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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission File Number: 000-49867

CTI Molecular Imaging, Inc.

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

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

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

Common Stock, $0.01 par value

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

CTI MOLECULAR IMAGING, INC.

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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

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

	•	our expectations regarding financial condition or results of operations for periods after September 30, 2004;
	•	our critical accounting policies;
	•	the timing of the exercisability of the Siemens option to purchase an additional ownership interest in CTI PET Systems and the effect of the Siemens option, or its exercise, on our business;
	•	our expectations regarding the size and growth of the market for our products and services and the market acceptance of CTI’s products and services;
	•	our business strategies and our ability to grow our business;
	•	competition, pricing, the seasonality of capital equipment sales, the timing of orders from and shipments to distribution partners and customers, and the availability of financing services for customers;
	•	our ability to enhance existing, or develop new, products and services and the impact of any such enhancements or developments;
	•	the development and timing of new applications for PET and the impact of any such new applications;
	•	the implementation or interpretation of current or future regulations and legislation;
	•	the number and scope of procedures involving our products and services for which third-party reimbursement is available, and the reimbursement levels of third-party payors;
	•	our ability to maintain contracts and relationships with key suppliers, customers, distributors or research and development collaboration partners;
	•	our ability to maintain our existing, or to develop additional, valuable intellectual property rights; and
	•	our future sources of and needs for liquidity and capital resources.

      The forward-looking statements contained in this report reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties. Many important factors could cause actual results or achievements to differ materially from any future results or achievements expressed in or implied by our forward-looking statements. Many of the factors that will determine future events or achievements are beyond our ability to control or predict. Important factors that could cause actual results or achievements to differ materially from the results or achievements reflected in our forward-looking statements include, among other things, the factors discussed in Part II, Item 7 of this report under the sub-heading “Risk Factors.”

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

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

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

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PART I

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

Overview

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

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

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

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

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

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Industry Background

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

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

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

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

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

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

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

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

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

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

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

Business Strategy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Our Products and Services

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Research & Development

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

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

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

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

Products Under Development

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

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

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

Our Relationship with Siemens

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

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

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      The exercisability of the put/call right is contingent upon CPS selling, during the year preceding exercise, in excess of the cumulative total number of units specified in the “Siemens minima plus 20% plan” attached to the joint venture agreement. The “Siemens minima plus 20% plan” provides for annual increases in the cumulative total number of units sold by CPS beginning on December 9, 1987. As of September 30, 2004, the cumulative total number of units sold by CPS was 852 and CPS would need to have sold a cumulative total of 1,055 units to achieve the required cumulative sales level for the put/call right to be exercisable. The cumulative unit sales requirement increases by 74 units each year. It is impossible to definitively state when the put/call right will become exercisable by either party. However, based upon our current forecasts, we do not expect this target level to be reached before the second half of fiscal year 2006. Siemens cannot exercise its option until the end of the fiscal year in which this target level is reached. Assuming that sales volumes are met in 2006 and further assuming the exercise of the one-year deferral right, the sale of CPS is not expected to occur before 2007.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Competition

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

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

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

Sales and Marketing

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

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

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