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Purpose: LabPET II is a new generation APD‐based PET scanner designed to achieve sub‐mm spatial resolution using truly pixelated detectors and highly integrated parallel front‐end processing electronics. Methods: The basic element uses a 4×8 array of 1.12×1.12 mm2 Lu1.9Y0.1SiO5:Ce (LYSO) scintillator pixels with one‐to‐one coupling to a 4×8 pixelated monolithic APD array mounted on a ceramic carrier. Four detector arrays are mounted on a daughter board carrying two flip‐chip, 64‐channel, mixed‐signal, application‐specific integrated circuits (ASIC) on the backside interfacing to two detector arrays each. Fully parallel signal processing was implemented in silico by encoding time and energy information using a dual‐threshold Time‐over‐Threshold (ToT) scheme. The self‐contained 128‐channel detector module was designed as a generic component for ultra‐high resolution PET imaging of small to medium‐size animals. Results: Energy and timing performance were optimized by carefully setting ToT thresholds to minimize the noise/slope ratio. ToT spectra clearly show resolved 511 keV photopeak and Compton edge with ToT resolution well below 10%. After correction for nonlinear ToT response, energy resolution is typically 24±2% FWHM. Coincidence time resolution between opposing 128‐channel modules is below 4 ns FWHM. Initial imaging results demonstrate that 0.8 mm hot spots of a Derenzo phantom can be resolved. Conclusion: A new generation PET scanner featuring truly pixelated detectors was developed and shown to achieve a spatial resolution approaching the physical limit of PET. Future plans are to integrate a small‐bore dedicated mouse version of the scanner within a PET/CT platform.