**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-K**

 

**FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**(Mark One)**
| **ý** | ** **                                                                                                                                                                                                                                                                                                                                     | **ANNUAL REPORT UNDER SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**      |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                           |                                                                                     |
| ** ** | **For the fiscal year ended: December 31, 2005.**                                                                                                                                                                                                                                                                                              |
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| **OR**     | ** **                                                                                                                                                                                                                                                                                                                                     | ** **                                                                               |
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| ** ̈** | ** **                                                                                                                                                                                                                                                                                                                                     | **TRANSITION REPORT UNDER SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.** |
|       |                                                                                                                                                                                                                                                                                                                                           |                                                                                     |
| ** ** | **For the transition period from                          to                           ** |
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**MEDICSIGHT,INC.**

(Exact Name of Registrant asSpecified in its Charter)

 

| **Delaware**                      | ** ** | **0-26886**  | ** ** | **13-4148725**      |
|-----------------------------------|------------|--------------|------------|---------------------|
| (State or Other Jurisdiction      |       | (Commission  |       | (I.R.S. Employer    |
| of Incorporation or Organization) |       | File Number) |       | Identification No.) |

 

| **46 Berkeley Square, London, W1J 5AT, United  Kingdom** |
|----------------------------------------------------------|
| (Address of Principal Executive Offices) (Zip Code)      |

 

**011-44-20-7598-4070**

(Registrant’s TelephoneNumber, Including Area Code)

 

Securities registered undersection 12(b) of the Exchange Act:  **Not applicable**

 

Securitiesregistered under section 12(g) of the Exchange Act:  **Common stock, par value$0.001 per share**

 

Indicate by check mark if the Registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ̈        No  ý

 

Indicate by check mark if the Registrant is notrequired to file reports pursuant to Section 13 or 15(d) of the Act.            Yes   ̈        No  ý

 

Check whether the issuer: (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required tofile), and (2) has been subject to such filing requirements for the past 90days.      Yes  ý        No   ̈

 

Indicate by check mark if disclosure of delinquentfilers is not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.       ý

 

Indicate by check mark whether the Registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer.

 
| Large  Accelerated Filer  ̈ |   | Accelerated  filer  ̈ |   | Non-accelerated  Filer ý |
|---------------------------------|--------|---------------------------|--------|-------------------------------|

 

Indicate by check mark whether the Registrant is ashell company (as defined in Rule 12b-2 of the Act).          Yes        ̈      No      ý

 

The aggregate market value of the common stock ofMedicsight, Inc. held by non-affiliates of the registrant was $14,036,705 basedon the average bid and asked prices of such common equity as of June 30, 2005.

 

As of March 29, 2006 the number of shares of commonstock, par value $0.001 per share, of Medicsight, Inc. issued and outstandingwas 37,667,883.

 

 

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NOTE REGARDING FORWARD LOOKING STATEMENTS

 

ThisAnnual Report on Form 10-K, including “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in Item 7, containsforward-looking statements that involve risks and uncertainties, as well asassumptions that, if they never materialize or prove incorrect, could cause theresults of Medicsight, Inc and its consolidated subsidiaries (the “Company”) todiffer materially from those expressed or implied by such forward-lookingstatements. All statements other than statements of historical fact arestatements that could be deemed forward-looking statements, including anyprojections of revenue, gross margin, expenses, earnings or losses fromoperations, synergies or other financial items; any statements of the plans,strategies and objectives of management for future operations, including therate of market development and acceptance of medical imaging technology; theexecution of restructuring plans; any statement concerning developments,performance or industry rankings relating to products or services; anystatements regarding future economic conditions or performance; any statementsof expectation or belief; and any statements of assumptions underlying any ofthe foregoing. The risks, uncertainties and assumptions referred to aboveinclude the performance of contracts by suppliers, customers and partners;employee management issues; the difficulty of aligning expense levels withrevenue changes; and other risks that are described herein, including but notlimited to the specific risks areas discussed in “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in Item 7 ofthis report, and that are otherwise described from time to time in theCompany’s Securities and Exchange Commission reports filed after this report.The Company assumes no obligation and does not intend to update theseforward-looking statements.

 

TheCompany’s main operating currency is UK sterling (£).

 

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# **PART I**

# ** **

## **ITEM1.**                  BUSINESS.

## ** **

**General**

** **

Medicsight,Inc. was originally incorporated as a Utah corporation in 1977 and wasre-incorporated in Delaware in 2000. All references in this report to “theCompany”, “we” or “us” refer to Medicsight, Inc. and subsidiaries. The Companyhas two primary business objectives:

 

•                  To conceive,develop and commercialize innovative medical imaging applications derived fromour core technology known as Medicsight CAD.

 

•                  To establish aglobal online community for medical imaging professionals (to be known asMedicExchange) with a rich selection of specialist clinical content forregistered users combined with a product marketplace where medical imagingvendors can sell their solutions online.

 

During2005 the Company initiated a plan of disposal of the Lifesyne scanning businesswhich was subsequently sold in November 2005 and its results are reflected asdiscontinued operations.

 

Duringthe year ended December 31, 2005 the Company raised $12,035,000 (net ofcommission and expenses) by issuing 3,327,000 restricted shares of commonstock.

 

TheCompany raised a further $3,600,000 (net of commission and expenses) on January13, 2006 by issuing 1,000,000 restricted shares of common stock and isreflected as common stock subscribed but unissued at December 31, 2005. TheCompany had received the funds prior to the December 31, 2005 and is reflectedas cash held for common stock subscribed but unissued at December 31, 2005.

 

Theseprivate placements were underwritten by Asia IT Capital Investments Limited(“Asia IT”), a related party. Asia IT received commissions of $1,630,000 on theabove private placements.

 

OnMarch 17, 2006 the Company raised a further $990,000 (net of commission andexpenses) by issuing 275,000 restricted shares of common stock. Asia IT earnedcommissions of $110,000 on the above private placement.

 

Duringthe year ended December 31, 2004 the Company raised $23,310,000 (net ofcommission and expenses) by issuing 8,579,000 restricted shares of commonstock. These private placements were underwritten by Asia IT, a related party.Asia IT received commissions of $2,410,000 on the above private placement.

 

TheCompany’s authorized share capital is 40,000,000 shares of common stock, parvalue $0.001. At March 27, 2006, 37,667,883 shares of common stock had beenissued.

 

Wemaintain our corporate offices at 46 Berkeley Square, London, W1J 5AT, UnitedKingdom, telephone+44 (0) 207-598-4070, facsimile: +44 (0) 207-598-4071.

 

**BusinessStrategy**

** **

Wehave four principal operating subsidiaries: Medicsight PLC (“MS-PLC”),Medicsight U.S.A., Inc (“MS-US”) (previously Lifesyne U.S.A.), Medicsight(International) Limited (“MIL”) and Medic Exchange, Inc (“MDX”) (previouslyknown as Medicsight On-line, Inc (“MOL”).

 

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LifesyneUK Limited (“Lifesyne”) was sold to an independent third party in November 2005and is reported as discontinued operations. In addition Medicsight AssetManagement Limited (“MAM”) ceased operations during the year.

 

*MS-PLC*. Our majority-owned subsidiary,MS-PLC, is currently engaged in efforts to commercialize the groups CADproducts (“Medicsight CAD”). At December 31, 2005 and December 31, 2004, theCompany owned 70,677,300 ordinary shares in MS-PLC, constituting 81.8% of theoutstanding shares.

 

*MS-US.*MS-US(previously Lifesyne US) is also a wholly owned subsidiary of MS-PLC, wasestablished toco-ordinate operations in the United States of America and is based inNashville, Tennessee.

 

*MIL.*MIL, a wholly owned subsidiary of MS-PLC, was established to co-ordinateoperations outside the United States of America and Europe and is based inGeneva, Switzerland.

 

*MDX.*MDX, a majority-owned subsidiary,incorporated in Delaware is currently engaged in developing the online business– “MedicExchange” and began operating in January 2006. The Company owns 90% ofMDX and 10% is owned by Compile Nominees Limited, a company registered inGibraltar, who is assisting MDX with the development of the portal.

 

*Lifesyne*.Lifesyne was a wholly owned non-core subsidiary of MS-PLC that was establishedin September 2002 to provide scanning services and thereby acquire patient CTscan data necessary to test and validate the Medicsight CAD software. Lifesyneoperated one scanning center in Westminster, London. On November 10, 2005, wesold Lifesyne to an independent third party for approximately $450,000. At thattime the net assets of Lifesyne totaled approximately $844,000 leading to animpairment loss of approximately $394,000.

 

Revenues and operating losses for Lifesyne follow:

 
| ** **           | ** ** | **December 31, 2005** | ** ** | **$(000)  December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|----------------------|------------|---------------------------------|------------|-----------------------------------------|------------|---------------------------------|------------|
| Revenues             |       | $                               | 427        |                                    | $          | 538                             |       | $ | 276 |   |
| Operating losses     |       | $                               | 1,084      |                                    | $          | 1,563                           |       | $ | 1,155 |   |
| Loss from impairment |       | $                               | 394        |                                    | $          | 582                             |       | $ | — |   |

 

*MAM*.MAM is also a wholly owned subsidiary of MS-PLC that was established inSeptember 2002 for the purpose of acquiring fixed assets on behalf of theoperating entities in the group. As Lifesyne’s strategy changed MAM’s businesswas limited so all assets were transferred to MS-PLC or Lifesyne at marketvalue or fully impaired on December 31, 2004. The impairment relating to theassets transferred to Lifesyne in Fiscal 2004 is included in discontinued itemsabove. MAM has ceased trading now that all of its assets have been disposed of.

 

***MedicExchange***

 

MedicExchangeis being established to provide medical imaging professionals with a globalonline community containing a variety of relevant clinical papers, trainingmaterials and content. This combined with a multi-vendor online sales channelfor diagnostic, treatment and surgery planning solutions will give theseprofessionals access to information and products that they otherwise would havedifficulty accessing. We believe that our low cost, on demand, digitallydownloadable model is unique in this sector.

 

MedicExchangewill offer medical imaging software vendors a single channel through which theycan access a large community of medical imaging professionals globally in orderto sell and market their product solutions. MedicExchange is scheduled to beavailable in mid-2006.

 

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*Product Benefits*

 

MedicExchangewill provide vendors the opportunity to sell a variety of applications directlyto radiologists in an efficient and low-cost manner (web-based downloads).MedicExchange will offer traditional pricing plans in addition to flexible “peruse” pricing. This decreases the financial purchasing risk and setup times forradiologists by giving them an attractive pricing model via an online channel.

 

MedicExchangewill seek to add value for the radiologists by delivering a centralized meetingplace for clinical information, information collaboration and trainingservices.

 

MedicExchangeintends to cover the following imaging specialty areas: Women’s Imaging,Cardiology, Gastroenterology, Thoracic, Orthopedic and Neurology.

 

*Market Opportunity*

 

Radiologistsexpect frequency of computed tomography (“CT”) procedures to grow by over 35%over the next five years (source: Frost & Sullivan research). Traditionaloriginal equipment manufacturers (“OEM”) typically control the access to theseapplications and charge high per unit price points (typically $50,000 to$200,000). These high price pointscreate long sales cycles. The “per use” pricing model removes this obstacle topurchase. Online product purchasing and downloads create a flexible, on demandusage model.

 

Radiologists state a preference for theconcept of a “per use” pricing model and web-based downloadable tools. Over 80%would consider a dedicated internet portal for their area of specialty a usefulservice (source: Frost & Sullivan research).

 

*What differentiates the company?*

 

Bycreating strong relationships with our 3rd party partner vendors MDXintends to develop the clinical information and contacts, provide products andproduct demonstrations, training and support that will result in MedicExchangeachieving its aim to be the leading global portal for clinical vendors andprofessionals.

 

MedicExchangeaims to provide essential information, training and collaborative tools toattract customers, enable them to use the demonstration applications, purchasethe applications and retain them as repeat users.

 

TheMedicExchange portal will be a global distribution portal (initially withwebsites in the U.S., Europe and Asia). We believe that the MedicExchange couldmaterially change the way in which new medical products reach the market. Otherwebsites in the area, in our view, have not been able to take full advantage ofthe expressed desire in the medical community for portals, such as theMedicExchange, because their product offerings are limited compared tothose ofMedicExchange.

 

***Medicsight CAD***

 

MedicsightCAD products help clinicians identify, measure, and analyze suspiciouspathology, such as colorectal polyps and lung lesions. For the last four years,the Company has been working on developing advanced technical algorithms inthis area employing a team of scientists, image processing experts and softwaredevelopers.

 

Todate, MS-PLC has focused on two of the leading causes of premature death, lungcancer and colorectal cancer. Between them, these diseases are responsible forover 8.5 million premature deaths globally. There is increasing evidence thatearly detection leads to an improved life expectancy. Developing technologythat enables early detection of lung and colorectal cancers has been a corefocus of our product development. However,

 

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MS-PLC’stechnology is scalable to many other disease areas. We have plans to furtherextend our technologies to new areas of abdominal imaging such as liver during2006.

 

TheCompany’s CAD products include ColonCAD Application Programming Interface (“API”), the first CAD technologyavailable for CT colonography, and LungCAD API. Medicsight CAD software isprovided to medical imaging partners as an integrated solution and will also beavailable online through MedicExchange directly to clinicians.

 

*Product benefits*

 

MedicsightCAD products enable radiologists to read CT scans using a “concurrent-read”approach. Unlike “second-read” software, in which software is used afterradiologists complete their primary review, concurrent-read software enablesradiologists to review the original, “unfiltered” images side-by-sidesimultaneously, with a software-enhanced image showing regions of interest. MS-PLC believes that using CAD in a concurrent-read capacity increases colonicpolyp and lung nodule detection efficiency by minimizing the impact on existingradiology workflows while providing valuable additional information to theradiologist.

 

Interms of clinical practice and therefore market segmentation, our products canbe split between diagnostic treatment and screening;

 

*“Diagnostic”products; incidental “disease detection” and “disease tracking”*.These products have been designed to be used in symptomatic patients but todetect other diseases incidental to those for which the investigation wasoriginally requested. Subsequently, these incidentally identified lesions maybe tracked so that their progress may be monitored by measurement.

 

“*Screening” products*; *population screening ofasymptomatic patients*. CAD CT seeks to provide a cost effectivesolution to identify certain diseases sufficiently early to make populationscreening programs more cost effective in terms of life years saved.

 

*Market Opportunity*

 

MS-PLChas to date focused on multi slice CT scan analysis. In the world today, thereare over 120 million scans done a year. Over a third of these are conducted inthe U.S. These are nearly all diagnostic scans – that is, scans on patientswith symptoms. When screening of asymptomatic patients begins (scans ofpatients without specific symptoms), we expect these figures to increasedramatically.

 

Forcolorectal cancer (“CRC”) alone, the market opportunity can be summarized asfollows:

 
| CRC Screening in  Medicsight Core Geographics (USA, Europe, China, Japan)                                                                                                  |   |          |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|------------|
| Total population                                                                                                                                                           |   | 2,070,000,000 |       |
| At risk  population (50 yrs+ M/F)                                                                                                                                          |   | 455,400,000   |       |
| Assume 50% of  population uptake to screen for CRC                                                                                                                         |   | 227,000,000   |       |
| Assume 10% of  this population screened using computed tomographic colonography (“CTC”)  (suggested figure as quoted at 5th international congress VC,  Boston). |   | 22,700,000    |       |
| Potential market  opportunity assuming a $50 charge per scan                                                                                                               |   | $             | 1.1billion |   |
|                                                                                                                                                                            |        |               |            |  |

 

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*Whatdifferentiates the Company.*

 

MS-PLCdelivers to the market innovative products that are clinically developed andsupported by leading scientists and physicians. We have:

 

•                                          Commercialagreements with key distribution partners that allow the efficient and costeffective delivery of our products to the market

 

•                                          Onlinedistribution model through MedicExchange

 

•                                          Highperformance CAD for Colon and Lung

 

•                                          CEand FDA approvals

 

•                                          Supportfrom a network that includes some of the leading scientists and physicians

 

•                                          Accessto large clinical databases

 

•                                          Significantinvestment in the protection of our intellectual property

 

*How does this evidence itself?*

 

•                                          Contractssigned with TeraRecon, Inc, Viatronix, Inc and Vital Images, Inc.

 

•                                          Lettersof intent (“LOI”) signed with a number of other partners including Barco

 

•                                          NationalCancer Centre (“NCC”), Tokyo agreed to conduct all MS-PLC Japanese ClinicalStudies

 

•                                          BeijingCancer Institute (“BCI”), Beijing agreed to conduct all MS-PLC Chinese ClinicalStudies

 

•                                          RadiologicalSociety of North America (“RSNA”) 2005 – Medicsight multi-partner IntegratedCAD launch

 

•                                          RSNA2005 – Seven peer reviewed papers accepted for presentation

 

•                                          MedicExchangeonline distribution launches mid-2006

 

# ***Business Development***

# ** **

MS-PLChas signed non–exclusive agreements with TeraRecon, Inc (for the distributionof both LungCAD and ColonCAD), Viatronix, Inc (for the distribution of bothLungCAD and ColonCAD) and Vital Images, Inc (for the distribution of ColonCAD). These agreements are part of the the Company’s plans to commercialize itsadvanced imaging technology on a worldwide basis. MS-PLC CAD software isintegrated into the partner companies’ existing product offerings.

 

TeraRecon has successfully integrated MS-PLC’sColonCAD and LungCAD softwareinto TeraRecon’s flagship Aquarius family of medical imaging. The combinedTeraRecon / Medicsight imaging system made its debut in November 2005 at theannual meeting of the Radiological Society of North America (“RSNA”) in Chicago,Illinois.

 

Viatronix has successfully integrated MS-PLC’sColonCAD and LungCAD software into its V3D TM Colonand V3DTM Explorersoftware applications. This was shown at the RSNA conference in Chicagoin November 2005.

 

VitalImages has successfully integrated MS-PLC’s Colon CAD software into its CTColonography application which is part of the VitreaTM softwarepackage. This was also shown at the November 2005 RSNA conference in Chicago.

 

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Inaddition to these signed partnerships, MS-PLC is in discussion with a number ofother major imaging companies in North America and Europe and is looking tohave further announcements in the near future.

 

InJapan, we expect to finalize agreements for distribution of MS-PLC LungCAD andColonCAD are expected in the coming months.

 

TheCompany sees Japan and China as strategically important in terms of futuregrowth and believes that the extensive business development and commitment ofopening offices in these countries should lead to further opportunities andannouncements in these areas in 2006.

 

*Regulatory Process*

 

In order to release newproducts into a specific market, MS-PLC must gain regulatory approvals for itsMedicsight CAD products. In the U.S., the Food and Drug Administration (“FDA”)is the regulatory authority. In Europe, regulatory approval is gained through Conformité Europeène (“CE”)marking. The procedure used and timescales involved differ depending on theregion but fundamentally each region requires evidence of products beingdeveloped under a strict quality management system. In October 2005 we gainedISO 13485:2003 certification confirming the MS-PLC’s compliance withinternational quality standards. All of our products are designed, built,distributed and supported to this level of quality control.

 

MS-PLC can follow one oftwo routes to obtain FDA approval for its products: a pre-market notification(“510(k)”) or a pre-market assessment (“PMA”). A 510(k) application issubmitted when the product is substantially equivalent to an existing legallymarketed device. A PMA is required for higher risk products and is the morestringent route which requires scientific evidence to demonstrate that theproduct is safe and effective for its intended use.

 

For European CEapprovals, a company is required to be regularly audited by an externalnotified body to demonstrate an effective quality system. If successful, thecompany may then label its products with CE mark.

 

Markets such as China andJapan have their own regulatory bodies but these often require companiesoutside of these markets to show evidence of an existing CE or FDA approval fora product before gaining approval in the local market.

 

MS-PLC has a significantamount of experience in preparing, submitting and gaining regulatory approvalsfor its products. In the US, MS-PLC has existing FDA 510(k) approvals for itsLungCAR and ColonCAR products and has approvals pending for the recent ColonCADand LungCAD releases. In Europe, MS-PLC has CE approval for all releasedproducts and is regularly audited by an external notified body. MS-PLC isseeking approvals for its ColonCAD and LungCAD products in Japan and China. Aseach new product is prepared for release, MS-PLC’s internal regulatory teamprepares the regulatory documentation for each market in order to allow thatproduct to be marketed and sold.

 

Because MS-PLC managesthe approval process, its business partners can rapidly integrate and releasetheir own products containing Medicsight CAD technology more quickly than ifthey had to gain all the approvals independently.

 

We regard our extensiveexperience in successfully obtaining European and FDA approvals as a valuableasset of the Company. We believe this experience will be useful in our effortsto obtain approval for our products in new markets such as China and Japan.

 

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*Risk Factors*

 

Wecannot assure you that the Company will be successful in commercializing theMedicsight CAD products or the MedicExchange portal, or if the products or theportal are commercialized, that they will be profitable to the Company. We faceobstacles in commercializing the Medicsight CAD products and the MedicExchangeportal and in generating operating revenues as detailed below.

 

TheCompany does not believe that there is currently any comparable system that iscompetitive with the Medicsight CAD products. There are computer-aideddiagnostic systems that operate in the field, but, in our view, such othersystems are more dependent than ours on human resources to carry out theanalysis. We are not aware of other systems in the field that have theautomated capability of our products.

 

TheCompany has had only a limited operating history and no revenues from itscontinuing operations upon which an evaluation of its prospects can be made.The Company’s prospects must be considered keeping in mind the risks, expensesand difficulties frequently encountered in the establishment of a new businessin constantly changing industry. There can be no assurance that the Companywill be able to achieve profitable operations in the foreseeable future or atall.

 

TheCompany has identified a number of specific risk areas that may affect theCompany’s operations and results in the future:

 

*Technical Risks.*The Medicsight CAD systemmay not deliver the levels of accuracy and reliability needed, or thedevelopment of such accuracy and reliability may be delayed.

 

*Market Risks.*The market for theMedicsight CAD products and MedicExchange may be slower to develop or smallerthan estimated or it may be more difficult to build the market thananticipated. The medical community may resist the Medicsight CAD andMedicExchange products or be slower to accept them than we expect. Revenuesfrom Medicsight CAD and MedicExchange may be delayed or costs may be higherthan expected which may result in the Company requiring additional funding.

 

*Regulatory Risks.*The Medicsight CADsystem is subject to regulatory requirements in the United States Europe,Japan, China and our other targeted markets. Necessary regulatory approvals maynot be obtained or may be delayed. We may incur substantial additional cost inobtaining regulatory approvals for our products in our targeted markets.

 

*Competitive Risks.*There are a number ofgroups and organizations, such as software companies in the medical imagingfield, scanner manufacturers, screening companies and other healthcareproviders that may develop a competitive offering to the Medicsight CAD andMedicExchange. In addition these competitors may have significantly greaterresources than the Company. We cannot make any assurance that they will notattempt to develop such offerings, that they will not be successful indeveloping such offerings or that any offerings they do develop will not have acompetitive edge over Medicsight CAD and MedicExchange.

 

*FinancialRisk.*The Company has incurred significant operating lossessince inception and has generated no revenues from continuing operations. As aresult, the Company has generated negative cash flows from operations and hasan accumulated deficit at December 31, 2005. The Company is operating in adeveloping industry based on new technology and its primary source of funds todate has been through the issuance of securities and borrowed funds. TheCompany is currently seeking additional funding and is actively developing thetechnology in order to bring it to market. While the Company is optimistic andbelieves appropriate actions are being taken, there can be no assurance thatmanagement’s efforts will be successful or that the products the Companydevelops and markets will be accepted by consumers.

 

*Corporate Structure.*The Company’scorporate structure may make it more difficult or costly to take certainactions. The Company conducts substantially all its business through MS-PLC, aU.K. public company which is 81.8% owned by the Company, and through MS-PLC’ssubsidiaries in the United Kingdom and the United States and through MDX, whichis 90% owned by the Company. Although the Company and MS-PLC sharedirectors and management, they are required to comply with corporate governanceand other laws and

 

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rules applicableto public companies in the United Kingdom and the United States.  Shouldthe Company propose to take any action, such as a transfer or allocation ofassets or liabilities between the Company and MS-PLC, the Company would have totake into consideration the potentially conflicting interests of the Company’s stockholdersand the minority stockholders of MS-PLC.  This may deter the Company fromtaking such actions that might otherwise be in the best interest of the Companyor cause the Company to incur additional costs in taking such actions. MS-PLCwould not be able to pay dividends or make other distributions of profitsor assets to the Company without making pro rata payments or distributions tothe minority stockholders of MS-PLC.  Although neither MS-PLC nor theCompany has plans to pay dividends or make distributions to itsshareholders, the Company’s corporate structure may deter MS-PLC and theCompany from doing so in the future. This risk will also apply to MDX asit begins its operations this year as the Company owns 90% of MDX’s equity.

 

*ForeignExchange Risks.*As the Company’s operating currency is UKsterling (£) and its financial statements are reported in US Dollars, theCompany’s assets and liabilities and its results of operations are affected bymovements in the $: £ exchange rate.

 

*OtherRisks.*The Company’s ability to deliver its software could behindered by risks such as the loss of key personnel or the patents andtrademarks being successfully challenged or credit facilities being reduced orterminated by lenders.

 

**Employees**

** **

As ofMarch 27, 2006, the Company and its subsidiaries had 59 employees, all of whomare full-time employees. Our employees are not part of a union. We believe thatwe have an excellent relationship with our employees.

 

**Patentsand Trademarks**

** **

Protectionof our proprietary technology and our rights over that technology, from copy orunchallenged and improper use, is essential to our future success. Anychallenges to, or disputes concerning, our core technology may result in greatexpense to us, delays in bringing products to market and disruption of ourfocus on our core activities. They may also result in loss of rights over ourtechnology or the right to operate in particular markets due to adverse legaldecisions against us.

 

TheCompany has filed patent applications in the United Kingdom, the United States,the European Patent Office and under the International Patent CooperationTreaty (which currently has 128 member countries) covering our coretechnologies and their applications. We have recently filed new patentapplications covering technology of both Medicsight CAD and MedicExchange andintend to continue filing new applications in the future.  Although priorart searches have been carried out, we cannot provide assurance that any or allof these patents will be granted or that they will not be challenged, or thatrights granted to us would actually provide us with advantage over ourcompetitors. The Company actively reviews third party patents but is notcurrently aware of any that our products will infringe.

 

Wehave filed applications to register “Medicsight”TM, “Lifesyne”TM  , “Medicsight Colon Screen”TM,“Medicsight Heart Screen”TM, “Medicsight Lung Screen”TM, “Colon CAR”TM, “Lung CAR”TM,“Computer Assisted Reader” TM and “Medicsight ImageView” TMas trademarks in the United Kingdom, the European Community and the UnitedStates. These trademarks are important to the corporate identity in connectionwith Medicsight CAD.

 

Failureto register appropriate patents, copyrights or trademarks in any jurisdictionmay impede our ability to create brand awareness in our products, result inexpenses in pursuing our rights with respect to our intellectual property, orresult in lost revenues due to intellectual property disputes. Where we may berequired to purchase licenses from sellers with prior rights in any country, wecannot assure you that we will be able to do so at a commercially acceptablecost.

 

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**Researchand Development**

** **

UnderUnited States generally accepted accounting principles, costs incurred inconnection with the development of software products that are intended for saleare accounted for in accordance with Statement of Financial AccountingStandards No. 86, “Accounting for the Costs of Computer Software to be Sold,Leased, or Otherwise Marketed”. Costs incurred prior to technologicalfeasibility being established for the product are expensed as incurred. Technologicalfeasibility is established upon completion of a detailed program design or, inits absence, completion of a working model. Thereafter, all software productioncosts can be capitalized and subsequently reported at the lower of unamortizedcost or net realizable value. Capitalized costs are amortized based on currentand future revenue for each product with an annual minimum equal to thestraight-line amortization over the remaining estimated economic life of theproduct. Amortization commences when the product is available for generalrelease to customers.

 

TheCompany concluded that capitalizing such expenditures on completion of aworking model was inappropriate because the Company did not incur any materialsoftware production costs and therefore has decided to expense all research anddevelopment costs. The Company’s research and development costs are comprisedof staff and consultancy costs expensed on the Medicsight CAD system.

 

During2005, 2004 and 2003 the Company expended $2,363,000, $2,972,000 and $2,498,000respectively for research and development expenses for its products. We cannotpredict the amount of additional expenditures that will be necessary prior toachieving commercialization of our products.

 

**MajorCustomers**

** **

In2005 the Company’s gross revenues from operations were derived solely from theCompany’s discontinued scanning operations.

 

**GovernmentalRegulation**

** **

MedicsightCAD has been designed to analyze digital data from medical scanners, such asCT, MRI and CAT scans, and provides improved analysis to enable the clinicianto identify areas of possible abnormality. Medicsight CAD will be subject togovernmental regulation in the United Kingdom, Europe and the United States. Weare not currently certain of the level of regulation that will be applied toMedicsight CAD in any specific jurisdiction. The level of governmentalregulation in the jurisdictions in which we engage, or expect to engage, inbusiness may vary. Any such regulation could delay the commercial introductionof Medicsight CAD and could significantly increase our costs of operations.

 

**General**

** **

Ourcorporate address is 46 Berkeley Square, London W1J 5AT, United Kingdom. Ourtelephone number is+44-20-7598-4070. Our web address is www.medicsight.com. Information on our websiteis not deemed to be a part of this Annual Report.

 

## **ITEM2.**                  PROPERTIES.

## ** **

Wemaintain our corporate offices at 46 Berkeley Square, London W1J 5AT, UnitedKingdom. The office is comprised of 9,642 square feet. We do not have a formal,written lease for these offices. Until June 30, 2003, rent was paid quarterlyin advance to a property management company, Berkeley Square Ventures Limited,which in turn collects the rent for Yang Cellulose Company Limited (“YCCL”)(previously International Cellulose Company Limited), the entity that holds thelease on the property. Subsequent to June 30, 2003, rent has been paid directlyto YCCL. In November 2001, YCCL was acquired by Macniven and Cameron EquityHoldings Limited (“M&C”) (previously STG Holdings PLC), a major shareholderof the Company. We have additional satellite offices in Nashville, Tennessee,Japan and China.

 

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## **ITEM3.**                  LEGAL PROCEEDINGS.

## ** **

TheCompany is involved with various legal actions and claims arising in theordinary course of business. Management believes that the outcome of any suchlitigation and claims will not have a material effect on the Company’sfinancial position or results of operations.

 

## **ITEM4.**                  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.

## ** **

None.

 

# **PART II**

# ** **

## **ITEM5.**                  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS.

## ** **

**MarketInformation**

** **

Theshares of our common stock have been quoted on the American Stock Exchange(www.amex.com) since December 19, 2005. The common stock is trading under thesymbol “MGT”.

 

Priorto December 19, 2005 the Company’s common stock was quoted on the OTC-BulletinBoard, maintained by the National Association of Securities Dealers, Inc underthe symbol “MSHT”

 

Thefollowing table sets forth the range of high and low bid information forMedicsight, Inc common stock for each quarter within the last two fiscal years:

 
| ** **                                    | ** ** | **Bid Quotations ($)** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| **Period**                                    | ** ** | **High**                         | ** ** | **Low** | ** ** |
|                                          |       |                             |       |   |   |
| **As  quoted on the American Stock Exchange** |       |                             |       |   |   |
| 2006                                          |       |                             |       |   |   |
| January 1 to  March 27                        |       | 5.00                             |       | 4.70 |   |
| 2005                                          |       |                             |       |   |   |
| December 19 to  December 31                   |       | 5.00                             |       | 5.00 |   |
|                                          |       |                             |       |   |   |
| **As  quoted on the OTC-Bulletin Board**      |       |                             |       |   |   |
| 2005                                          |       |                             |       |   |   |
| October 1 to  December 18                     |       | 5.00                             |       | 4.95 |   |
| Third Quarter                                 |       | 5.05                             |       | 4.85 |   |
| Second Quarter                                |       | 5.50                             |       | 4.90 |   |
| First Quarter                                 |       | 5.15                             |       | 4.85 |   |
|                                          |       |                             |       |   |   |
| 2004                                          |       |                             |       |   |   |
| Fourth Quarter                                |       | 5.50                             |       | 4.35 |   |
| Third Quarter                                 |       | 4.85                             |       | 4.40 |   |
| Second Quarter                                |       | 4.75                             |       | 4.48 |   |
| First Quarter                                 |       | 4.60                             |       | 3.20 |   |

 

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Theseover-the-counter market quotations reflect inter-dealer prices, without retailmark-up, markdown or commission and may not necessarily represent actualtransactions.

 

As of March 27, 2006, there were 907 holders ofrecord of the Company’s common stock.

 

**Dividends**

 

TheCompany has never declared or paid cash dividends on the common stock. TheCompany currently intends to retain earnings, if any, to support its growthstrategy and does not anticipate paying cash dividends in the foreseeablefuture. Payment of future dividends, if any, will be at the discretion of theCompany’s Board of Directors after taking into account various factors,including the Company’s financial condition, operating results, current andanticipated cash needs and plans for expansion.

 

**Securities Authorized for Issuance Under EquityCompensation Plans**

 

Allthe Company’s Equity Compensation Plans are issued by our majority-ownedsubsidiary, MS-PLC and not the Company to employees of MS-PLC. All securitiesthat are issuable under these plans are MS-PLC shares. MS-PLC’s shares are notcurrently quoted on any recognized stock exchange. All MS-PLC’s equity plansallow employees the option to purchase MS-PLC’s shares at £1.00 ($1.65).

 

OnMarch 20, 2003, the Board of Directors of MS-PLC approved a stock option plan“A” for its employees and reserved 4,000,000 shares of its stock for issuanceupon exercise of options granted under this plan. On April 30, 2003, MS-PLCgranted options over 2,828,600 shares of MS-PLC to its employees. At December31, 2005 there were 1,872,500 options outstanding and 100% of the optionsissued were exercisable under this plan.

 

OnSeptember 30, 2004, MS-PLC granted options over 3,400,500 shares of MS-PLC toits employees under a stock option plan “B”. At December 31, 2005, there were2,043,700 options outstanding and 70% of the options issued were exercisableunder this plan.

 

OnJune 30, 2005, MS-PLC granted options over 230,000 shares of MS-PLC to itsemployees under a stock option plan “C”, which was subsequently adopted by theBoard of Directors of MS-PLC on August 15, 2005. At December 31, 2005, therewere 230,000 options outstanding and none of the options issued wereexercisable under this plan. Options issued under this plan vest equally afterthe grantee has been employed for 12, 24 and 36 months.

 

TheCompany has elected to adopt the disclosure only provisions of Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation” as amended by SFAS No. 148, “Accounting for Stock-BasedCompensation - Transition and Disclosure - an amendment of FASB Statement No.123”, and measures the cost for MS-PLC’s employee stock compensation plan byusing the accounting methods prescribed by APB Opinion No. 25, “Accounting forStock Issued to Employees”, which allows that no compensation cost berecognized unless the exercise price of the options granted is lower than thefair market value of the Company’s stock at date of grant. Accordingly, nostock-based employee compensation cost is reflected in net loss, as all optionsgranted had an exercise price equal to the market value of the underlyingcommon stock on the date of grant.

 

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The followingtable summarizes the MS-PLC Stock Option activity:

 
| ** **                                 | ** ** | **Stock Options Outstanding** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                 | ** ** | **Shares**                              | ** ** | **Exercise  Price Per  Share** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                                       |       |                                    |       |   |   |   |   |
| Balance January  1, 2004                   |       | —                                  |       | — |   | — |   |
| Granted                                    |       | 2,375,700                               |       | $ | 1.65 |   | $ | 1.65 |   |
| Forfeited                                  |       | (400,450                                | )          |   |   |   |   |
| Exercised                                  |       | —                                  |       | — |   | — |   |
|                                       |       |                                    |       |   |   |   |   |
| Outstanding  December 31, 2004             |       | 1,975,250                               |       | $ | 1.65 |   | $ | 1.65 |   |
|                                       |       |                                    |       |   |   |   |   |
| Granted                                    |       | 3,630,500                               |       | $ | 1.65 |   | $ | 1.65 |   |
| Forfeited                                  |       | (1,459,550                              | )          |   |   |   |   |
| Exercised                                  |       | —                                  |       | — |   | — |   |
|                                       |       |                                    |       |   |   |   |   |
| Outstanding  December 31, 2005             |       | 4,146,200                               |       | $ | 1.65 |   | $ | 1.65 |   |
|                                       |       |                                    |       |   |   |   |   |
| Options  exercisable at: December 31, 2005 |       | 3,362,850                               |       | $ | 1.65 |   | $ | 1.65 |   |

 

Following is asummary of the status of stock options outstanding at December 31, 2005:

 
| ** **            | ** ** | ** **          | ** ** | **Outstanding Options** | ** ** | **Exercisable Options**                             | ** **    |
|-----------------------|------------|---------------------|------------|-------------------------|------------|-----------------------------------------------------|---------------|
| ** **            | ** ** | **Exercise  Price** | ** ** | **Number**              | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** **    | **Weighted  Average  Exercise  Price** | ** ** | **Number** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| * *              | * *   | * *            | * *   | * *                | * *   | * *                                            | * *      | * * | * * | * * | * * | * * | * * |
| “A” Options |       | $                   | 1.65       |                    | 1,872,500  |                                                | 1 year   |   | $ | 1.65 |   | 1,872,500 |   | $ | 1.65 |   |
| “B” Options |       | $                   | 1.65       |                    | 2,043,700  |                                                | 1 year   |   | $ | 1.65 |   | 1,490,350 |   | $ | 1.65 |   |
| “C” Options |       | $                   | 1.65       |                    | 230,000    |                                                | 2 years  |   | $ | 1.65 |   | 0 |   | $ | 1.65 |   |
|                  |       |                |       | 4,146,200               |       |                                                |          |   |   | 3,362,850 |   |   |   |

 

As ofJanuary 1, 2006 the Company has adopted Statement of Financial AccountingStandards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”).SFAS 123R requires the recognition of the fair value of stock-basedcompensation in net income. Stock-based compensation primarily consists ofstock options and performance awards. Stock options are granted to employees atexercise prices equal to the fair market value of our stock at the dates ofgrant.

 

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**RecentSales of Unregistered Securities**

** **

BetweenJanuary 1, 2005 and December 31, 2005 the Company issued 3,327,000 shares ofcommon stock at $4.00 per share to a number of institutional investors andprivate individuals as part of a private placement raising approximately$12,035,000 net of commissions payable to Asia IT, a related party, andexpenses. The shares of common stock were issued without registration in relianceupon the exemption provided by Section 4(2) of the Securities Act of 1933. Thefunds raised were used to fund ongoing operations and the acquisition ofproperty and equipment by MS-PLC and its subsidiaries.

 

OnJanuary 13, 2006 the Company issued 1,000,000 shares of common stock at $4.00per share to a number of institutional investors and private individuals aspart of a private placement raising approximately $3,600,000 net of commissionspayable to Asia IT, a related party, and expenses The shares of common stockwere issued without registration in reliance upon the exemption provided bySection 4(2) of the Securities Act of 1933. The funds raised were used to fundongoing operations and the acquisition of property and equipment by MS-PLC andits subsidiaries.

 

OnMarch 17, 2006 the Company issued 275,000 shares of common stock at $4.00 pershare to a number of institutional investors and private individuals as part ofa private placement raising approximately $990,000 net of commissions payable toAsia IT, a related party, and expenses. The shares of common stock were issuedwithout registration in reliance upon the exemption provided by Section 4(2) ofthe Securities Act of 1933. The funds raised were used to fund ongoingoperations and the acquisition of property and equipment by MS-PLC and itssubsidiaries.

 

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## **ITEM6.**                  SELECTED FINANCIAL DATA.

## ** **

Theselected financial data set forth below have been derived from the consolidatedfinancial statements of the Company and the related notes thereto. Thestatement of operations data for the five years ended December 31, 2005 and thebalance sheet data as of December 31, 2005, 2004, 2003, 2002 and 2001 arederived from the consolidated financial statements of the Company as atDecember 31, 2005, 2004, 2003, 2002 and 2001 which have been audited by Amper,Politziner & Mattia, P.C., independent registered public accountants. Thefollowing selected financial data should be read in conjunction with the Company’sconsolidated financial statements and the related notes thereto and“Management’s Discussion and Analysis and Results of Operations”, which areincluded elsewhere herein.

 
| **(all figures in $ thousands except per share data)** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Operating  revenues – continuing operations                                               |       | $        | —     |     | $          | —   |       | $        | —     |     | $          | — |   | $ | — |   |
|                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Loss from  continuing operations                                                               |       | (10,738  | )          | (12,885  | )          | (8,941   | )          | (98,844  | )          | (45,845  | )          |
| Loss from  discontinued operations                                                             |       | (1,478   | )          | (2,145   | )          | (1,155   | )          | (69      | )          | —   |       |
|                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Net loss                                                                                       |       | (12,216  | )          | (15,030  | )          | (10,096  | )          | (98,913  | )          | (45,845  | )          |
|                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Loss per share  from continuing operations                                                     |       | $        | (0.31      | )        | $          | (0.42    | )          | $        | (0.40      | )        | $          | (5.12 | ) | $ | (2.47 | ) |
|                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Total Assets                                                                                   |       | $        | 24,486     |     | $          | 21,041   |       | $        | 17,649     |     | $          | 15,430 |   | $ | 87,920 |   |
|                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Long term  obligations                                                                         |       | $        | 6          |     | $          | 223      |       | $        | 306        |     | $          | 42 |   | $ | 19 |   |
|                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Dividends  declared per common share ($)                                                       |       | $        | 0.00       |     | $          | 0.00     |       | $        | 0.00       |     | $          | 0.00 |   | $ | 0.00 |   |
|                                                                                                |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

## **ITEM7.**                  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS.

## ** **

Exceptfor historical information, the material contained in this Management’sDiscussion and Analysis and Results of Operations is forward-looking. TheCompany’s actual results could differ materially from the results discussed inthe forward-looking statements, which include certain risks and uncertainties.These risks and uncertainties include the rate of market development andacceptance of medical imaging technology, the unpredictability of the Company’ssales cycle, the limited revenues and significant operating losses generated todate, and the possibility of significant ongoing capital requirements.

 

TheCompany’s main operating currency is UK sterling (£).

 

TheCompany has identified a number of specific risk areas that may affect theCompany’s operations and results in the future. We cannot assure you that theCompany will be successful in commercializing the Medicsight CAD products orthe MedicExchange portal, or if the products or the portal are commercialized,that they will be profitable to the Company. We face obstacles incommercializing the Medicsight CAD products and the MedicExchange portal and ingenerating operating revenues as detailed below.

 

TheCompany does not believe that there is currently any comparable system that iscompetitive with the Medicsight CAD products. There are computer-aideddiagnostic systems that operate in the field, but, in

 

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ourview, such other systems are more dependent than ours on human resources tocarry out the analysis. We are not aware of other systems in the field thathave the automated capability of our products.

 

TheCompany has had only a limited operating history and no revenues from itscontinuing operations upon which an evaluation of its prospects can be made.The Company’s prospects must be considered keeping in mind the risks, expensesand difficulties frequently encountered in the establishment of a new businessin constantly changing industry. There can be no assurance that the Companywill be able to achieve profitable operations in the foreseeable future or atall.

 

TheCompany has identified a number of specific risk areas that may affect theCompany’s operations and results in the future:

 

*Technical Risks.*The Medicsight CAD maynot deliver the levels of accuracy and reliability needed, or the developmentof such accuracy and reliability may be delayed.

 

*Market Risks.*The market for theMedicsight CAD and MedicExchange may be slower to develop or smaller thanestimated or it may be more difficult to build the market than anticipated. Themedical community may resist the Medicsight CAD and MedicExchange products orbe slower to accept it than we expect. Revenues from Medicsight CAD andMedicExchange may be delayed or costs may be higher than expected which mayresult in the Company requiring additional funding.

 

*Regulatory Risks.*The Medicsight CADsystem is subject to regulatory requirements in the United States Europe,Japan, China and our other targeted markets. Necessary regulatory approvals maynot be obtained or may be delayed. We may incur substantial additional cost inobtaining regulatory approvals for our products in our targeted markets.

 

*Competitive Risks.*There are a number ofgroups and organizations, such as software companies in the medical imagingfield, scanner manufacturers, screening companies and other healthcareproviders that may develop a competitive offering to the Medicsight CAD andMedicExchange. In addition these competitors may have significantly greaterresources than the Company. We cannot make any assurance that they will notattempt to develop such offerings, that they will not be successful indeveloping such offerings or that any offerings they do develop will not have acompetitive edge over Medicsight CAD and MedicExchange.

 

*FinancialRisk.*The Company has incurred significant operating lossessince inception and has generated no revenues from continuing operations. As aresult, the Company has generated negative cash flows from operations and hasan accumulated deficit at December 31, 2005. The Company is operating in adeveloping industry based on new technology and its primary source of funds todate has been through the issuance of securities and borrowed funds. TheCompany is currently seeking additional funding and is actively developing thetechnology in order to bring it to market. While the Company is optimistic andbelieves appropriate actions are being taken, there can be no assurance thatmanagement’s efforts will be successful or that the products the Companydevelops and markets will be accepted by consumers.

 

*Corporate Structure.*The Company’scorporate structure may make it more difficult or costly to take certainactions. The Company conducts substantially all its business through MS-PLC, aU.K. public company which is 81.8% owned by the Company, and through MS-PLC’ssubsidiaries in the United Kingdom and the United States and through MDX, whichis 90% owned by the Company. Although the Company and MS-PLC share directorsand management, they are required to comply with corporate governance andother laws and rules applicable to public companies in the UnitedKingdom and the United States.  Should the Company propose to take anyaction, such as a transfer or allocation of assets or liabilities between theCompany and MS-PLC, the Company would have to take into consideration thepotentially conflicting interests of the Company’s stockholders and theminority stockholders of MS-PLC.  This may deter the Company from takingsuch actions that might otherwise be in the best interest of the Company orcause the Company to incur additional costs in taking such actions. MS-PLCwould not be able to pay dividends or make other distributions of profitsor assets to the Company without making pro rata payments or distributions tothe minority stockholders of MS-PLC.  Although neither MS-PLC nor theCompany has plans to pay dividends or make distributions to itsshareholders, the Company’s corporate

 

16

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structure maydeter MS-PLC and the Company from doing so in the future. This risk willalso apply to MDX as it begins its operations this year as the Company owns 90%of MDX’s equity.

 

*ForeignExchange Risks.*As the Company’s operating currency is UKsterling (£) and its financial statements are reported in US Dollars, theCompany’s assets and liabilities and its results of operations are affected bymovements in the $: £ exchange rate.

 

*OtherRisks.*The Company’s ability to deliver its software could behindered by risks such as the loss of key personnel or the patents andtrademarks being successfully challenged or credit facilities being reduced orterminated by lenders.

 

**RESULTSOF OPERATIONS**

** **

**FiscalYear Ended December 31, 2005 vs. Fiscal Year Ended December 31, 2004**

** **

*Research and Development*. The Company’sresearch and development expenses for Fiscal 2005 were $2,363,000 as comparedto $2,972,000 for Fiscal 2004. The decrease of $609,000 was due to reduction inthe numbers of staff required for the development of the products. TheCompany’s research and development costs were comprised of staff andconsultancy costs expensed on the development of MS-PLC’s software products.

 

*Selling, General and Administrative Expenses.*TheCompany’s selling, general and administrative expenses from continuingoperations for Fiscal 2005 were $9,300,000 as compared to $10,578,000 forFiscal 2004. The decrease of approximately $1,300,000 was due to a number offactors:

 

•                  Salaries anddirectors’ and sub-contractors’ compensation declined from $5,009,000 in Fiscal2004 to $4,595,000 in Fiscal 2005 due to reduction in staff numbers and thereduction of sub-contractors costs (re-structuring of the medical boards).

 

•                  Rent, rates andservice charges declined from $1,623,000 in Fiscal 2004 to $1,418,000 due tothe Company requiring less space in 46 Berkeley Square in 2005.

 

•                  Other savingsinclude travel (due to Company’s review of its requirements in 2005 -$154,000), the cessation of the clinical trial in 2004 and subsequent reductionin medical images costs ($440,000) and a reduction in depreciation following2004’s impairment review ($348,000).

 

ForFiscal 2005, the Company did not record an impairment charge from continuingoperations. For Fiscal2004, the Company recorded an impairment to MAM’s property and equipment of$386,000 which relates to the closure of the Ravenscourt centre. This was as aresult of the decision to transfer MAM’s assets to MS-PLC and Lifesyne or sellto independent third parties at open market value or fully impair, as itsbusiness opportunities were limited due to the change in strategy by Lifesyne.

 

*Impairment Loss on Investments.* For Fiscal2005 there was no impairment charge on investments as compared to Fiscal 2004where the Company incurred an impairment loss on investments of $70,000relating to the impairment in the carrying value of Eurindia PLC (“Eurindia”).The Company based this impairment on information provided by Eurindia’smanagement.

 

*Income Tax Benefit Realized.*In Fiscal 2005, MS-PLC received $858,000relating to a tax credit paid by the United Kingdom taxation authorities underits R&D tax relief scheme for small and medium. The basis for the R&Drelief is to encourage the development of new technologies and is onlyapplicable to the research and development of a new technology and not aproduct.

 

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The tax credit relates to expenditures incurredbetween November 2001 and December 2003. The Company did not accrue for anypotential tax credit for Fiscal 2004 as it has determined that the completiondate of the new technology occurred at the end of Fiscal 2003.

 

*Discontinuedoperations*. Therevenues from the Company’s discontinued Lifesyne’s scanning operations forFiscal 2005 was $427,000 as compared to $538,000 for Fiscal 2004. The reductionwas due mainly to the 10 month trading period in Fiscal 2005.

 

Theselling, general and administrative expenses from the Company’s discontinuedLifesyne’s scanning operations for Fiscal 2005 was $1,527,000 as compared to$2,101,000 for Fiscal 2004. The reduction was mainly due to a reduction instaff and the 10 month trading period in Fiscal 2005.

 

ForFiscal 2005, the Company recorded impairment of $394,000 against property andequipment related to the discontinued Lifesyne operations. For Fiscal 2004, theCompany recorded impairment of $582,000 against property and equipment relatedto the discontinued Lifesyne operations.

 

*Net Loss and Net Loss per Share.*Net losswas $12,216,000 for Fiscal 2005 compared to a net loss of $15,030,000 forFiscal 2004. Net loss per share for Fiscal 2005 was $0.36, based on weightedaverage shares outstanding of 34,224,023, compared to $0.49 for Fiscal 2004,based on weighted average shares outstanding of 30,853,734. The decrease in netloss for Fiscal 2005 is principally due to reduction in selling, general andadministrative costs and the realized income tax benefit.

 

Theloss from continuing operations was $10,738,000 for Fiscal 2005 compared to aloss from continuing operations of $12,885,000 for Fiscal 2004. Loss per sharefrom continuing operations for Fiscal 2005 was $0.31, based on weighted averageshares outstanding of 34,224,023, compared to $0.42 for Fiscal 2004, based onweighted average shares outstanding of 30,853,734.

 

Note As the Company’s operating currency is UK sterling (£) its results ofoperations are affected by changes in the $: £ rates used to translate therevenues and costs. For Fiscal 2005 the average rate was $1.80: £1.00 and forFiscal 2004 the rate was $1.83: £1.00, a decrease of 1.7%.

 

*ContractualObligations and Commitments.*As of December 31, 2005, theCompany was party to a capital lease obligation in the amount of $25,000 formotor vehicles. The obligation for the vehicle lease requires monthly paymentsof $1,700, including interest, through April 2007. The underlying vehiclessecure the lease.

 

On May25, 2005, the Company’s discontinued Lifesyne operations settled theoutstanding capital lease obligation for its scanner which was subsequentlysold. The outstanding capital lease obligation was $286,000 as of December 31,2004.

 

TheCompany’s corporate offices are at 46 Berkeley Square, London W1J 5AT, UnitedKingdom. There is no formal, written lease for these offices (see ITEM 2 onpage 10). Rental costs for 46 Berkeley Square are expected to be approximately$600,000 per annum. The Company has service offices in U.S.A., Japan and Chinawith notice periods of between one and three months to cancel.

 

**FiscalYear Ended December 31, 2004 vs. Fiscal Year Ended December 31, 2003**

** **

*Research and Development*. The Company’sresearch and development expenses for Fiscal 2004 were $2,972,000 as comparedto $2,498,000 for Fiscal 2003. The Company’s research and development costswere comprised of staff and consultancy costs expensed on the development ofMedicsight CAD products. The increase was due to the Company outsourcingadditional resources where required.

 

*Selling, General and Administrative Expenses.*TheCompany’s selling, general and administrative expenses from continuingoperations for Fiscal 2004 were $10,578,000 as compared to $8,848,000 forFiscal 2003. 

 

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Theamount of salaries and directors’ and sub-contractors’ compensation increasedto $5,009,000 in Fiscal 2004 from $3,579,000 in Fiscal 2003. The amount of theincrease is due to increases in staff numbers and sub-contractors (includingmedical board members and radiologists) as the Company has expanded. In Fiscal2004 the Company incurred costs of $1,458,000 related to marketing and publicrelations and $487,000 relating to the clinical trials as compared to$1,299,000 and $492,000, respectively, in Fiscal 2003.

 

For Fiscal 2004, the Company recorded an impairmentto MAM’s property and equipment of $386,000 which relates to the closure of theRavenscourt center. This was as a result of the decision to transfer MAM’sassets to MS-PLC and Lifesyne or sell to independent third parties at openmarket value or fully impair, as MAM’s business opportunities were limited dueto the change in strategy by Lifesyne. No impairment charge was recorded inFiscal 2003.

 

*Impairment Loss on Investments.* For Fiscal2004, the Company incurred an impairment loss on investments of $70,000relating to the impairment in the carrying value of Eurindia PLC (“Eurindia”).The Company based this impairment on information provided by Eurindia’smanagement.

 

ForFiscal 2003, the Company incurred an impairment loss on investments of $95,000relating to the impairments in the carrying value of Eurindia and StrategicIntelligence PLC (“SI-PLC”). Eurindia was impaired by $59,000 based on Eurindia’smanagement’s assessment of the value of its portfolio at $0.72 per share. TheCompany fully impaired its investment in SI-PLC of $36,000, as the Company wasunable to obtain any information or representations from SI-PLC as to the fairvalue.

 

*Discontinued operations.*Revenues from theCompany’s discontinued Lifesyne scanning operations for Fiscal 2004 were$538,000 as compared to $276,000 for Fiscal 2003. The increase was due togrowth in the number of scans undertaken.

 

TheCompany’s selling, general and administrative expenses from the discontinuedLifesyne’s scanning operations for Fiscal 2004 was $1,527,000 as compared to$1,155,000 for Fiscal 2003.

 

ForFiscal 2004, the Company recorded impairment of $582,000 against property andequipment related to the discontinued Lifesyne operations. For Fiscal 2003there was no impairment loss.

 

*Net Loss and Net Loss per Share.*Net losswas $15,030,000 for Fiscal 2004 compared to a net loss of $10,096,000 forFiscal 2003. Net loss per share for Fiscal 2004 was $0.49, based on weightedaverage shares outstanding of 30,853,734, compared to a net loss per share of$0.45 for Fiscal 2003, based on weighted average shares outstanding of22,203,126. The increase in net loss for Fiscal 2004 is principally dueincrease in staff costs, the effects of an appreciation of 11.6% in the $: £exchange rate (see note below) and the limited share of the losses attributableto the minority interest.

 

Theloss from continuing operations was $12,885,000 for Fiscal 2004 compared to aloss from continuing operations of $8,941,000 for Fiscal 2003. Loss per sharefrom continuing operations for Fiscal 2004 was $0.42, based on weighted averageshares outstanding of 30,853,734, compared to $0.40 for Fiscal 2003, based onweighted average shares outstanding of 22,203,126.

 

Note As the Company’s operating currency is UK sterling (£) its results of operationsare affected by significant changes in the $: £ rates used to translate therevenues and costs. For Fiscal 2004 the average rate was $1.83: £1.00 and forFiscal 2003 the rate was $1.64: £1.00, an increase of 11.6%.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

*Working Capital Information as at December 31:*

 
| ** **                                     | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                     | ** ** | **($’000’s)** |
| Cash and Cash Equivalents                      |       | $                       | 7,249      |     | $          | 5,276    |       | $ | 845 |   |
|                                           |       |                    |       |     |       |     |       |
| Current Assets                                 |       | 11,867                  |       | 6,515    |       | 2,144    |       |
|                                           |       |                    |       |     |       |     |       |
| Current Liabilities                            |       | (2,746                  | )          | (2,353   | )          | (6,540   | )          |
|                                           |       |                    |       |     |       |     |       |
| Working Capital Surplus/(Deficit)              |       | $                       | 9,121      |     | $          | 4,162    |       | $ | (4,396 | ) |
|                                           |       |                    |       |     |       |     |       |
| Ratio of Current Assets to Current Liabilities |       | 4.32                    |       | 2.77     |       | 0.33     |       |
|                                                |            |                         |            |          |            |          |            |  |  |  |  |

 

*Net Change in Cash and Cash Equivalents.*DuringFiscal 2005 the Company’s cash and cash equivalents increased by $1,973,000.This is primarily the result of proceeds received from shares issued by theCompany in excess of net cash used in operating and investing activities andrepayments of debt. The Company used net cash of $8,998,000 in continuingoperations and used net cash of $1,078,000 in discontinued operations. TheCompany received net cash of $15,346,000 in financing activities and used $3,388,000in investing activities.

 

DuringFiscal 2004, the Company’s cash and cash equivalents increased by $4,431,000.This increase was primarily the result of proceeds received from shares issuedby the Company in excess of the net cash used in operating and investingactivities and repayments of debt. The Company used net cash of $13,629,000 incontinuing operations and used net cash of $1,486,000 in discontinuedoperations. The Company received net cash of $20,175,000 in financing activitiesand used $434,000 in investing activities.

 

*Net Cash Used in Operations.* In Fiscal2005, the Company’s continuing operations used net cash of $8,998,000. Thedecrease of $4,631,000 from the amount of net cash used in continuingoperations in Fiscal 2004 is mainly due to the reduction of research anddevelopment, reductions in SG&A costs, increases in VAT received andrealized income tax benefit of $858,000.

 

InFiscal 2004 the Company used net cash in continuing operations of $13,629,000.The increase of $1,547,000 from the amount of net cash used in continuingoperations in Fiscal 2003 was mainly due to increases in staff andsub-contractors (including medical board members and radiologists).

 

*Net Cash Used in Investing Activities.* InFiscal 2005, the Company used $3,388,000 in investing activities. On November10, 2005 the Company’s majority-owned subsidiary MS-PLC completed the sale ofits subsidiary Lifesyne to an independent third party for $443,000.Additionally on May 25, 2005 Medicsight’s indirect subsidiary MAM completed thesale of the CT Lightspeed 16 slice scanner located at the redundant test centerat Ravenscourt Hospital in West London for $300,000, net of applicable salestax, to GE Medical Systems. The Company used funds to purchase $131,000 ofadditional fixed assets. The Company held $4,000,000 for funds received inDecember 2005 for common stock subscribed but unissued until January 2006.

 

InFiscal 2004, the Company had a net cash outflow from investing activities of$434,000. The Company used the funds to purchase additional fixed assets, themajority of which was required for the clinical trials and presentation ortesting our software.

 

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*Net Cash Provided by Financing Activities.*In Fiscal 2005, the Company had a net cash inflow from financing activities of$15,346,000. The funds received in Fiscal 2005 consisted of $12,035,000 (net ofcommission and expenses) raised by the sale of the Company’s common stock and$3,600,000 received for common stock subscribed but unissued by the Companyless $333,000 used to settle the outstanding capital lease obligation on CTLightspeed 16 slice scanner by MAM.

 

InFiscal 2004, the Company had a net cash inflow from financing activities of$20,175,000. The funds received in Fiscal 2004, consisted of $23,310,000 (netof commission and expenses) raised by common stock issued by the Company. TheCompany also repaid in full the Asia IT facility ($2,880,000) and the Company’soverdraft facility ($196,000).

 

*Stockholders’ Equity.* The Company’sstockholders’ equity at December 31, 2005 was $21,734,000, including anaccumulated deficit of $(190,714,000) as compared to $18,465,000 at December31, 2004, including an accumulated deficit of $(178,498,000). Additionalpaid-in capital was $208,684,000 and $196,652,000, at December 31, 2005 andDecember 31, 2004 respectively. The increase in stockholders’ equity was aresult of an increase in accumulated deficit of $12,216,000 offset by anincrease in additional paid-in capital of $12,032,000 and common stocksubscribed but unissued of $3,600,000. The increase in additional paid-incapital resulted from issues of common stock at a premium by the Company inFiscal 2005.

 

TheCompany’s stockholders’ equity at December 31, 2004 was $18,465,000, includingan accumulated deficit of $(178,498,000), as compared to $10,489,000 atDecember 31, 2003, including an accumulated deficit of $(163,468,000).Additional paid-in capital was $196,652,000 and $173,810,000, at December 31, 2004and December 31, 2003, respectively. The increase in stockholders’ equitywas a result of an increase in accumulated deficit of $15,030,000 offset by anincrease in additional paid-in capital of $22,842,000. The increase inadditional paid-in capital resulted from issues of common stock at a premium bythe Company in Fiscal 2004.

 

*Additional Capital.*The Company mayrequire additional capital during its fiscal years ending December 31, 2006and 2007 to implement its business strategies, including cash for payment ofincreased operating expenses such as salaries for additional employees. Suchadditional capital may be raised through additional public or private equityofferings, as well as borrowings and other resources. Currently, the Companyhas two available lines of credit.

 

OnDecember 15, 2000, the Company entered into an unsecured credit facility withAsia IT that provides a $20,000,000 line of credit. Such line of creditoriginally expired on December 31, 2001, but has been extended until June 30, 2007.Interest on advances under the credit facility accrues at 2% above US LIBOR.The Company can draw down on this credit facility for its financingrequirements, upon approval by the Company’s Board of Directors and subject toapproval by Asia IT (such approval not to be unreasonably withheld). TheCompany is restricted from borrowing funds, directly or indirectly, other thanthrough the credit facility with Asia IT, without the consent of Asia IT. Theavailability of the credit facility reduces upon the Company’s sale of any ofits investment assets. The amounts drawn and interest charged under thisfacility are repayable on demand or at the maturity of the facility.

 

OnNovember 20, 2001, Asia IT entered into a £10,000,000 ($18,000,000) creditfacility with MS-PLC. Such facility matures on June 30, 2007 and is secured bya lien on all assets of MS-PLC. Interest on outstanding amounts accrues at 2%above Sterling LIBOR. Pursuant to such credit facility, MS-PLC had covenantedto undertake a public offering of its common shares in an amount not less than£25,000,000 ($45,000,000) not later than March 2002. MS-PLC did not completesuch an offering but the facility nevertheless remains in place.

 

AtDecember 31, 2005, the Company had not drawn down any funds under the$20,000,000 facility with Asia IT, and MS-PLC had not drawn down any fundsunder its £10,000,000 ($18,000,000) facility with Asia IT. Under thesefacilities Asia IT, a related party, has deposited $2,500,000 for the benefitof the Company which the Company has not utilized.

 

DuringFiscal, 2005, the Company raised $12,035,000 (net of commission and expenses)by issuing 3,327,000 shares of its common stock in a private placement. TheCompany raised a further $3,600,000 (net

 

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ofcommission and expenses) on January 13, 2006 by issuing 1,000,000 shares of itscommon stock in a private placement. The Company received the consideration forthe future issue in advance prior to the December 31, 2005. The Companyrecorded these funds as cash held for common stock subscribed but unissued atDecember 31, 2005, and correspondingly recorded the obligation to issue sharesas common stock subscribed but unissued at December 31, 2005.

 

Theseprivate placements were underwritten by Asia IT, a related party. Asia ITreceived commissions of $1,630,000 on the above private placements.

 

On March17, 2006 the Company raised a further $990,000 (net of commission and expenses)by issuing 275,000 restricted shares of common stock. Asia IT earnedcommissions of $110,000 on the above private placement.

 

Duringthe year ended December 31, 2004 the Company raised $23,310,000 (net ofcommission and expenses) by issuing 8,579,000 restricted shares of commonstock. These private placements were underwritten by Asia IT, a related party.Asia IT received commissions of $2,410,000 on the above private placement.

 

TheCompany’s authorized share capital is 40,000,000 shares of common stock, parvalue $0.001. At March 27, 2006, 37,667,883 shares of common stock had beenissued.

 

To theextent that additional capital is raised through the sale of equity orequity-related securities of the Company or its subsidiaries, the issuance ofsuch securities could result in dilution to the Company’s stockholders. Noassurance can be given, however, that the Company will have access to thecapital markets in the future, or that financing will be available onacceptable terms to satisfy the Company’s cash requirements to implement itsbusiness strategies. If we are unable to access the capital markets or obtainacceptable financing, our results of operations and financial conditions couldbe materially and adversely affected. We may be required to raise substantialadditional funds through other means. The products derived from our proprietarysoftware, Medicsight CAD, and our online portal, MedicExchange, are expected toaccount for substantially all of our revenues from operations in theforeseeable future. Our technology has not yet been fully commercialized, andwe have not begun to receive any revenues from our commercial operationsassociated with the software products. We cannot assure our stockholders thatour technology and products will be commercialized successfully, or that if socommercialized, that revenues will be sufficient to fund our operations.Management believes it has sufficient cash and available facilities to fundoperations for the coming year. If adequate funds are not available to us, wemay be required to curtail operations significantly or to obtain funds throughentering into arrangements with collaborative partners or others that mayrequire us to relinquish rights to certain of our technologies or products thatwe would not otherwise relinquish.

 

**ContractualObligations**

 

As ofDecember 31, 2005, the Company has the following contractual obligations:

 
| ** **                                              | ** ** | **Payments Due By Period** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**** ($000’s)** | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
|                                                    |       |                                      |       |   |   |   |   |   |   |   |   |
| Capital Lease Obligations                               |       | $                                         | 25         |   | $ | 19 |   | $ | 6 |   | $ | — |   | $ | — |   |
|                                                    |       |                                      |       |   |   |   |   |   |   |   |   |
| Total                                                   |       | $                                         | 25         |   | $ | 19 |   | $ | 6 |   | $ | — |   | $ | — |   |

 

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**CriticalAccounting Policies.**

 

* *InDecember 2001 and January 2002, the Securities and Exchange Commissionrequested that all registrants list their three to five most “criticalaccounting policies” in the Management’s Discussion and Analyses of FinancialCondition and Results of Operations. The Securities and Exchange Commissionindicated a “critical accounting policy” is one which is both important to theportrayal of the company’s financial condition and results and requiresmanagement’s most difficult, subjective or complex judgments, often as a resultof the need to make estimates about the effect of matters that are inherentlyuncertain. We believe that the following accounting policies fit the definitionof critical accounting policies.

 

*RevenueRecognition.*We expect to earn our revenue primarily fromsoftware licenses and related services. Our revenue will be recognized in accordancewith Statement of Position 97-2 (SOP 97-2), as amended by Statementof Position 98-9. The Company’s revenues were derived from its discontinuedscanning services operated by Lifesyne. Scan revenue is recognized when theservice is delivered.

 

Therecognition of revenues from software licenses and related services willrequire difficult and complex judgments. The terms of the license contract,such as whether the contract is long-term (over 12 months) or short-term,cancelable or non-cancelable and the basis on which the licensee is charged ,for example, will affect the recognition of revenues from services, such asup-front fees on installation, activation and up-front license fees, on-goinglicense fees, termination fees and maintenance fees. Where fees are receivedprior to any service being delivered, the recognition of the fees is deferreduntil the related service has been delivered successfully. Recognition of feesthat relate to any “milestone” is deferred until the “milestone” has beenachieved.

 

TheCompany believes that the accounting estimates related to the recognition ofrevenue and establishment of reserves for uncollectable amounts in the resultsof operations is a “critical accounting estimate” because: (1) it requiresmanagement to make assumptions about future collections, and (2) theimpact of changes in actual performance versus these estimates on the accountsreceivable balance reported on our consolidated balance sheets and the resultsreported in our consolidated statements of operations could be material.Further the Company has no history of uncollectable amounts and therefore mustinitially look to the estimates for the industry or particular companies thatthe management feels operate in a similar environment in addition to any currentmarket indicators about general economic conditions that might impact thecollectibility of accounts.

 

*Researchand Development.***Costsincurred in connection with the development of software products that areintended for sale are accounted for in accordance with Statement of FinancialAccounting Standards No. 86, “Accounting for the Costs of Computer Software tobe Sold, Leased, or Otherwise Marketed”. Costs incurred prior to technologicalfeasibility being established for the product are expensed as incurred.Technological feasibility is established upon completion of a detail programdesign or, in its absence, completion of a working model. Thereafter, allsoftware production costs are capitalized and subsequently reported at thelower of unamortized cost or net realizable value. Capitalized costs areamortized based on current and future revenue for each product with an annualminimum equal to the straight-line amortization over the remaining estimatedeconomic life of the product. Amortization commences when the product isavailable for general release to customers.

 

TheCompany concluded that capitalizing such expenditures on completion of aworking model was inappropriate because the Company did not incur any materialsoftware production costs and therefore has decided to expense all research anddevelopment costs. The Company’s research and development costs are comprisedof staff and consultancy costs expensed on the Medicsight CAD system.

 

*Impairmentof Long-lived Assets and Long-lived Assets To Be Disposed of*.The Company evaluates the carrying value of long-lived assets for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. The Company’s assessment for impairment ofan asset involves estimating the undiscounted cash flows expected to resultfrom use of the asset and its eventual disposition. An impairment lossrecognized is measured as the amount by which the carrying amount of the assetexceeds the fair value of the asset.

 

Calculatingthe estimated fair value of an asset involves significant judgments and avariety of assumptions. Judgments that the Company makes concerning the valueof its intangible assets include assessing time

 

23

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andcost involved for development, time to market, and risks of regulatory failureor obsolescence, (due to market, environmental or technological advances forexample). For calculating fair value based on discounted cash flows, weforecast future operating results and future cash flows, which includelong-term forecasts of revenue growth, gross margins and capital expenditures.

 

Animpairment analysis was performed as of December 31, 2005 and 2004 and theCompany concluded there was no impairment loss.

 

*Impairmentof Excess of Purchase Price Over Net Assets Acquired.***The Company adopted SFAS No. 142 onJanuary 1, 2002. Under this standard, goodwill is no longer be amortized overits estimated useful life, but is tested for impairment on an annual basis andwhenever indicators of impairment arise. Under the provisions of SFAS No. 142,any impairment loss identified upon adoption of this standard is recognized asa cumulative effect of a change in accounting principle. Any impairment lossincurred subsequent to the initial adoption of SFAS No 142 is recorded as acharge to current period earnings.

 

Inconnection with the adoption of SFAS No. 142, we performed our initialimpairment analysis of goodwill and indefinite-lived intangible assets as of January 1,2002. The implementation involved the determination of the fair value of eachreporting unit, where a reporting unit is defined as an operating segment orone level below. We continue to perform an impairment analysis at leastannually.

 

Wedetermined the fair value of each significant reporting unit based ondiscounted forecasts of future cash flows. Judgments and assumptions arerequired in the preparation of the estimated future cash flows, includinglong-term forecasts of revenue growth, gross margins and capital expenditures.

 

**RecentAccounting Pronouncements.**

 

In May2005, the Financial Accounting Standards Board (“FASB”) issued SFAS 154, “Accounting Changes and Error Corrections, areplacement of APB Opinion No. 20 and FASB Statement No. 3”.* *The standard requires retrospectiveapplication to prior periods’ financial statements of a voluntary change inaccounting principle unless it is deemed impracticable. The standard statesthat a change in method of depreciation, amortization or depletion forlong-lived, non-financial assets be accounted for as a change in accountingestimate that is affected by a change in accounting principle.  Thestandard is effective for accounting changes and corrections of errors madeoccurring in fiscal years beginning after December 15, 2005.  The adoptionof SFAS No. 154 is not expected to have a material impact on the Company’sfinancial position or results of operations.

 

 InDecember 2004, the FASB issued SFAS 153,”Exchanges of Non-monetary Assets, anamendment of APB Opinion No.29”. The standard is based on the principlethat exchanges of non-monetary assets should be measured based on the fairvalue of the assets exchanged and eliminates the exception under APB OpinionNo. 29 for an exchange of similar productive assets and replaces it withan exception for exchanges of non-monetary assets that do not have commercialsubstance. The standard is effective for non-monetary exchanges occurring infiscal periods beginning after June 15, 2005. The Company cannot determinethe impact of SFAS 153 at this time.

 

InDecember 2004, the FASB issued SFAS 123 (revised 2004),”Share-Based Payment”. The standardeliminates the disclosure-only election under the prior SFAS 123 andrequires the recognition of compensation expense for stock options and otherforms of equity compensation based on the fair value of the instruments on thedate of grant be expensed over the period service is received. We intend toadopt this Statement using the modified prospective method as of January 1,2006. The Company estimates that the charge to the Statement of Operations forthe year to December 31, 2006 will be approximately $500,000.

 

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| **ITEM 7A** | ** ** | **QUANTATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK** |
|-------------|------------|---------------------------------------------------------------|

 

**Interest Rate Risk**

 

TheCompany’s exposure to market risk associated with changes in interest ratesrelates to its debt obligations. The Company has the following debt facilitiesall repayable on demand:

 
| **Debt Holder**                 | ** ** | **Facility** | ** ** | **Draw Down** | ** ** | **Interest rate** | ** ** | **At December 31**  | ** ** |
|---------------------------------|------------|--------------|------------|---------------|------------|-------------------|------------|---------------------|------------|
|                            |       |         |       |          |       |              |       |                |       |
| Asia IT Capital Investments Ltd |       | $            | 20,000,000 |          | $          | 0                 |       | US LIBOR + 2%       |       | 6.84 | % |
|                            |       |         |       |          |       |              |       |                |       |
| Asia IT Capital Investments Ltd |       | $            | 18,000,000 |          | $          | 0                 |       | Sterling LIBOR + 2% |       | 6.77 | % |

 

Since the Company has not drawn down funds undereither facility, a hypothetical 100 basis point increase in interest rateswould not increase the Company’s interest costs, assuming no draw downs aremade.

 

**Foreign Exchange Risk**

 

TheCompany does not hold significant cash balances in British Pounds so anyadverse movements in the exchange rates are considered immaterial.

 

As the Company’s operating currency is UK sterling (£)and its financial statements are reported in US Dollars, the Company’s assetsand liabilities and its results of operations are affected by movements in the$: £ exchange rate.

 
| **ITEM 8.** | ** ** | **FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA** |
|-------------|------------|-------------------------------------------------|

 

Theinformation required by this Item is included on pages F-1 to F-20 of thisAnnual Report.

 
| **ITEM 9.** | ** ** | **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND  FINANCIAL DISCLOSURE.** |
|-------------|------------|--------------------------------------------------------------------------------------------|

 

None.

 
| **ITEM  9A**. | ** ** | **CONTROLS  AND PROCEDURES.** |
|---------------|------------|-------------------------------|

 

**Evaluationof Disclosure Controls and Procedures.** As required by Rule13a-15(b) under the Exchange Act, our management carried out anevaluation of the effectiveness of the design and operation of the Company’s “disclosurecontrols and procedures” as of December 31, 2005. This evaluation was carriedout under the supervision and with the participation of our management,including our Company’s Chief Executive Officer and Chief Financial Officer. Asdefined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,disclosure controls and procedures are controls and other procedures of theCompany that are designed to ensure that information required to be disclosedby the Company in the reports it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms. Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by the Company inthe reports it files or submits under the Exchange Act is accumulated andcommunicated to the Company’s management, including the Company’s ChiefExecutive Officer and Chief Accounting Officer, as appropriate, to allow timelydecisions regarding required disclosure.

 

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Based upon thatevaluation, the Company’s Chief Executive Officer and Chief Accounting Officerconcluded that the Company’s disclosure controls and procedures were effectiveas of December 31, 2005. It should be noted that the design of any system ofcontrols is based in part upon certain assumptions about the likelihood offuture events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions, regardless ofhow remote.

 

**Changesin Internal Control Over Financial Reporting.** As required byRule 13a-15(d) under the Exchange Act, our management, including ourChief Executive Officer and Chief Accounting Officer, also conducted anevaluation of our internal control over financial reporting to determinewhether any change occurred during the quarter ended December 31, 2005 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting. Based on that evaluation during the quarterended December 31, 2005 there has been no change in our internal control overfinancial reporting that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 
| **ITEM 9B.** | ** ** | **OTHER  INFORMATION.** |
|--------------|------------|-------------------------|

 

None.

 

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| **ITEM 10.** | ** ** | **DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.** |
|--------------|------------|---------------------------------------------------------|

 

Thefollowing table sets forth the current officers and directors of Medicsight,Inc:

 
| **Name**               | ** ** | **Age** | ** ** | **Position**                                      |
|------------------------|------------|---------|------------|---------------------------------------------------|
|                   |       |    |       |                                              |
| Stephen Forsyth        |       | 55      |       | Chairman and Director                             |
| Tim Paterson-Brown     |       | 45      |       | Chief Executive Officer and Director              |
| Paul Gothard           |       | 38      |       | Chief Financial Officer and Director              |
| David Mason            |       | 33      |       | Director                                          |
| Neal Wyman             |       | 53      |       | Independent Director and Audit Committee Chairman |
| L. Peter Fielding M.D. |       | 66      |       | Independent Director and Audit Committee Member   |
| Peter Venton OBE       |       | 64      |       | Independent Director and Audit Committee Member   |
| Sir Christopher Paine  |       | 71      |       | Independent Director                              |
| Dr Allan Miller        |       | 70      |       | Independent Director                              |

 

Directorsare elected in accordance with the Company’s by-laws to serve until the nextannual stockholders meeting and until their successors are elected in theirstead. The Company does not currently pay compensation to directors forservices in that capacity. Officers are appointed by the Board of Directors andhold office until their successors are chosen and qualified, until their deathor until they resign or have been removed from office. All corporate officersserve at the discretion of the Board of Directors. There are no familyrelationships between any director or executive officer and any other directoror executive officer of the Company.

 

*Stephen Forsyth***joinedthe Company in December 2003 as Chairman and Chief Executive Officer. He stooddown as CEO in September 2004. Previously he was Chairman and Chief Executiveof Leisure Investments PLC, a publicly quoted company registered in England andWales between 1976 and 1989. He subsequently assisted the Phoenix Trust CompanyLimited between 1990 and 1999 with its various operations and investments. InJanuary 1999, he established The International Cotton Company, in which he hasbeen the principal financier of a number of new technology orientated companiesfrom their inception, including Accsys Technologies PLC, Titan Wood Limited andMedicsight PLC. The International Cotton Company changed its name toInternational Capital Corporation PLC in 2003. Stephen remains the Chairman ofthis investment holding company. Stephen is a founding Trustee of theMedicsight Foundation (renamed “The Foundation for the Early Detection ofDisease”), a United Kingdom registered charity, which is concerned with therelief of human suffering and poverty and the promotion of health andeducation.

 

*TimPaterson-Brown*joined the Company in December2003 as Director and was appointed Chief Executive Officer in September 2004.Tim qualified as a Chartered Surveyor with Strutt and Parker in 1984 followingdegrees at London University and Magdalene College, Cambridge. In 1987 Timjoined Leisure Investments PLC. He subsequently worked closely with StephenForsyth for the Phoenix Trust Company Limited between 1990 and 1999 assistingwith its various operations and investments. In 1999, he joined TheInternational Cotton Company as a Director. The International Cotton Companyhas been the principal financier of a number of new technology orientatedcompanies from their inception, including Accsys Technologies PLC, Titan WoodLimited and Medicsight PLC. The International Cotton Company changed its nameto International Capital Corporation PLC in 2003. Tim is also a foundingTrustee of the Medicsight Foundation (renamed “The Foundation for the EarlyDetection of Disease”), a United Kingdom registered charity, which is concernedwith the relief of human suffering and poverty and the promotion of health andeducation.

 

*Paul Gothard* has served as ChiefFinancial Officer and a Director of the Company since November 2002. Heobtained a BA (Hons) degree in 1989 and subsequently became a Member of theInstitute of Chartered Accountants in 1993. He initially joined the Company inJuly 2001 as Group Financial Controller. His responsibilities have includedcorporate structuring and fundraising as well as corporate management andgovernance and managing the listing of the Company’s common stock on theAmerican Stock Exchange. Prior to joining the Company Paul was the GroupFinancial Controller of IP Powerhouse Ltd, a company involved in

 

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constructing andleasing of space in data centers across Europe. From May 1994 to October 1998,Paul served as the Finance Director of Merriman White solicitors.

 

*David Mason* co-founded in 1994SpeedServe Inc, an on-line vendor of books, videos, DVDs and Video Gamehardware and software.  Following SpeedServe Inc.’s merger with Buy.com,Inc in 1998, David served as  chiefexecutive officer of Buy.com Europe, a joint venture between Buy.com, Softbankand Vivendi and developed and launched its French and German businesses.

 

*NealWyman* trained as a Chartered Accountant with Coopers andLybrand before moving to KPMG where he worked in the Far East. He moved intothe recruitment industry in London specializing in financial services, gainingexperience with a diverse range of clients. He entered executive search in1981, initially specializing in the financial services industry beforebroadening into general appointments and professional services. He now focuseson general management, finance and non-executive appointments in both privateand quoted companies, with particular focus on venture capital. He is agraduate of the London School of Economics. Neal was appointed an independentdirector of the Company on November 23, 2004 and subsequently was appointed asChairman of the Audit Committee on November 26, 2004.

 

*L. PeterFielding*, M.D. is an experienced physician who providesconsulting services to healthcare and academic organizations, in addition tohis departmental and institutional responsibilities at WellSpan SurgicalAssociates. His clients in the past five years have included, in the U.S.A.National Cancer Institute; American Joint Committee on Cancer; Taiko PostUniversity – Connecticut; Purely Cotton Inc. – Seattle; Musculoskeletal SystemsInc. - Pittsburgh; University of Connecticut Medical School. , and, in theU.K.: Imperial College for Science, Technology and Medicine and the Associationof Surgeons in the United Kingdom and Ireland. Dr Fielding specializes inhealthcare strategic planning, organizational structure and operational issues.He has participated in the organization and development of the Pain ReliefCenter; Hyperbaric Medicine and Advanced Wound Care Center; Clinical WeightReduction Center; York Hospital Human Motion Institute and the MolecularBiology Research Laboratory.

 

*PeterVenton, OBE* has over 30 years’ experience in the computingand telecommunications industry and holds several patents in the sector. He isa former Chief Executive of Plessey Radar and of GEC-Marconi Prime Contracts.Peter currently serves as the Technical Audit Chairman for the DefenceEvaluation & Research Agency and joined the Board of MS- PLC as anindependent director in November 2001. Peter was appointed an independentdirector of the Company on November 23, 2004 and subsequently was appointed asmember of the Audit Committee on November 26, 2004.

 

*SirChristopher Paine*was the President of the British MedicalAssociation until 2001. He is currently the chairman of the Medical Advisory Board of theInternational Hospitals Group, chairman of Royal Society of Medicine SupportServices Ltd and a trustee of the London Clinic. He was Medical Directorof the Advisory Committee on Distinction Awards for the National Health Serviceuntil the end of 1999 and has been President of the Royal College ofRadiologists and The Royal Society of Medicine. Sir Christopher is a MedicalOncologist. He was a consultant clinical oncologist from 1970 at the ChurchillHospital in Oxford. He also served as director of clinical studies at themedical school. He was district general manager of the Oxford Health Authorityfrom 1984-88. In addition, he has served on the Animal Welfare Council andImperial Cancer Research Fund. Sir Christopher was appointed an independentdirector of the Company on November 23, 2004 and subsequently was appointed asmember of the Audit Committee on November 26, 2004.

 

*Dr AllanMiller* qualified in medicine at St Bartholomew’s Hospital MedicalSchool, London in 1961. In 1965 Dr Miller was admitted to the Royal College ofPhysicians. After spending eight years in general practice he joined, HoffmanLa Roche where he held the positions of Head of Clinical CardiovascularResearch Worldwide, Head of Dermatological Research Worldwide and Head ofClinical Research UK. Dr Miller spent 14 years as Medical Director for NappPharmaceuticals Ltd and four years as European Medical Research Director of thePurdue Pharma, Mundipharma, Napp group based in Cambridge, England. Dr Milleris a Member of the British Medical Association and a Fellow of the RoyalSociety of Medicine.

 

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**Significant Employees**

 

Significantemployees of MS-PLC are:

 

*AdamBoyse*was appointed Chief OperatingOfficer in June 2005. Adam has been with Medicsight since May 2005and has nearly 15 years experience in the software development sector. With diverseexperience covering markets such as automotive, telecommunications andpharmaceuticals, Adam has the strategic and operational experience to bringsoftware products into commercial reality. Prior to Medicsight, Adam served asVice President of Software Development for IDBS, a market-leading life sciencessoftware company, where he oversaw the growth of the development group andsteered the company to ISO 9001 and TickIT certification. Adam has also been apart time lecturer at Birmingham University and presented at a number ofcomputing conferences. Adam has a First Class BSc(Hons), Computer Science fromCoventry University, United Kingdom.

 

*JonahAburrow-Jones*wasappointed Vice President of Commercial Development in July 2005. Jonah has morethan 12 years of product management and sales experience, most recently servingas the senior product line manager for the Voxar Product Group of Barco. Priorto Barco, Jonah was the international product manager for E-Z-EM, Inc, aninternational manufacturer of contrast agents for gastrointestinal radiology.He has extensive industry and clinical experience and experience in developingand managing sales, marketing and product development teams.

 

*Dr JohnCostello*has been a ConsultantPhysician in general and respiratory medicine at King’s College Hospital since1977 and senior lecturer in Medicine at Guy’s Kings and St Thomas’s School ofMedicine. Between 1982 and 1998 he was Director of the academic department ofrespiratory medicine. He specializes in bronchial asthma and its treatment andhas authored many books and articles in the area.. He studied at UniversityCollege, Dublin and has since held appointments at a number of hospitals in theUnited Kingdom and the United States. He has been Founder President of theRespiratory Medicine Section at the Royal Society of Medicine and a member ofCouncil at the British Thoracic Society. He was the first Medical Director atKings and served as its Clinical Director of Medicine.InFebruary 2002 he was appointed as Director of Medical Science at MS-PLC, withresponsibility for developing innovative technology for radiological populationpre-emptive scanning for early detection of cancer and coronary heart disease.

 

*Dr JamshidDehmeshki* was appointed Chief Scientific Officer in July 2001. Heholds a PhD from Nottingham University and an MSc in Applied Mathematics andComputer Science. The main subject of his PhD was a stochastic model-basedapproach to image processing. He has written widely on the recognition,classification and segmentation of textured images into different regions basedon their statistical characteristics. Dr Dehmeshki worked as a research fellowin the Centre for Industrial and Medical Information (“CIMI”) for two yearswhere he developed ‘image processing’ algorithms for various medical andindustrial applications, such as MRI and CT scan.. From March 1999 to July2001, he worked as a senior research fellow in the NMR Research Unit at theInstitute of Neurology, National Hospital for Neurology and Neurosurgery,University College London.

 

***Section 16(a) Beneficial Ownership Reporting Compliance***

* *

Underthe securities laws of the United States, the Company’s directors, itsexecutive officers, and any persons holding more than ten percent of theCompany’s common stock are required to report their initial ownership of theCompany’s common stock and any subsequent changes in that ownership to theSecurities and Exchange Commission (the “Commission”). Specific due dates forthese reports have been established and the Company is required to disclose anyfailure to file by these dates. The Company can report that there were nodelinquent filings to report in Fiscal 2005.

 

29

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**Audit Committee Financial Expert**

 

TheCompany’s Board of Directors has determined that Mr. Neal Wyman, an independentdirector, is the audit committee financial expert, as defined in Regulation S-Kpromulgated under the Securities and Exchange Act of 1934, serving on its auditcommittee.

 

**Code of Ethics**

 

TheCompany adopted a Code of Ethics that applies to the Company’s principalexecutive officer, principal financial officer and principal accounting officeror controller, or persons performing similar functions on or after November 25,2004. The Company’s Code of Ethics was approved by the Audit Committee onNovember 26, 2004.

 

Copiesof the Company’s Code of Ethics can be obtained, without charge by writing tothe Company Secretary at Medicsight, Inc, 46 Berkeley Square, London W1J 5AT.Additionally, the Code can be downloaded at *http://www.medicsight.com/downloads/code_of_ethics.pdf*

 

30

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| **ITEM 11.** | ** ** | **EXECUTIVE COMPENSATION.** |
|--------------|------------|-----------------------------|

 

Thefollowing table summarizes Fiscal Year 2005, 2004 and 2003 compensation forservices in all capacities of the Company’s executive officers.

 

**SummaryCompensation Table**

 
| ** **                       | ** ** | ** **              | ** ** | **Long-Term Compensation** | ** ** | ** **     | ** ** |
|----------------------------------|------------|-------------------------|------------|----------------------------|------------|----------------|------------|
| ** **                       | ** ** | **Annual Compensation** | ** ** | **Awards**                 | ** ** | **Payouts**    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Name and Principal  Position** | ** ** | **Year**                | ** ** | **Salary  ($)**            | ** ** | **Bonus  ($)** | ** ** | **Securities  Underlying  Options (#)** | ** ** | **Restricted  Stock  Awards (#)** | ** ** | **LTIP  Payouts  ($)** | ** ** | **All Other  Compensation** | ** ** |
|                             |       |                    |       |                       |       |           |       |   |   |   |   |   |   |   |   |
| Tim Paterson-Brown,              |       | 2005                    |       | 216,696                    |       | 16,252         |       | — |   | — |   | — |   | — |   |
| CEO (1)                          |       | 2004                    |       | 26,600                     |       | —         |       | — |   | — |   | — |   | — |   |
|                             |       |                    |       |                       |       |           |       |   |   |   |   |   |   |   |   |
| Paul Gothard, CFO                |       | 2005                    |       | 162,522                    |       | 12,189         |       | 86,500 | (2) | — |   | — |   | — |   |
|                             |       | 2004                    |       | 157,380                    |       | —         |       | 27,500 | (2) | — |   | — |   | — |   |
|                             |       | 2003                    |       | 115,115                    |       | —         |       | 22,000 | (2) | — |   | — |   | — |   |
|                             |       |                    |       |                       |       |           |       |   |   |   |   |   |   |   |   |
| Stephen Forsyth,                 |       | 2004                    |       | —                     |       | —         |       | — |   | — |   | — |   | — |   |
| Chairman and CEO (3)             |       | 2003                    |       | —                     |       | —         |       | — |   | — |   | — |   | — |   |
|                             |       |                    |       |                       |       |           |       |   |   |   |   |   |   |   |   |
| Simon Zuanic, CEO (3)            |       | 2003                    |       | 131,560                    |       | —         |       | — |   | — |   | — |   | 100,315 |   |
|                             |       |                    |       |                       |       |           |       |   |   |   |   |   |   |   |   |
| Stefan Allesch-Taylor,           |       | 2003                    |       | 116,222                    |       | —         |       | — |   | — |   | — |   | — |   |
| Chairman and CEO (3)             |       |                    |       |                       |       |           |       |   |   |   |   |   |   |   |   |

 

----

(1)                                  Tim Paterson-Brownwas appointed Chief ExecutiveOfficer on September 21, 2004.

 

(2)                                  Comprises options over shares in the Company’sprincipal subsidiary, MS-PLC’s under its “A” and “B” plans as described in ITEM5 (see page 11 above) and the notes to the Financial Statements.

 

(3)                                  Stefan Allesch-Taylor resigned as the Company’sChief Executive Officer effective January 13, 2003 and resigned as Chairmaneffective December 8, 2003. Simon Zuanic was appointed Chief Executive OfficerJanuary 13, 2003 and resigned effective December 8, 2003 to work in otheroperations within the International Capital Corporation PLC group. StephenForsyth was appointed the Company’s Chairman and Chief Executive Officereffective December 8, 2003. Stephen Forsyth resigned as Chief ExecutiveOfficer on September 21, 2004.

 

31

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| **ITEM 12.** | ** ** | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND  RELATED STOCKHOLDER MATTERS.** |
|--------------|------------|------------------------------------------------------------------------------------------------------|

## ** **

Thefollowing table sets forth certain information regarding beneficial ownershipof the Company’s common stock as of March 27, 2006:

 

•                                          each personknown by the Company to be the beneficial owner of more than 5% of theoutstanding common stock;

 

•                                          each personserving as a director or executive officer of the Company; and

 

•                                          all executiveofficers and directors of the Company as a group.

 

Beneficialownership is determined in accordance with the rules of the Securities andExchange Commission. In general, a person who has voting power and/orinvestment power with respect to securities is treated as a beneficial owner ofthose securities. For purposes of this table, shares subject to outstandingwarrants and options exercisable within 60 days of the date of this AnnualReport are considered as beneficially owned by the person holding such securities.To our knowledge, except as set forth in this table, the persons named in thistable have sole voting and investment power with respect to the shares shown.Except as otherwise indicated, the address of each of the directors, executiveofficers and 5% shareholders in this table is as follows: Medicsight, Inc., 46Berkeley Square, London, W1J 5AT, United Kingdom.

 

Percentagebeneficially owned is based upon 37,667,883 shares of common stock issued andoutstanding as of March 27, 2006.

 
| **Name and address of Beneficial Owner**                                                  | ** ** | **Number of Shares  Beneficially Owned** | ** ** | **Percentage of Common  Equity Beneficially Owned** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
|                                                                                                               |       |                                                    |       |                                                                    |       |
| **5% Beneficial Owners**                                                                                           |       |                                                    |       |                                                                    |       |
| ** **                                                                                                         |       |                                                    |       |                                                                    |       |
| Macniven and Cameron Equity Holdings Limited (1)  46 Berkeley Square  London, United Kingdom  W1J 5AT              |       | 10,673,642                                              |       | 28.3                                                                    | %          |
|                                                                                                               |       |                                                    |       |                                                                    |       |
| VHC International Limited  4th Floor Charter Place  23-27 Seaton Place  St Helier, Jersey JE2 3QL  Channel Islands |       | 4,019,133                                               |       | 10.7                                                                    | %          |
|                                                                                                               |       |                                                    |       |                                                                    |       |
| General Mediterranean Holding SA  Center Financier  29 Avenue de la Porte Neuve  L-2227 Luxembourg                 |       | 3,600,000                                               |       | 9.6                                                                     | %          |
|                                                                                                               |       |                                                    |       |                                                                    |       |
| **Directors and Officers (2)**                                                                                     |       |                                                    |       |                                                                    |       |
| ** **                                                                                                         |       |                                                    |       |                                                                    |       |
| Stephen Forsyth                                                                                                    |       | —                                                  |       |                                                                    | *          |
|                                                                                                               |       |                                                    |       |                                                                    |       |
| Tim Paterson-Brown                                                                                                 |       | 250,000                                                 |       |                                                                    | *          |
|                                                                                                               |       |                                                    |       |                                                                    |       |
| Paul Gothard                                                                                                       |       | —                                                  |       |                                                                    | *          |
|                                                                                                               |       |                                                    |       |                                                                    |       |
| David Mason                                                                                                        |       | —                                                  |       |                                                                    | *          |
|                                                                                                               |       |                                                    |       |                                                                    |       |
| Neal Wyman                                                                                                         |       | —                                                  |       |                                                                    | *          |
|                                                                                                               |       |                                                    |       |                                                                    |       |
| L. Peter Fielding                                                                                                  |       | —                                                  |       |                                                                    | *          |
|                                                                                                               |       |                                                    |       |                                                                    |       |
| Peter Venton                                                                                                       |       | 16,666                                                  |       |                                                                    | *          |
|                                                                                                               |       |                                                    |       |                                                                    |       |
| Sir Christopher Paine                                                                                              |       | —                                                  |       |                                                                    | *          |
|                                                                                                               |       |                                                    |       |                                                                    |       |
| Dr Allan Miller                                                                                                    |       | —                                                  |       |                                                                    | *          |
|                                                                                                               |       |                                                    |       |                                                                    |       |
| Total Officers and Directors as a Group (9 persons)                                                                |       | 266,666                                                 |       |                                                                    | *          |

 

32

----

 

----

(1)          International CapitalCorporation PLC, Suite 2B, Centre Plaza, Main Street, Gibraltar, which owns95.8% of the outstanding share capital of Macniven and Cameron Equity HoldingsLimited (previously STG Holdings PLC). Additionally Stephen Forsyth is theDirector of Macniven and Cameron Equity Interests Limited.

 

(2)   Addresses for these directors and officersare care of the Company at 46 Berkeley Square, London W1J 5AT, United Kingdom.

 

•                  Lessthan 1%.

 
| **ITEM 13.** | ** ** | **CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.** |
|--------------|------------|-----------------------------------------------------|

 

*Asia ITCapital Investments Ltd (a related party)—*On December 29,2000, the Company acquired all of the issued and outstanding shares of HTTPInsights Limited (“Insights”). Asia IT Capital Investments Limited (“Asia IT”) wasa shareholder in Insights as well as the Company at the time of theacquisition, and has provided a credit facility for up to $20,000,000. Thecredit facility expired on December 31, 2001, but has been extended to June 30,2007. All advances under the credit facility accrue interest at 2% above USLIBOR. The Company is restricted from borrowing funds, directly or indirectly,other than through the credit facility, without the consent of Asia IT.

 

OnNovember 20, 2001, Asia IT entered into a 10,000,000($18,000,000) credit facility with MS-PLC. Such facility ceases on June 30,2007 and is secured by a lien on all of the assets of MS-PLC. Interest onoutstanding amounts accrues at 2% above Sterling LIBOR. Pursuant to such creditfacility, MS-PLC had covenanted to undertake a public offering of its ordinaryshares in an amount not less than 25,000,000not later than March 2002. MS-PLC did not complete such an offering and thefacility nevertheless remains in place.

 

Inaddition, a director of Asia IT is a brother of Tim Paterson-Brown, a directorof the Company and its chief executive officer since December 8, 2003 and adirector of MS-PLC since September 5, 2003. In addition to the loan facilitiesmade available by Asia IT to the Company and MS-PLC, Asia IT receivedcommissions on shares issued under private placements in both Fiscal 2005 andFiscal 2004.

 

On March17, 2006 the Company raised $990,000, net of commissions and expenses, in aprivate placement of restricted common stock at $4.00 per share. Asia IT earnedcommissions of $110,000.

 

33

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OnJanuary 13, 2006 the Company raised $3,600,000, net of commissions andexpenses, in a private placement of restricted common stock at $4.00 per share.Asia IT received commissions of $400,000.

 

DuringFiscal 2005 the Company raised $12,035,000, net of commissions and expenses, ina private placement of restricted common stock at $4.00 per share. Asia ITreceived commissions of $1,230,000.

 

DuringFiscal 2004 the Company raised $23,310,000, net of commissions and expenses, ina private placement of restricted common stock at $3.00 per share. Asia ITreceived commissions of $2,410,000, which was partly settled by issuing 420,000shares of common stock of the Company to Asia IT valued at $3.00 per share.

 

*Corporateoffices—*The Company’s corporate offices at 46 BerkeleySquare, London W1J 5AT, United Kingdom. The office is comprised of 9,642 squarefeet. We do not have a formal, written lease for these offices. Until June 30,2003, rent was paid quarterly in advance to a property management company,Berkeley Square Ventures Limited, which in turn collects the rent for YangCellulose Company Limited (“YCCL”) (previously International Cellulose CompanyLimited), the entity that holds the lease on the property. Subsequent to June30, 2003, rent has been paid directly to YCCL. In November 2001, YCCL wasacquired by Macniven and Cameron Equity Holdings Limited (“M&C”)(previously STG Holdings PLC), a major shareholder of the Company. We haveadditional satellite offices in Nashville, Tennessee, Japan and China.

 

**PARTIV**

 
| **ITEM 14.** | ** ** | **PRINCIPAL ACCOUNTANT FEES AND SERVICES.** |
|--------------|------------|---------------------------------------------|

 
| *Audit Fees.*         |   | Fees billed by our  principal accountant amounted to $87,000 in Fiscal 2005 and $82,000 in Fiscal  2004.                  |
|-----------------------|--------|---------------------------------------------------------------------------------------------------------------------------|
|                  |   |                                                                                                                      |
| *Audit Related Fees.* |   | Fees billed by our principal  accountant amounted to $0 in Fiscal 2005 and $0 in Fiscal 2004.                             |
|                  |   |                                                                                                                      |
| *Tax Fees.*           |   | Fees billed by our  principal accountant amounted to $0 in Fiscal 2005 and $0 in Fiscal 2004.                             |
|                  |   |                                                                                                                      |
| *All Other Fees.*     |   | Fees billed by our  principal accountant amounted to $0 in Fiscal 2005 and $0 in Fiscal 2004  concerning various matters. |

 

The Company’s audit committee has approved the Company’s audit fees.

 

As of November 25, 2004, the audit committee is directly responsiblefor the appointment, compensation, retention and oversight of the work of anyindependent auditor engaged (including resolution of disagreements betweenmanagement and the auditor regarding financial reporting) for the purpose ofpreparing or issuing an audit report or performing other audit, review orattest services for the Company. Each such firm shall report directly to theCompany’s audit committee. The audit committee also is responsible foroverseeing the accounting and financial reporting processes of the Company andthe audits of the financial statements of the Company.

 

34

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| **ITEM 15.** | ** ** | **EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.** |
|--------------|------------|----------------------------------------------------------------------|

 

**Financial Statements**

 

The financial statementsof the Company for the fiscal years covered by this Annual Report are locatedon pages F-1 to F-20 of this Annual Report.

 

### ***Exhibits***

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                    |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                               |
| 2.1             |       | Articles of Merger of Medicsight, Inc., a Utah  corporation (1)                                                                    |
| 2.2             |       | Certificate of Merger of Medicsight, Inc., a  Delaware corporation (1)                                                             |
| 2.3             |       | Offering Document to acquire shares of Radical  Technology PLC. (2)                                                                |
| 3.1             |       | Certificate of Incorporation of Medicsight, Inc. and  amendments thereto (1)                                                       |
| 3.2             |       | By-Laws of Medicsight, Inc. (1)                                                                                                    |
| 4.1             |       | Loan Note issued by HTTP Insights, Ltd. to  Nightingale Technologies Ltd. (5)                                                      |
| 10.1            |       | Share Sale Agreement between Nightingale  Technologies Limited and Medicsight, Inc. (3)                                            |
| 10.2            |       | Letter Agreement between Asia IT Capital  Investments, Ltd. and Medicsight, Inc. (4)                                               |
| 10.2            |       | Letter Agreement between Asia IT Capital Investments,  Ltd. and Medicsight PLC (5)                                                 |
| 21.1            |       | Subsidiaries (filed herewith at page E-1).                                                                                         |
| 31.1            |       | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 of Chief Executive Officer (filed herewith at page  E-2). |
| 31.2            |       | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 of Chief Financial Officer (filed herewith at page  E-3). |
| 32.1            |       | Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 of Chief Executive Officer (filed herewith at page  E-4). |
| 32.2            |       | Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 of Chief Financial Officer (filed herewith at page  E-5). |

 

----

(1)                                  Incorporated herein by reference to theCompany’s Current Report on Form 8-K filed on January 30, 2004.

 

(2)                                  Incorporated herein by reference to theCompany’s Current Report on Form 8-K filed on May 23, 2000.

 

(3)                                  Incorporated herein by reference to theCompany’s Current Report on Form 8-K filed March 7, 2001.

 

(4)                                  Incorporated herein by reference to theCompany’s Registration Statement on Form SB-2, filed December 26, 2001.

 

(5)                                  Incorporated herein by reference to theCompany’s Annual Report on Form 10-KSB, filed April 19, 2002.

 

### ***Reports on Form 8-K***

### * *

None.

 

35

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**SIGNATURES**

 

Inaccordance with Section 13 or 15(d) of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|     |           |   | MEDICSIGHT, INC.                                               |
|----------|----------------|--------|----------------------------------------------------------------|
|     | March 29, 2006 |   |                                                           |
|     |           |   |                                                           |
|     |           | By:    |  /s/ TIM PATERSON-BROWN                                   |
| * * | * *       |   | * Chief Executive Officer (Principal Executive  Officer)* |
|     | March 29, 2006 |   |                                                           |
|     |           | By:    |  /s/ PAUL A GOTHARD                                       |
| * * | * *       |   | * Chief Financial Officer (Principal Financial  Officer)* |

 

Inaccordance with the Exchange Act, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 
| **Signature**              | ** ** | **Title**  | ** ** | **Date**       |
|----------------------------|------------|------------|------------|----------------|
| ** **                 | ** ** | ** ** | ** ** | ** **     |
| /s/ STEPHEN  FORSYTH       |       | Director   |       | March 29, 2006 |
| Stephen Forsyth            |       |       |       |           |
|                       |       |       |       |           |
| /s/ TIM  PATERSON-BROWN    |       | Director   |       | March 29, 2006 |
| Tim  Paterson-Brown        |       |       |       |           |
|                       |       |       |       |           |
| /s/ PAUL GOTHARD           |       | Director   |       | March 29, 2006 |
| Paul Gothard               |       |       |       |           |
|                       |       |       |       |           |
| /s/ DAVID MASON            |       | Director   |       | March 29, 2006 |
| David Mason                |       |       |       |           |
|                       |       |       |       |           |
| /s/ NEAL WYMAN             |       | Director   |       | March 29, 2006 |
| Neal Wyman                 |       |       |       |           |
|                       |       |       |       |           |
| /s/ L. PETER  FIELDING     |       | Director   |       | March 29, 2006 |
| L. Peter Fielding          |       |       |       |           |
|                       |       |       |       |           |
| /s/ PETER VENTON           |       | Director   |       | March 29, 2006 |
| Peter Venton               |       |       |       |           |
|                       |       |       |       |           |
| /s/ SIR  CHRISTOPHER PAINE |       | Director   |       | March 29, 2006 |
| Sir Christopher  Paine     |       |       |       |           |
|                       |       |       |       |           |
| /s/ ALLAN MILLER           |       | Director   |       | March 29, 2006 |
| Allan Miller               |       |       |       |           |

 

36

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**MEDICSIGHT, INC.AND SUBSIDIARIES**

 

**CONSOLIDATEDFINANCIAL STATEMENTS**

 

**TOGETHER WITHINDEPENDENT REGISTERED PUBLIC ACCOUNTANTS REPORT**

 

F-1

----

 

**MEDICSIGHT, INC.AND SUBSIDIARIES**

** **

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**
| Report of Independent  Registered Public Accounting Firm                                                                                                                         |   | F-3         |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|
|                                                                                                                                                                             |   |        |
| Consolidated Balance Sheets as of  December 31, 2005 and December 31, 2004                                                                                                       |   | F-4         |
|                                                                                                                                                                             |   |        |
| Consolidated Statements of  Operations for the years ended December 31, 2005, December 31, 2004 and  December 31, 2003                                                           |   | F-5         |
|                                                                                                                                                                             |   |        |
| Consolidated Statements of  Changes in Stockholders’ Equity and Comprehensive Income/(Loss) for the years  ended December 31, 2005, December 31, 2004 and December 31, 2003 |   | F-6         |
|                                                                                                                                                                             |   |        |
| Consolidated Statements of  Cash Flows for the years ended December 31, 2005, December 31, 2004 and  December 31, 2003                                                           |   | F-7         |
|                                                                                                                                                                             |   |        |
| Notes to the Consolidated  Financial Statements                                                                                                                                  |   | F-8 to F-20 |

 

F-2

----

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of Directorsand Stockholders

Medicsight, Inc. andSubsidiaries

 

Wehave audited the accompanying consolidated balance sheets of Medicsight, Inc.(a Delaware Corporation) and Subsidiaries as of December 31, 2005 and 2004, andthe related consolidated statements of operations, stockholders’ equity andcomprehensive loss, and cash flows for each of the three years in the periodended December 31, 2005. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes considerationof internal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofMedicsight, Inc. and Subsidiaries as of December 31, 2005 and 2004, and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2005, in conformity with accounting principlesgenerally accepted in the United States of America.

 

Inconnection with our audits of the financial statements referred to above, weaudited Schedule II – Valuation and Qualifying Accounts. In our opinion, thefinancial schedule, when considered in relation to the financial statementstaken as a whole, presents fairly, in all material respects, the informationstated therein.

 

 
| /s/ Amper, Politziner  & Mattia P.C. |   |
|------------------------------------------|--------|
|                                     |
| March 17, 2006                           |
| Edison, New Jersey                       |

 

F-3

----

 

**MEDICSIGHT,INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDBALANCE SHEET**

**DECEMBER31, 2005 AND DECEMBER 31, 2004**

($ thousands)

 
| ** **                                                                                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                                                                                                               |       |     |       |     |       |
| CURRENT ASSETS:                                                                                                                      |       |     |       |     |       |
| Cash and cash equivalents                                                                                                            |       | $        | 7,249      |     | $          | 5,276 |   |
| Cash held for common stock subscribed but unissued                                                                                   |       | 4,000    |       | —   |       |
| Accounts receivable                                                                                                                  |       | —   |       | 26       |       |
| Other receivables                                                                                                                    |       | 344      |       | 28       |       |
| Prepaid expenses                                                                                                                     |       | 213      |       | 498      |       |
| Value-Added Tax receivable                                                                                                           |       | 61       |       | 687      |       |
| Total current  assets                                                                                                                |       | 11,867   |       | 6,515    |       |
|                                                                                                                                 |       |     |       |     |       |
| PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation  of $1,542 and $3,227                                               |       | 252      |       | 2,066    |       |
|                                                                                                                                 |       |     |       |     |       |
| INVESTMENTS, at cost                                                                                                                 |       | 359      |       | 359      |       |
|                                                                                                                                 |       |     |       |     |       |
| SECURITY DEPOSITS                                                                                                                    |       | 808      |       | 901      |       |
|                                                                                                                                 |       |     |       |     |       |
| EXCESS OF PURCHASE PRICE OVER                                                                                                        |       |     |       |     |       |
| NET ASSETS ACQUIRED                                                                                                                  |       | 11,200   |       | 11,200   |       |
|                                                                                                                                 |       |     |       |     |       |
| Total assets                                                                                                                         |       | $        | 24,486     |     | $          | 21,041 |   |
|                                                                                                                                 |       |     |       |     |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                           |       |     |       |     |       |
|                                                                                                                                 |       |     |       |     |       |
| CURRENT LIABILITIES:                                                                                                                 |       |     |       |     |       |
| Accounts payable                                                                                                                     |       | $        | 1,172      |     | $          | 1,193 |   |
| Accounts payable – related party                                                                                                |       | 1,151    |       | —   |       |
| Accrued expenses                                                                                                                     |       | 404      |       | 1,053    |       |
| Current portion of obligations under capital leases                                                                                  |       | 19       |       | 107      |       |
| Total current  liabilities                                                                                                           |       | 2,746    |       | 2,353    |       |
|                                                                                                                                 |       |     |       |     |       |
| Obligations under capital leases, net of current  portion                                                                            |       | 6        |       | 223      |       |
| Total  liabilities                                                                                                                   |       | 2,752    |       | 2,576    |       |
|                                                                                                                                 |       |     |       |     |       |
| Commitments and contingencies                                                                                                        |       |     |       |     |       |
| STOCKHOLDERS’ EQUITY:                                                                                                           |       |     |       |     |       |
| Common stock,  $0.001 par value, 40,000,000 shares authorized, 36,392,883 and 33,067,125 shares  issued and outstanding respectively |       | 36       |       | 33       |       |
| Additional paid-in capital                                                                                                           |       | 208,684  |       | 196,652  |       |
| Common stock subscribed but unissued, net                                                                                            |       | 3,600    |       | —   |       |
| Accumulated comprehensive income                                                                                                     |       | 128      |       | 278      |       |
| Accumulated deficit                                                                                                                  |       | (190,714 | )          | (178,498 | )          |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                                      |       | 21,734   |       | 18,465   |       |
|                                                                                                                                 |       |     |       |     |       |
| Total liabilities and stockholders’ equity                                                                                      |       | $        | 24,486     |     | $          | 21,041 |   |

 

 The accompanying notes are an integral part ofthese statements.

 

F-4

----

 

**MEDICSIGHT,INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FOR THEYEARS ENDED DECEMBER 31, 2005, DECEMBER 31, 2004, AND DECEMBER 31, 2003**

($ thousands except per share data)

 
| ** **                                                                              | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                                    |       |       |       |       |       |       |       |
| REVENUES                                                                                |       | $          | —     |       | $          | —     |       | $ | — |   |
|                                                                                    |       |       |       |       |       |       |       |
| EXPENSES:                                                                               |       |       |       |       |       |       |       |
| Selling, general and administrative                                                     |       | 9,300      |       | 10,578     |       | 8,848      |       |
| Research and development cost                                                           |       | 2,363      |       | 2,972      |       | 2,498      |       |
| Impairment of investments                                                               |       | —     |       | 70         |       | 95         |       |
|                                                                                    |       | 11,663     |       | 13,620     |       | 11,441     |       |
|                                                                                    |       |       |       |       |       |       |       |
| Operating loss                                                                          |       | (11,663    | )          | (13,620    | )          | (11,441    | )          |
|                                                                                    |       |       |       |       |       |       |       |
| OTHER INCOME/(EXPENSE)                                                                  |       |       |       |       |       |       |       |
| Interest and other income                                                               |       | 67         |       | 130        |       | 12         |       |
| Net foreign exchange losses                                                             |       | —     |       | —     |       | (2         | )          |
| Loss before  Income tax benefit realized, Minority interest and Discontinued operations |       | (11,596    | )          | (13,490    | )          | (11,431    | )          |
|                                                                                    |       |       |       |       |       |       |       |
| Income tax benefit realized                                                             |       | 858        |       | —     |       | —     |       |
| Provision of income taxes                                                               |       | —     |       | —     |       | —     |       |
| Loss before Minority interest and Discontinued  operations                              |       | (10,738    | )          | (13,490    | )          | (11,431    | )          |
|                                                                                    |       |       |       |       |       |       |       |
| Minority interest                                                                       |       | —     |       | 605        |       | 2,490      |       |
| Loss from continuing operations                                                         |       | (10,738    | )          | (12,885    | )          | (8,941     | )          |
|                                                                                    |       |       |       |       |       |       |       |
| Discontinued operations                                                                 |       |       |       |       |       |       |       |
| Loss from impairment of assets                                                          |       | (394       | )          | (582       | )          | —     |       |
| Loss from operations of Lifesyne                                                        |       | (1,084     | )          | (1,563     | )          | (1,155     | )          |
|                                                                                    |       |       |       |       |       |       |       |
| Net loss                                                                                |       | $          | (12,216    | )          | $          | (15,030    | )          | $ | (10,096 | ) |
|                                                                                    |       |       |       |       |       |       |       |
| PER SHARE DATA:                                                                         |       |       |       |       |       |       |       |
| Net loss from continuing activities                                                     |       | $          | (0.31      | )          | $          | (0.42      | )          | $ | (0.40 | ) |
| Net loss from discontinued activities                                                   |       | (0.05      | )          | (0.07      | )          | (0.05      | )          |
|                                                                                    |       |       |       |       |       |       |       |
| Basic and diluted loss per share                                                        |       | $          | (0.36      | )          | $          | (0.49      | )          | $ | (0.45 | ) |
|                                                                                    |       |       |       |       |       |       |       |
| Weighted average number of common shares outstanding                                    |       | 34,224,023 |       | 30,853,734 |       | 22,203,126 |       |

 

The accompanyingnotes are an integral part of these statements.

 

F-5

----

 

**MEDICSIGHT,INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME/(LOSS)**

**FORTHE YEARS ENDED DECEMBER 31, 2003 TO DECEMBER 31, 2005**

**(inthousands)**

 
| ** **                                                                       | ** ** | ** **        | ** ** | ** **  | ** ** | **Additional** | ** ** | **Shares** | ** ** | ** **        | ** ** | **Accumulated**    | ** ** | ** **             | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------|------------|-------------|------------|----------------|------------|------------|------------|-------------------|------------|--------------------|------------|------------------------|------------|------------|------------|
| ** **                                                                       | ** ** | **Common  stock** | ** ** | **Paid-In** | ** ** | **to  be**     | ** ** | **Vendor** | ** ** | **Comprehensive** | ** ** | **Accumulated**    | ** ** | **Stockholders’** | ** ** |
| ** **                                                                       | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Issued** | ** ** | **Guarantee**     | ** ** | **Income  (Loss)** | ** ** | **Deficit**            | ** ** | **Equity** | ** ** |
| BALANCE, JANUARY 1, 2003                                                         |       | 21,155            |       | $           | 21         |           | $          | 162,156    |       | —            |       | $                  | (3,689     | )                      | $          | 290        |       | $ | (153,372 | ) | $ | 5,406 |   |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| Common stock issued (net  of commissions)                                        |       | 3,333             |       | 3           |       | 9,060          |       | —     |       | —            |       | —             |       | —                 |       | 9,063      |       |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| Additional paid-in  capital received on stock issued by MS-PLC, net              |       | —            |       | —      |       | 2,594          |       | —     |       | —            |       | —             |       | —                 |       | 2,594      |       |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| Cash  received re guarantee                                                      |       | —            |       | —      |       | —         |       | —     |       | 3,689             |       | —             |       | —                 |       | 3,689      |       |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| COMPREHENSIVE  LOSS                                                              |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| Net loss for the year                                                            |       | —            |       | —      |       | —         |       | —     |       | —            |       | —             |       | (10,096                | )          | (10,096    | )          |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| Translation adjustment                                                           |       | —            |       | —      |       | —         |       | —     |       | —            |       | (167               | )          |                   |       | (167       | )          |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| Total comprehensive loss                                                         |       | —            |       | —      |       | —         |       | —     |       | —            |       | (167               | )          | (10,096                | )          | (10,263    | )          |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| BALANCE, DECEMBER 31,  2003                                                      |       | 24,488            |       | 24          |       | 173,810        |       | —     |       | —            |       | 123                |       | (163,468               | )          | 10,489     |       |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| Common stock issued (net  of commissions)                                        |       | 8,578             |       | 9           |       | 23,301         |       | —     |       | —            |       | —             |       | —                 |       | 23,310     |       |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| Minority Interest of  MS-PLC shares issued to the Company in debt capitalisation |       | —            |       | —      |       | (459           | )          | —     |       | —            |       | —             |       | —                 |       | (459       | )          |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| COMPREHENSIVE  LOSS                                                              |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| Net loss for the year                                                            |       | —            |       | —      |       | —         |       | —     |       | —            |       | —             |       | (15,030                | )          | (15,030    | )          |
| Translation adjustment                                                           |       | —            |       | —      |       | —         |       | —     |       | —            |       | 155                |       |                   |       | 155        |       |
| Total comprehensive loss                                                         |       | —            |       | —      |       | —         |       | —     |       | —            |       | 155                |       | (15,030                | )          | (14,875    | )          |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| BALANCE, DECEMBER 31,  2004                                                      |       | 33,066            |       | 33          |       | 196,652        |       | —     |       | —            |       | 278                |       | (178,498               | )          | 18,465     |       |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| Common stock issued (net  of commissions)                                        |       | 3,327             |       | 3           |       | 12,032         |       | —     |       | —            |       | —             |       | —                 |       | 12,035     |       |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| Common stock to be issued  (net of commissions)                                  |       |              |       |        |       |           |       | 3,600      |       |              |       |               |       |                   |       | 3,600      |       |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| COMPREHENSIVE  LOSS                                                              |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| Net loss for the year                                                            |       | —            |       | —      |       | —         |       | —     |       | —            |       | —             |       | (12,216                | )          | (12,216    | )          |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| Translation adjustment                                                           |       | —            |       | —      |       | —         |       | —     |       | —            |       | (150               | )          | —                 |       | (150       | )          |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| Total comprehensive loss                                                         |       | —            |       | —      |       | —         |       | —     |       | —            |       | (150               | )          | (12,216                | )          | (12,366    | )          |
|                                                                             |       |              |       |        |       |           |       |       |       |              |       |               |       |                   |       |       |       |
| BALANCE, DECEMBER 31,  2005                                                      |       | 36,393            |       | $           | 36         |           | $          | 208,684    |       | $                 | 3,600      |               | $          | —                 |       | $          | 128        |   | $ | (190,714 | ) | $ | 21,734 |   |
|                                                                                  |            |                   |            |             |            |                |            |            |            |                   |            |                    |            |                        |            |            |            |  |  |  |  |  |  |  |

 

The accompanyingnotes to the consolidated financial statements are an integral part of thesestatements.

 

F-6

----

 

**MEDICSIGHT,INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOW FOR THE YEARS ENDED**

**DECEMBER31, 2005, DECEMBER 31, 2004, AND DECEMBER 31, 2003**

($ thousands)

 
| ** **                                                                  | ** ** | **Year ended**         | ** ** | **Year ended**         | ** ** | **Year ended**        | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                  | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **December 31, 2003** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                       |       |                   |       |                   |       |                  |       |
| Net loss                                                                    |       | $                      | (12,216    | )                      | $          | (15,030               | )          | $ | (10,096 | ) |
|                                                                        |       |                   |       |                   |       |                  |       |
| Adjustments to  reconcile net loss to net cash used in operating activities |       |                   |       |                   |       |                  |       |
| Loss from  discontinuing operations                                         |       | 1,478                  |       | 2,145                  |       | 1,155                 |       |
| Depreciation and  amortization                                              |       | 237                    |       | 764                    |       | 623                   |       |
| Impairment of  investment                                                   |       | —                 |       | 70                     |       | 95                    |       |
| Impairment of  property and equipment                                       |       | —                 |       | 386                    |       | —                |       |
| Increase in  minority’s interest in MS-PLC                             |       | —                 |       | (459                   | )          | —                |       |
| Minority  interest in net losses of subsidiary                              |       | —                 |       | (605                   | )          | (2,490                | )          |
| Loss on disposal  of fixed assets                                           |       | 219                    |       | —                 |       | —                |       |
| (Increase)/decrease  in assets                                              |       |                   |       |                   |       |                  |       |
| Accounts  receivable                                                        |       | (34                    | )          | (2                     | )          | (13                   | )          |
| Prepaid expenses  and other receivables                                     |       | (235                   | )          | 151                    |       | (261                  | )          |
| VAT receivable                                                              |       | 584                    |       | (83                    | )          | (322                  | )          |
| Security  deposits                                                          |       | —                 |       | —                 |       | (743                  | )          |
| Increase/(decrease)  in liabilities                                         |       |                   |       |                   |       |                  |       |
| Accounts payable                                                            |       | 124                    |       | (1,100                 | )          | 3                     |       |
| Accounts payable  – related party                                      |       | 1,151                  |       | —                 |       | —                |       |
| Accrued expenses                                                            |       | (306                   | )          | 134                    |       | (33                   | )          |
| Net cash used in  operating activities                                      |       | (8,998                 | )          | (13,629                | )          | (12,082               | )          |
|                                                                        |       |                   |       |                   |       |                  |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                       |       |                   |       |                   |       |                  |       |
| Cash held for common stock subscribed but unissued                          |       | (4,000                 | )          | —                 |       | —                |       |
| Proceeds from sale of fixed assets                                          |       | 300                    |       | —                 |       | —                |       |
| Purchase of property and equipment                                          |       | (131                   | )          | (434                   | )          | (1,239                | )          |
| Proceeds from sale of Lifesyne                                              |       | 443                    |       | —                 |       | —                |       |
| Net cash (used  in)/provided by investing activities                        |       | (3,388                 | )          | (434                   | )          | (1,239                | )          |
|                                                                        |       |                   |       |                   |       |                  |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                       |       |                   |       |                   |       |                  |       |
| Principal payments under capital lease obligations                          |       | (289                   | )          | (59                    | )          | (535                  | )          |
| (Decrease)/increase in bank overdraft                                       |       | —                 |       | (196                   | )          | 196                   |       |
| (Decrease)/increase in line of credit – related  party                 |       | —                 |       | (2,880                 | )          | 356                   |       |
| Repayments of short-term debt                                               |       | —                 |       | —                 |       | (3,250                | )          |
| Proceeds from sale of common stock (net of  commissions)                    |       | 12,035                 |       | 23,310                 |       | 9,063                 |       |
| Proceeds from sale of common stock to be issued (net  of commissions)       |       | 3,600                  |       | —                 |       | —                |       |
| Proceeds from MS-PLC sale of stock (net of  commissions)                    |       | —                 |       | —                 |       | 4,222                 |       |
| Proceeds from vendor guarantee                                              |       | —                 |       | —                 |       | 3,689                 |       |
| Net cash  provided by financing activities                                  |       | 15,346                 |       | 20,175                 |       | 13,741                |       |
|                                                                        |       |                   |       |                   |       |                  |       |
| Cash flows of discontinued operations                                       |       |                   |       |                   |       |                  |       |
| Net cash used in  operating activities                                      |       | (1,078                 | )          | (1,486                 | )          | (1,067                | )          |
| Net cash used in  investing activities                                      |       | —                 |       | —                 |       | (54                   | )          |
| Net cash (used  in)/provided by financing activities                        |       | (44                    | )          | (13                    | )          | 57                    |       |
|                                                                        |       | (1,122                 | )          | (1,499                 | )          | (1,064                | )          |
|                                                                        |       |                   |       |                   |       |                  |       |
| Effects of exchange rates on cash and cash  equivalents                     |       | 135                    |       | (182                   | )          | (289                  | )          |
|                                                                        |       |                   |       |                   |       |                  |       |
| NET CHANGE IN CASH & CASH EQUIVALENTS                                   |       | 1,973                  |       | 4,431                  |       | (933                  | )          |
|                                                                        |       |                   |       |                   |       |                  |       |
| CASH & CASH EQUIVALENTS, BEGINNING OF YEAR                              |       | 5,276                  |       | 845                    |       | 1,778                 |       |
|                                                                        |       |                   |       |                   |       |                  |       |
| CASH & CASH EQUIVALENTS, END OF YEAR                                    |       | $                      | 7,249      |                   | $          | 5,276                 |       | $ | 845 |   |
|                                                                        |       |                   |       |                   |       |                  |       |
| SUPPLEMENTAL DISCLOSURES OF CASH PAID                                       |       |                   |       |                   |       |                  |       |
| Interest                                                                    |       | $                      | 5          |                   | $          | 41                    |       | $ | 66 |   |
|                                                                        |       |                   |       |                   |       |                  |       |
| NON CASH FINANCING ACTIVITIES                                               |       |                   |       |                   |       |                  |       |
| Capital lease obligations for equipment                                     |       | $                      | —     |                   | $          | —                |       | $ | 841 |   |

 

The accompanyingnotes are an integral part of these statements.

 

F-7

----

 

**MEDICSIGHT, INC.AND SUBSIDIARIES**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**1.****              Organization,basis of presentation and liquidity**

 

Medicsight,Inc. (along with its subsidiaries, the “Company”) is the successor consolidatedentity formed by the reverse acquisition on December 22, 1999 by Fairfax EquityLimited (“Fairfax”) (now Medicsight Finance Limited) of Internet Holdings, Inc.a publicly-held company originally incorporated in Utah in 1977 under the nameTrolley Enterprises, Inc. Fairfax, which was treated as the accounting acquirerin the transaction, was incorporated in the United Kingdom on October 18, 1999.Prior to its reverse acquisition by Fairfax, control of the former InternetHoldings, Inc., as well as its corporate name, had changed a number of times. Allprior operations had previously been discontinued and all related claims andcounterclaims were settled, the last of which settlements occurred in November1999.

 

TheCompany has two primary business objectives:

 

•                  Toconceive, develop and commercialize innovative medical imaging applicationsderived from our core technology known as Medicsight CAD.

 

•                  Toestablish a global online community for Medical Imaging professionals (to beknown as MedicExchange) with a rich selection of specialist clinical contentfor registered users combined with a product marketplace where Medical Imagingvendors can sell their solutions online.

 

During2005 the Company initiated a plan of disposal of the Lifesyne business and wassubsequently sold in November 2005 and its results are reflected asdiscontinued operations – Note 3.

 

TheCompany has incurred significant operating losses since inception and hasgenerated no revenues from continuing operations. As a result, the Company hasgenerated negative cash flows from operations and has an accumulated deficit atDecember 31, 2005. The Company is operating in a developing industry based onnew technology and its primary source of funds to date has been through theissuance of securities and borrowed funds. The Company is currently seekingadditional funding and is actively developing the technology in order to bring itto market. While the Company is optimistic and believes appropriate actions arebeing taken, there can be no assurance that management’s efforts will besuccessful or that the products the Company develops and markets will beaccepted by consumers.

 

F-8

----

 

**2.     Summary of significant accountingpolicies:**

 

*Principles of consolidation—*Theconsolidated financial statements include the accounts of Medicsight, Inc. andits subsidiaries in which it has a controlling interest. Subsidiaries acquiredare consolidated from the date of acquisition. All inter-company accounts andtransactions have been eliminated in consolidation.

 

*Cash and cash equiv*alents—The Companyconsiders investments with original maturities of three months or less to becash equivalents.

 

*Investments—*Investments consist of equityownership in various corporations. The Company records these investments athistorical cost, subject to any provision for impairment.

 

*Property and equipment—*Property and equipmentare stated at cost. Depreciation is calculated on the various asset classesover their estimated useful lives, which range from two to five years.Leasehold improvements are depreciated over the term of the lease.

 

*Excess of purchase price over net assets acquired—*Excessof purchase price over net assets acquired (“goodwill”) represents the excessof acquisition purchase price over the fair value of the net assets acquired.Effective January 1, 2002 with the adoption of Statement of Financial AccountingStandard (“SFAS”) No. 142 “Goodwill and Other intangible Assets”, goodwill isno longer to be amortized.

 

ForFiscal 2005 and Fiscal 2004, the Company had excess of purchase price over netassets acquired of $11,200,000.

 

*Impairment of excess of purchase price over net assetsacquired—*Inaccordance with SFAS No. 142 “Goodwill and Other intangible Assets” goodwillwill be tested for impairment on an annual basis or whenever indicators ofimpairment arise. An impairment analysis was performed as of December 31, 2005and 2004 and the Company concluded there was no impairment loss.

 

*Impairment of long-lived assets and long-lived assets to bedisposed of—*The Company evaluates the carrying value oflong-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. TheCompany’s assessment for impairment of an asset involves estimating theundiscounted cash flows expected to result from use of the asset and itseventual disposition. An impairment loss recognized is measured as the amountby which the carrying amount of the asset exceeds the fair value of the asset.

 

*Foreign currency translation—*The accountsof the Company’s foreign subsidiaries are maintained using the local currencyas the functional currency. For these subsidiaries, assets and liabilities aretranslated into U.S. dollars at year-end exchange rates, and income and expenseaccounts are translated at average monthly exchange rates. Net gains and lossesfrom foreign currency translation are excluded from operating results and areaccumulated as a separate component of stockholders’ equity.

 

Gainsand losses on foreign currency transactions are reflected in current operatingresults.

 

*Revenue recognition—*Revenue will be recognizedas services are performed, in accordance with the terms of the contractualarrangement, where persuasive evidence of an arrangement exists, the fee isfixed and determinable and collection is reasonably assured.

 

TheCompany’s revenues were derived from the Company’s discontinued Lifesynescanning operations – see “*Discontinued Operations*”– Note 3 below.

 

*Research and development—*Costs incurred inconnection with the development of software products that are intended for saleare accounted for in accordance with SFAS No. 86, “Accounting for the Costs ofComputer Software to be Sold, Leased, or Otherwise Marketed”. Costs incurredprior to technological feasibility being established for the product areexpensed as incurred.

 

F-9

----

 

Technologicalfeasibility is established upon completion of a detailed program design or, inits absence, completion of a working model. Thereafter, all software productioncosts can be capitalized and subsequently reported at the lower of un-amortizedcost or net realizable value. Capitalized costs are amortized based on currentand future revenue for each product with an annual minimum equal to thestraight-line amortization over the remaining estimated economic life of theproduct. Amortization commences when the product is available for generalrelease to customers.

 

TheCompany concluded that capitalizing such expenditures on completion of aworking model was inappropriate because the Company did not incur any materialsoftware production costs and therefore has decided to expense all research anddevelopment costs. The Company’s research and development costs are comprisedof staff and consultancy costs expensed on the Medicsight CAD system.

 

TheCompany’s expenditures on research and development are comprised of staff andconsultants employed in the development of Medicsight CAD. During the twelvemonths ended December 31, 2005, December 31, 2004 and December 31, 2003, theCompany expended $2,363,000, $2,972,000 and $2,498,000 respectively forresearch and development expenses for Medicsight CAD and its products. Wecannot predict the amount of additional expenditures that will be necessaryprior to achieving commercialization of our products.

 

*Income taxes—* Deferred taxes are computedbased on the tax liability or benefit in future years of the reversal oftemporary differences in the recognition of income or deduction of expensesbetween financial and tax reporting purposes. The net difference, if any,between the provision for taxes and taxes currently payable is reflected in thebalance sheet as deferred taxes. Deferred tax assets and/or liabilities, ifany, are classified as current and non-current based on the classification ofthe related asset or liability for financial reporting purposes, or based onthe expected reversal date for deferred taxes that are not related to an assetor liability. Valuation allowances are recorded to reduce deferred tax assetsto that amount which is more likely than not to be realized.

 

*Loss per share—*Basic loss per share iscalculated by dividing net loss attributable to the ordinary shareholders bythe weighted average number of common shares outstanding during the period.Diluted loss per share is calculated by dividing the net loss attributable tothe ordinary shareholders by the sum of the weighted average number of commonshares outstanding and the diluted potential ordinary shares.

 

*Comprehensive loss—*Comprehensive lossreflects the change in equity of a business enterprise during a period fromtransactions and other events and circumstances from non-owner sources.Comprehensive loss is comprised of net income/(loss) and foreign currencytranslation adjustments.

 

*Fair value of financial instruments—*SFAS107, “Disclosures about Fair Value ofFinancial Instruments”, requires all entities to disclose the fair valueof certain financial instruments in their financial statements. Accordingly,the Company reports that the carrying amount of cash and cash equivalents,accounts receivable, monetary prepayments, accounts payable and accruedliabilities, advances and short term debt approximates fair value due to theshort maturity of these instruments.

 

*Segment reporting—*The Company follows theprovisions of SFAS No. 131, “Disclosure About Segments of an Enterprise andRelated Information”. The approach designates the internal organization that isused by management for making operating decisions and assessing performance asthe source of the Company’s reportable segments. SFAS No. 131 also requiresdisclosures about products and services, geographic areas and major customers.

 

*Common stock—*The holder of each share ofcommon stock outstanding is entitled to one vote per share.

 

*Stock options—* The Company has elected tofollow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees”, (“APB 25”) and related interpretations in accounting for itsemployee stock options. Under this method, compensation cost is measured as theamount by which the market price of the underlying stock exceeds the exerciseprice of the stock option at the date at which both the number of options

 

F-10

----

 

grantedand the exercise price are known. Under APB 25, because the exercise priceof our employee stock options equals the market price of the underlying stockon the date of grant, no compensation expense was recognized.

 

TheCompany has elected to adopt the disclosure only provisions of SFAS No. 123, “Accountingfor Stock-Based Compensation” as amended by SFAS No. 148, “Accounting forStock-Based Compensation - Transition and Disclosure - an amendment of FASBStatement No. 123”, and measures the cost for MS-PLC’s employee stockcompensation plan by using the accounting methods prescribed by APB 25, “Accountingfor Stock Issued to Employees”, which allows that no compensation cost berecognized unless the exercise price of the options granted is lower than thefair market value of the Company’s stock at date of grant. Accordingly, nostock-based employee compensation cost is reflected in net loss, as all optionsgranted had an exercise price equal to the market value of the underlyingcommon stock on the date of grant.

 

In accordance with SFAS 148,“Accounting for Stock-Based Compensation - Transition and Disclosure,” theeffect on net income and earnings per share if the Company had applied the fairvalue recognition provisions of SFAS 123, “Accounting for Stock-BasedCompensation,” to stock-based employee compensation is as follows for the yearsended December 31:

 
| ** **                                                                                                                                                                                        | ** ** | **2005**                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                                                                                        | ** ** | **($ thousands, except per share data)** | ** ** |
|                                                                                                                                                                                              |       |                                          |       |     |       |     |       |
| Net loss - as  reported                                                                                                                                                                           |       | $                                             | (12,216    | )        | $          | (15,030  | )          | $ | (10,096 | ) |
| Add:                                                                                                                                                                                              |       |                                          |       |     |       |     |       |
| Stock-based  employee compensation expense included in reported net income, net of related  tax effects                                                                                           |       | 0                                             |       | 0        |       | 0        |       |
| Deduct:                                                                                                                                                                                           |       |                                          |       |     |       |     |       |
| Adjustment to  total stock-based employee compensation expense determined under the  intrinsic value method for expense determined under the fair value based  method, net of related tax effects |       | (645                                          | )          | (292     | )          | (65      | )          |
| Pro forma net  loss                                                                                                                                                                               |       | $                                             | (12,861    | )        | $          | (15,322  | )          | $ | (10,161 | ) |
|                                                                                                                                                                                              |       |                                          |       |     |       |     |       |
| Loss per share:                                                                                                                                                                                   |       |                                          |       |     |       |     |       |
| Basic and  diluted, as reported                                                                                                                                                                   |       | $                                             | (0.36      | )        | $          | (0.49    | )          | $ | (0.45 | ) |
| Basic and  diluted, pro forma                                                                                                                                                                     |       | $                                             | (0.38      | )        | $          | (0.50    | )          | $ | (0.46 | ) |

 

Thefollowing weighted-average assumptions were used for the years ended December31:

 
| ** **              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
|                    |       |     |       |     |       |     |       |
| Risk-free interest rate |       | 4.5      | %          | 3.5      | %          | 3.5      | %          |
|                    |       |     |       |     |       |     |       |
| Expected volatility     |       | 65       | %          | 81       | %          | 81       | %          |
|                    |       |     |       |     |       |     |       |
| Dividend yield          |       | 0        | %          | 0        | %          | 0        | %          |
|                    |       |     |       |     |       |     |       |
| Expected life           |       | 1 year   |       | 1 year   |       | 2 years  |       |

 

F-11

----

 

*Use of estimates—*The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements as well as revenues and expenses during the reporting period. Actualresults could vary from those estimates.

 

*Recent accounting pronouncements—*

 

In May2005, the Financial Accounting Standards Board (“FASB”) issued SFAS 154, “Accounting Changes and Error Corrections, areplacement of APB Opinion No. 20 and FASB Statement No. 3”.* *The standard requires retrospectiveapplication to prior periods’ financial statements of a voluntary change inaccounting principle unless it is deemed impracticable. The standard statesthat a change in method of depreciation, amortization or depletion for long-lived,non-financial assets be accounted for as a change in accounting estimate thatis affected by a change in accounting principle.  The standard iseffective for accounting changes and corrections of errors made occurring infiscal years beginning after December 15, 2005.  The adoption of SFAS No.154 is not expected to have a material impact on the Company’s financialposition or results of operations.

 

 InDecember 2004, the FASB issued SFAS 153,”Exchanges of Non-monetary Assets, anamendment of APB Opinion No.29”. The standard is based on the principlethat exchanges of non-monetary assets should be measured based on the fairvalue of the assets exchanged and eliminates the exception under APB OpinionNo. 29 for an exchange of similar productive assets and replaces it withan exception for exchanges of non-monetary assets that do not have commercialsubstance. The standard is effective for non-monetary exchanges occurring infiscal periods beginning after June 15, 2005. The Company cannot determinethe impact of SFAS 153 at this time.

 

 InDecember 2004, the FASB issued SFAS 123 (revised 2004),”Share-Based Payment”. The standardeliminates the disclosure-only election under the prior SFAS 123 andrequires the recognition of compensation expense for stock options and otherforms of equity compensation based on the fair value of the instruments on thedate of grant be expensed over the period service is received. We intend toadopt this Statement using the modified prospective method. The Companyestimates that the charge to the Statement of Operations for the year toDecember 31, 2006 will be approximately $500,000.

 

**3.****              DiscontinuedActivities**

 

*Discontinued Activities.*During the thirdquarter of 2005 a plan was initiated for the disposal of the Lifesyne business.In accordance with SFAS No. 144 “Accountingfor Impairment or disposal of Long-Lived Assets” Lifesyne has beenaccounted for as discontinued operations. Accordingly, our financial statementshave been restated to reflect the Lifesyne Segment as a discontinued operationin our consolidated statements of operations and cash flows for all periodspresented. Statement of operations information presented in the notes toconsolidated financial statements has been restated to reflect continuingoperations for all periods presented.

 

OnNovember 10, 2005 Lifesyne was sold to an independent third party forapproximately $450,000. On August 18, 2005, MS-PLC entered into an optionagreement with the purchaser to acquire Lifesyne for a non-refundable depositof approximately $90,000 as the purchaser needed further time to arrange thefinancing for the acquisition. This deposit constituted part of the saleproceeds on completion of the acquisition. At that time the net assets ofLifesyne totaled approximately $844,000 leading to an impairment loss ofapproximately $394,000.

 

ForFiscal 2004, the Company recorded impairment of $582,000 against property andequipment related to the discontinued Lifesyne operations.

 

F-12

----

 

Revenues and operating losses for Lifesyne for yearsended December 31:

 
| ** **                     | ** ** | **$(000)** | ** ** |
|--------------------------------|------------|------------|------------|
| ** **                     | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                           |       |       |       |   |   |   |   |
| Revenues                       |       | $          | 427        |   | $ | 538 |   | $ | 276 |   |
| Operating losses               |       | $          | 1,084      |   | $ | 1,563 |   | $ | 1,155 |   |
| Loss from impairment of assets |       | $          | 394        |   | $ | 582 |   | $ | — |   |
|                                |            |            |            |  |  |  |  |  |  |  |  |  |

 

**4.****              Investments**

 

TheCompany accounts for its investments in non-marketable securities under thecost method of accounting as it owns less than a 20% interest in each of thecompanies and does not have significant influence over the entities. TheCompany reviews each investment continually to assess for other-than-temporarydecreases in value in its investments. The Company reviews all available financialand non-financial data in assessing the extent of any impairment.

 

AtDecember 31, 2005, the Company held the following investment:

 

— A 6% holding inEurindia PLC, a company that seeks to invest in small Indian IT servicescompanies.

 

AtDecember 31, 2004, the Company held the following investment:

 

— A 6% holding inEurindia PLC. During Fiscal 2004 the Company recorded an impairment of $70,000reducing the carrying value to approximately $359,000.

 

**5.****              Property andequipment**

 

Propertyand equipment consist of the following as of December 31:

 
| ** **                     | ** ** | **2005**         | ** ** | **2004**         | ** ** |
|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                     | ** ** | **($’000)** | ** ** | **($’000)** | ** ** |
|                           |       |             |       |             |       |
| Computer hardware and software |       | $                | 848        |             | $          | 1,071 |   |
| Furniture and fixtures         |       | 881              |       | 4,150            |       |
| Motor Vehicles                 |       | 65               |       | 72               |       |
|                           |       |             |       |             |       |
|                           |       | 1,794            |       | 5,293            |       |
| Less: Accumulated depreciation |       | (1,542           | )          | (3,227           | )          |
|                           |       | $                | 252        |             | $          | 2,066 |   |

 

DuringFiscal 2005 the Company recorded impairment to property and equipment of$394,000. This was as a result of the sale of Lifesyne to an independent thirdparty.

 

DuringFiscal 2004 the Company recorded impairment to property and equipment of $386,000.This was as a result of a decision to transfer MAM’s assets to MS-PLC andLifesyne or sell to independent third parties at open market value or fullyimpair, as its business opportunities were limited due to the change instrategy of Lifesyne concerning the number of centers it was going to operate.The impairment relates to Ravenscourt centre that was closed in 2004.

 

F-13

----

 

**6.****              Line of Credit –related party**

 

OnDecember 15, 2000, the Company entered into an unsecured credit facility withAsia IT Capital Investments Limited (“Asia IT”), a related party – see Note 15,which provides a $20,000,000 line of credit. Such line of credit originallyexpired on December 31, 2001, but has been extended until June 30, 2007.Interest on advances under the credit facility accrues at 2% above US LIBOR. AtDecember 31, 2005 US LIBOR was 4.8%. The Company can draw down on this creditfacility for its financing requirements, upon approval by the Company’s Boardof Directors and subject to approval by Asia IT (such approval not to beunreasonably withheld). The Company is restricted from borrowing funds,directly or indirectly, other than through the credit facility with Asia IT,without the consent of Asia IT. The availability of the credit facility reducesupon the Company’s sale of any of its investment assets.

 

OnNovember 20, 2001, Asia IT entered into a 10,000,000($18,000,000) credit facility with MS-PLC. Such facility ceases on June 30,2007 and is secured by a lien on all of the assets of MS-PLC. Interest onoutstanding amounts accrues at 2% above Sterling LIBOR. Pursuant to such creditfacility, MS-PLC had covenanted to undertake a public offering of its ordinaryshares in an amount not less than 25,000,000not later than March 2002. MS-PLC did not complete such an offering and thefacility nevertheless remains in place.

 

At theyears ended December 31, 2005 and 2004 the Company had no drawings under the$20,000,000 facility with Asia IT, and MS-PLC had no drawings under its 10,000,000($18,000,000) facility with Asia IT. Under these facilities Asia IT, a relatedparty, has deposited $2,500,000 for the benefit of the Company which theCompany has not utilized.

 

**7.****              Capital leases**

 

Theassets under capital leases, which are included in property and equipment, areas follows:

 
| ** **                     | ** ** | **2005**         | ** ** | **2004**         | ** ** |
|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                     | ** ** | **($’000)** | ** ** | **($’000)** | ** ** |
|                           |       |             |       |             |       |
| Furniture and fixtures         |       | $                | —     |             | $          | 857 |   |
| Motor Vehicles                 |       | 65               |       | 72               |       |
|                           |       | 65               |       | 929              |       |
| Less: Accumulated depreciation |       | (35              | )          | (556             | )          |
|                           |       | $                | 30         |             | $          | 373 |   |

 

Thefollowing is a schedule by year of future minimum lease payments under capitalleases, together with the present value of the net minimum lease payments, asof December 31, 2005:

 
| ** **                                  | ** ** | **($’000)** | ** ** |
|---------------------------------------------|------------|------------------|------------|
| Fiscal Year                                 |       |             |       |
|                                        |       |             |       |
| 2006                                        |       | $                | 20         |   |
| 2007                                        |       | 6                |       |
| Total minimum lease payments                |       | 26               |       |
| ** **                                  | ** ** | ** **       | ** ** |
| Less amount  representing interest          |       | 1                |       |
| Present value of net minimum lease payments |       | 25               |       |
| ** **                                  | ** ** | ** **       | ** ** |
| Less current  maturities                    |       | 19               |       |
| Long-term  maturities                       |       | $                | 6          |   |

 

F-14

----

 

**8.****              Stockholders’equity**

 

Duringthe year ended December 31, 2005 the Company raised $12,035,000 (net ofcommission and expenses) by issuing 3,327,000 restricted shares of common stockin a private placement.

 

TheCompany raised a further $3,600,000 (net of commission and expenses) on January13, 2006 by issuing 1,000,000 restricted shares of common stock and isreflected as common stock subscribed but unissued at December 31, 2005. TheCompany had received the funds prior to the December 31, 2005 and is reflectedas Cash held for common stock subscribed but unissued at December 31, 2005.

 

Theseprivate placements were underwritten by Asia IT, a related party. Asia ITreceived commissions of $1,630,000 on the above private placements.

 

Duringthe year ended December 31, 2004 the Company raised $23,310,000 (net ofcommission and expenses) by issuing 8,579,000 restricted shares of common stock.These private placements were underwritten by Asia IT, a related party. Asia ITreceived commissions of $2,410,000 on the above private placement.

 

OnJanuary 27, 2004, the Company amended its Certificate of Incorporation toincrease the number of shares the Company is authorized to issue from25,000,000 shares to 40,000,000 shares of common stock. This amendment wasapproved by a majority of the stockholders of the Company.

 

AtDecember 31, 2005 the Company owned 70,677,300 ordinary shares in MS-PLC,constituting 81.8% of the outstanding shares.

 

**9.****              Stock option plan**

 

Allthe Company’s Equity Compensation Plans are issued by our majority-ownedsubsidiary, MS-PLC and not the Company to employees of MS-PLC. All securitiesthat are issuable under these plans are MS-PLC shares. MS-PLC’s shares are notcurrently quoted on any recognized stock exchange. All MS-PLC’s equity plansallow employees the option to purchase MS-PLC’s shares at £1.00 ($1.65).

 

On March20, 2003, the Board of Directors of MS-PLC approved a stock option plan “A” forits employees and reserved 4,000,000 shares of its common stock for issuanceupon exercise of options granted under this plan. On April 19, 2003, theRemuneration Committee of MS-PLC also approved the stock option plan andimplemented it on April 30, 2003 granted options over 2,828,600 shares toemployees of MS-PLC. At December 31, 2005 there were 1,872,500 optionsoutstanding and 100% of the options issued were exercisable under this plan.

 

OnSeptember 30, 2004 MS-PLC granted options over 3,400,500 shares to itsemployees under the stock option plan “B”. Subsequently on August 15, 2005, theBoard of Directors of MS-PLC approved the stock option plan “B”. At December 31,2005 there were 2,043,700 options outstanding and 70% of the options issuedwere exercisable under this plan after MS-PLC had passed certain vestingcriteria.

 

OnJune 30, 2005 MS-PLC granted options over 230,000 shares to its employees.Subsequently on August 15, 2005, the Board of Directors of MS-PLC approved astock option plan “C”. At December 31, 2005 there were 230,000 optionsoutstanding and none of the options issued were exercisable. Options issuedunder this plan vest equally after employees have been employed for 12, 24 and36 months.

 

F-15

----

 

The followingtable summarizes the MS-PLC Stock Option activity:

 
| ** **                    | ** ** | **Stock Options Outstanding** | ** ** |
|-------------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **Shares**                    | ** ** | **Exercise   Price Per   Share** | ** ** | **Weighted   Average   Exercise   Price** | ** ** |
| ** **                    | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance January 1, 2004       |       | —                        |       | — |   | — |   |
| Granted                       |       | 2,375,700                     |       | $ | 1.65 |   | $ | 1.65 |   |
| Forfeited                     |       | (400,450                      | )          |   |   |   |   |
| Exercised                     |       | —                        |       | — |   | — |   |
|                          |       |                          |       |   |   |   |   |
| Outstanding December 31, 2004 |       | 1,975,250                     |       | $ | 1.65 |   | $ | 1.65 |   |
|                          |       |                          |       |   |   |   |   |
| Granted                       |       | 3,630,500                     |       | $ | 1.65 |   | $ | 1.65 |   |
| Forfeited                     |       | (1,459,550                    | )          |   |   |   |   |
| Exercised                     |       | —                        |       | — |   | — |   |
|                          |       |                          |       |   |   |   |   |
| Outstanding December 31, 2005 |       | 4,146,200                     |       | $ | 1.65 |   | $ | 1.65 |   |
|                          |       |                          |       |   |   |   |   |
| Options exercisable at:       |       |                          |       |   |   |   |   |
| December 31,  2005            |       | 3,362,850                     |       | $ | 1.65 |   | $ | 1.65 |   |

 

Following is asummary of the status of stock options outstanding at December 31, 2005:

 
| ** **            | ** **   | ** **   | ** **   | ** **   | ** **   | **Outstanding Options** | ** **   | **Exercisable Options** | ** **   |
|-----------------------|--------------|--------------|--------------|--------------|--------------|-------------------------|--------------|-------------------------|--------------|
| ** **            | ** **   | ** **   | ** **   | ** **   | ** **   | **Weighted**            | ** **   | ** **              | ** **   | ** ** | ** ** | ** ** | ** ** |
| ** **            | ** **   | ** **   | ** **   | ** **   | ** **   | **Average**             | ** **   | **Weighted**            | ** **   | ** ** | ** ** | **Weighted** | ** ** |
| ** **            | ** **   | *** *** | ** **   | ** **   | *** *** | **Remaining**           | ** **   | **Average**             | ** **   | ** ** | *** *** | **Average** | *** *** |
| ** **            | ** **   | **Exercise** | ** **   | ** **   | ** **   | **Contractual**         | ** **   | **Exercise**            | ** **   | ** ** | ** ** | **Exercise** | ** ** |
| ** **            | ** **   | **Price**    | ** **   | **Number**   | ** **   | **Life**                | ** **   | **Price**               | ** **   | **Number** | ** ** | **Price** | ** ** |
| *** ***          | *** *** | *** *** | *** *** | *** *** | *** *** | *** ***            | *** *** | *** ***            | *** *** | *** *** | *** *** | *** *** | *** *** |
| “A” Options |         | $            | 1.65         |         | 1,872,500    |                    | 1 year       |                    | $            | 1.65 |   | 1,872,500 |   | $ | 1.65 |   |
| “B” Options |         | $            | 1.65         |         | 2,043,700    |                    | 1 year       |                    | $            | 1.65 |   | 1,490,350 |   | $ | 1.65 |   |
| “C” Options |         | $            | 1.65         |         | 230,000      |                    | 2 years      |                    | $            | 1.65 |   | 0 |   | $ | 1.65 |   |
|                  |         |         |         | 4,146,200    |         |                    |         |                    |         | 3,362,850 |   |   |   |

 

F-16

----

 

**10.****       Income Taxes**

 

Theincome tax provision is summarized as follows for the years ended December 31:

 
| ** **                           | ** ** | **2005**         | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------|------------|------------------|------------|----------|------------|----------|------------|
| ** **                           | ** ** | **($’000)** |
| Current                              |       |             |       |     |       |     |       |
| Federal                              |       | $                | 0          |     | $          | 0        |       | $ | 0 |   |
| State and local                      |       | 0                |       | 0        |       | 0        |       |
| Foreign                              |       | 0                |       | 0        |       | 0        |       |
| Deferred                             |       | 0                |       | 0        |       | 0        |       |
|                                 |       |             |       |     |       |     |       |
| Total income tax provision (benefit) |       | $                | 0          |     | $          | 0        |       | $ | 0 |   |

 

Significantcomponents of deferred tax assets were as follows as of December 31:

 

Deferred Tax Assets

 
| ** **                              | ** ** | **2005**         | ** ** | **2004**         | ** ** |
|-----------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                              | ** ** | **($’000)** | ** ** | **($’000)** | ** ** |
|                                    |       |             |       |             |       |
| Tax loss carry-forward                  |       | $                | 16,460     |             | $          | 14,230 |   |
| Capital loss carry forward              |       | 45,230           |       | 45,230           |       |
| Property and plant depreciation methods |       | 35               |       | 35               |       |
| Total                                   |       | 61,725           |       | 59,495           |       |
| Valuation Allowance                     |       | (61,725          | )          | (59,495          | )          |
| Net deferred tax asset                  |       | $                | —     |             | $          | — |   |

 

TheCompany has net operating loss carry-forwards for United States tax purpose tooffset future taxable income of $4,221,000 expiring in years 2006 through 2018.As it is not more likely than not that the resulting deferred tax benefits willbe realized, a full valuation allowance has been recognized for such deferredtax assets. The utilization of net operating loss carry forwards may besignificantly limited under the Internal Revenue Code as a result of ownershipchanges due to the Company’s stock and other equity offerings.

 

UnderUnited Kingdom taxation, MS-PLC has $51,226,000 of net operating losscarry-forwards to offset future taxable income. As it is not more likely thannot that the resulting deferred tax benefits will be realized, a full valuationallowance has been recognized for such deferred tax assets.

 

Theprovision for income tax differs from the amount computed by applying thestatutory federal income tax rate to income before the provision for incometaxes. The sources and tax effects of the differences are as follows for theyear ended December 31:

 
| ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                        |       |     |       |     |       |     |       |
| Income taxes at the federal statutory rates |       | (35      | )%         | (35      | )%         | (35      | )%         |
| Change in valuation allowance               |       | 1        |       | 1        |       | 1        |       |
| Foreign operations                          |       | 34       |       | 34       |       | 34       |       |
| Effective rate of income tax                |       | 0        | %          | 0        | %          | 0        | %          |

 

TheCompany has net capital losses to be carried forward in the U.S. of$129,229,000 to offset against future capital gains expiring in years 2007through 2009.

 

F-17

----

 

The receipt of $858,000 relates to a tax creditpaid by the United Kingdom taxation authorities in the second quarter of Fiscal2005 under its R&D tax relief scheme for small and medium enterprises toMS-PLC. The basis for the R&D relief is to encourage the development of newtechnologies and is only applicable to the research and development of a newtechnology and not a product.

 

The receipt represented the tax credit received forexpenditures incurred between November 2001 and December 2003. The Company didnot accrue for any potential tax credit for Fiscal 2004 as it has determinedthat the completion date of the new technology occurred at the end of Fiscal2003 and therefore no application for Fiscal 2004 will be made.

 

**11.****       Operating leases**

 

Asdiscussed in Note 14 the Company does not have a formal lease on its offices at46 Berkeley Square. Total rent expense was $969,000, $1,101,000, and $909,000for years ended December 31, 2005, 2004 and 2003, respectively.

 

**12.****       Segment reporting**

 

ForFiscal 2005, Fiscal 2004 and Fiscal 2003 the Company’s reportable segment wasthe provision of medical scanning services derived from the discontinued Lifesyneoperation. All revenues were generated within the United Kingdom.

 

**13.****       Concentrations**

 

TheCompany maintains its cash and cash equivalents at major financial institutionsin the United Kingdom. Cash held in foreign institutions amounted to $6,933,000and $5,194,000 at December 31, 2005 and 2004, respectively. The Companyperiodically evaluates the relative credit standing of financial institutionsconsidered in its cash investment strategy.

 

**14.****       Related PartyTransactions**

 

OnDecember 29, 2000, the Company acquired all of the issued and outstandingshares of HTTP Insights Limited (“Insights”). Asia IT was a shareholder inInsights as well as the Company at the time of the acquisition, and hasprovided a credit facility for up to $20,000,000. The credit facility expiredon December 31, 2001, but has been extended to June 30, 2007. All advancesunder the credit facility accrue interest at 2% above US LIBOR. The Company isrestricted from borrowing funds, directly or indirectly, other than through thecredit facility, without the consent of Asia IT.

 

OnNovember 20, 2001, Asia IT entered into a 10,000,000($18,000,000) credit facility with MS-PLC. Such facility ceases on June 30,2007 and is secured by a lien on all of the assets of MS-PLC. Interest onoutstanding amounts accrues at 2% above Sterling LIBOR. Pursuant to such creditfacility, MS-PLC had covenanted to undertake a public offering of its ordinaryshares in an amount not less than 25,000,000($45,000,000) not later than March 2002. MS-PLC did not complete such anoffering and the facility nevertheless remains in place.

 

Inaddition, a director of Asia IT is a brother of Tim Paterson-Brown who wasappointed to the Board on December 8, 2003 and to the Board of MS-PLC onSeptember 5, 2003. In addition to the loan facilities

 

F-18

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madeavailable by Asia IT to the Company and MS-PLC, Asia IT received commissions onshares issued under private placements in both Fiscal 2005 and Fiscal 2004.

 

Duringthe year ended December 31, 2005 the Company raised $12,035,000 net ofcommissions and expenses, in a private placement of restricted common stock at$4.00 per share. Asia IT received commissions of $1,230,000. The Company raiseda further $3,600,000 net of commissions and expenses, on January 13, 2006 in aprivate placement of restricted common stock at $4.00 per share. Asia ITreceived commissions of $400,000. The Company had received the funds prior tothe December 31, 2005.

 

DuringFiscal 2004 the Company raised $23,310,000, net of commissions and expenses, ina private placement of restricted common stock at $3.00 per share. Asia ITreceived commissions of $2,410,000, which was partly settled by issuing 420,000shares of Company common stock valued at $3.00 per share.

 

TheCompany’s corporate offices at 46 Berkeley Square, London W1J 5AT, UnitedKingdom. The office is comprised of 9,642 square feet. Until June 30, 2003,rent was paid quarterly in advance to a property management company, BerkeleySquare Ventures Limited, which in turn collects the rent for Yang CelluloseCompany Limited (“YCCL”) (previously International Cellulose Company Limited),the entity that holds the lease on the property. Subsequent to June 30, 2003,rent has been paid directly to YCCL. In November 2001, YCCL was acquired by Macnivenand Cameron Equity Holdings Limited (“M&C”) (previously STG Holdings PLC),a major shareholder of the Company. The rent payable is based on the amount ofspace each company occupies. There are no formal leases between the Company andYCCL. The Company paid rent of $969,000 in Fiscal 2005, $1,101,000 in Fiscal2004, and $909,000 in Fiscal 2003.

 

**15.****       Legal Proceedings**

 

TheCompany is involved with various legal actions and claims arising in theordinary course of business. Management believes that the outcome of any suchlitigation and claims will not have a material effect on the Company’sfinancial position or results of operations.

 

**16.****       Subsequent events**

 

On March17, 2006 the Company raised $990,000, net of commissions and expenses, in aprivate placement of restricted common stock at $4.00 per share. Asia IT earnedcommissions of $110,000.

 

F-19

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**17.****       Quarterly Financial Data(un-audited)**

 

Thetables below summarize the Company’s un-audited quarterly operating results forFiscal 2005 and 2004. Discontinued operations relate to Lifesyne UK Ltd – seeNote 3.

 

THREE MONTHS ENDED

($ thousands except pershare data)

 
| ** **                       | ** **     | **March 31, 2005** | ** ** | **June 30, 2005** | ** ** | **September 30, 2005** | ** ** | **December 31, 2005** | ** **   |
|----------------------------------|----------------|--------------------|------------|-------------------|------------|------------------------|------------|-----------------------|--------------|
|                             |           |               |       |              |       |                   |       |                  |         |
| Revenues                         | - continuing   |               | $          | —            |       | $                      | —     |                  | $            |  — |   | $ | — |   |
|                             | - discontinued |               | 151        |              | 131        |                   | 113        |                  | 32           |   |
|                             |           |               |       |              |       |                   |       |                  |         |   |
| Loss                             | - continuing   |               | (2,848     | )                 | (1,999     | )                      | (2,968     | )                     | (2,923       | ) |
| Loss                             | - discontinued |               | (246       | )                 | (365       | )                      | (684       | )                     | (183         | ) |
|                             |           |               |       |              |       |                   |       |                  |         |
| Net loss                         |           | $                  | (3,094     | )                 | $          | (2,364                 | )          | $                     |  (3,652 | ) | $ | (3,106 | ) |
|                             |           |               |       |              |       |                   |       |                  |         |
| Basic and diluted loss per share |           |               |       |              |       |                   |       |                  |         |
| Continuing operations            |           | (0.09              | )          | (0.06             | )          | (0.09                  | )          | (0.08                 | )            |
| Discontinued operations          |           | (0.00              | )          | (0.01             | )          | (0.02                  | )          | (0.01                 | )            |
|                             |           |               |       |              |       |                   |       |                  |         |
| Net loss                         |           | $                  | (0.09      | )                 | $          | (0.07                  | )          | $                     |  (0.11  | ) | $ | (0.09 | ) |

 

THREE MONTHS ENDED

($ thousands except per share data)

 
| ** **                       | ** **     | **March 31, 2004** | ** ** | **June 30, 2004** | ** ** | **September 30, 2004** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------|----------------|--------------------|------------|-------------------|------------|------------------------|------------|-----------------------|------------|
|                             |           |               |       |              |       |                   |       |                  |       |
| Revenues                         | - continuing   |               | $          | —            |       | $                      | —     |                  | $          | — |   | $ | — |   |
|                             | - discontinued |               | 152        |              | 136        |                   | 111        |                  | 139        |   |
|                             |           |               |       |              |       |                   |       |                  |       |   |
| Loss                             | - continuing   |               | (3,217     | )                 | (2,861     | )                      | (2,976     | )                     | (3,831     | ) |
| Loss                             | - discontinued |               | (314       | )                 | (342       | )                      | (519       | )                     | (970       | ) |
|                             |           |               |       |              |       |                   |       |                  |       |
| Net loss                         |           | $                  | (3,531     | )                 | $          | (3,203                 | )          | $                     | (3,495     | ) | $ | (4,801 | ) |
|                             |           |               |       |              |       |                   |       |                  |       |
| Basic and diluted loss per share |           |               |       |              |       |                   |       |                  |       |
| Continuing operations            |           | (0.12              | )          | (0.09             | )          | (0.08                  | )          | (0.13                 | )          |
| Discontinued operations          |           | (0.01              | )          | (0.01             | )          | (0.02                  | )          | (0.03                 | )          |
|                             |           |               |       |              |       |                   |       |                  |       |
| Net loss                         |           | $                  | (0.13      | )                 | $          | (0.10                  | )          | $                     | (0.10      | ) | $ | (0.16 | ) |

 

F-20

----

 

#### **Schedule II**

 

**Medicsight, Inc**

 

Valuation and Qualifying Accounts

($000’s)

 
| ** **                           | ** ** | **Balance  at** | ** ** | ** **    | ** ** | ** **     | ** ** | ** **       | ** ** |
|--------------------------------------|------------|-----------------|------------|---------------|------------|----------------|------------|------------------|------------|
| ** **                           | ** ** | **beginning**   | ** ** | ** **    | ** ** | ** **     | ** ** | **Balance  at**  | ** ** |
| **Deferred Tax Valuation Allowance** | ** ** | **of  year**    | ** ** | **Additions** | ** ** | **Write-offs** | ** ** | **end  of year** | ** ** |
|                                 |       |            |       |          |       |           |       |             |       |
| 2003                                 |       | 46,112          |       | 234           |       | —         |       | 46,346           |       |
| 2004                                 |       | 46,346          |       | 13,149        |       | —         |       | 59,495           |       |
| 2005                                 |       | 59,495          |       | 2,230         |       | —         |       | 61,725           |       |

 

**The deferred tax valuationallowance applies to both operating loss carry-forwards and capital lossesincurred by the Company.**

 

----