000 and 2001, our reported net income would have been $3.5 million, $4.9 million and $6.8 million, respectively.

(5)	Pro forma earnings per share gives effect to the conversion of all outstanding shares of our convertible redeemable preferred stock into 1,280,000 shares of common stock and the release of restrictions on restricted common stock.

(6)	The supplemental pro forma earnings per share reflects the issuance of 2,176,471 shares in the offering and use of the related proceeds to extinguish $37,000 of outstanding long-term debt as if the extinguishment had occurred at the beginning of the respective periods.

(7)	When we refer to adjusted EBITDA, we mean net earnings or loss before minority interest, interest expense (net), income taxes, depreciation, amortization and all non-cash charges. We have included adjusted EBITDA because we generally consider it to be a good indicator of our ability to generate cash flow in order to liquidate our liabilities and reinvest in our company. Adjusted EBITDA is not a measurement of financial performance under accounting principles generally accepted in the U.S. and should not be considered a substitute for net income or loss as a measure of performance, or to cash flow as a measure of liquidity. Investors should note that this calculation of adjusted EBITDA might differ from similarly titled measures for other companies. A reconciliation of net income under generally accepted accounting principles to adjusted EBITDA is as follows:



												Six Months
												Ended
			Year Ended September 30,									March 31,

			1999			2000			2001			2001			2002

Revenues:
	CTI PET Systems			70.6	%		69.5	%		70.7	%		67.7	%		69.3	%
	PETNet			12.1			16.5			18.9			19.4			24.9
	Detector materials			2.7			8.6			9.7			8.5			10.3
	Other products and services			26.8			30.3			24.1			20.5			20.2
	Intercompany eliminations			(12.2	)		(24.9	)		(23.4	)		(16.1	)		(24.7	)

		Total		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

Income (loss) from operations:
	CTI PET Systems			108.4	%		82.1	%		71.4	%		72.0	%		189.4	%
	PETNet			(4.2	)		6.0			6.4			2.5			(3.5	)
	Detector materials			(3.1	)		18.4			18.9			19.5			35.3
	Other products and services			12.6			24.3			12.1			3.4			(111.8	)
	Intercompany eliminations			(13.7	)		(30.8	)		(8.8	)		2.6			(9.4	)

		Total		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%


U.S. Bancorp Piper Jaffray	Bear, Stearns & Co. Inc.


Banc of America Securities LLC	Wachovia Securities


	*Six Months Ended March 31, 2002 Compared to Six Months Ended March 31, 2001*