** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **
|       |   | **(Mark  One)**                                                                               |
|------------|--------|-----------------------------------------------------------------------------------------------|
|       |   |                                                                                          |
| **ý** |   | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|       |   |                                                                                          | **For the  quarterly period ended March 31, 2004** |
|       |   |                                                                                          |
| **o**      |   | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|       |   |                                                                                          | **For the  transition period from                   to               ** |
|       |   |                                                                                          |   |
|       |   |                                                                                          | **Commission  file number   0-26886** |

** **

** **

| **MEDICSIGHT, INC.**                                                                |
|-------------------------------------------------------------------------------------|
| (Exact  name of registrant as specified in its charter)                             |
|                                                                                |   |   |
| **Delaware**                                                                        |   | **13-4148725** |
| (State  or other jurisdiction of  incorporation or organization)                    |   | (I.R.S.  Employer  Identification No.) |
|                                                                                |   |   |
| **46 Berkeley Square, London, W1J 5AT, UNITED KINGDOM**                             |
| (Address  of principal executive offices, including zip code)                       |
|                                                                                |   |   |
| **011- 44-20-7598-4070**                                                            |
| (Registrant’s  telephone number, including area code)                          |
|                                                                                |   |   |
|                                                                                |   |   |
| (Former  name, former address and former fiscal year, if changed since last report) |

 

Indicateby check whether the registrant: (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days Yes  ý  No  o

 

Indicateby check whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act):Yes  o  No  ý

 

**APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY**

**PROCEEDINGS DURING THE PRECEDING FIVE YEARS**

** **

Indicateby check mark whether the registrant filed all documents and reports requiredto be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934subsequent to the distribution of securities under a plan confirmed by court.  Yes  o No  o

 

**APPLICABLE ONLY TO CORPORATE ISSUERS**

** **

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: As of May 10, 2004: 30,855,758 shares of Common Stock, par value $0.001per share.

 

 

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**NOTE REGARDING AMENDMENT AND RESTATEMENT**

 

During Fiscal 2003, the Company identifiedcertain errors in its previously issued quarterly financial statements relatingto the impairment of an intangible assets and the Company also revised itstreatment of software development costs in the third quarter of Fiscal 2003.

 

As a result, the Company has restated itspreviously issued financial statements for the quarter ended March 31,2003.  A summary of the significanteffects of the restatements is set forth below.

 

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 
|                                                  |   | **Three  months ended  March 31, 2003** |   | **Three  months ended  March 31, 2003** |   |
|-------------------------------------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|
|                                                  |   | **(as  previously reported)**           |   | **(as  restated)**                      |   |
|                                                  |   | **$000’s**                         |   | **$000’s**                         |   |
|                                                  |   |                                    |   |                                    |   |
| REVENUES                                              |   | $                                       | 9      |                                    | $      | 9 |   |
|                                                  |   |                                    |   |                                    |   |
| EXPENSES:                                             |   |                                    |   |                                    |   |
| Selling, general and administrative charges           |   | 2,976                                   |   | 1,929                                   |   |
| Research and development cost                         |   | —                                  |   | 469                                     |   |
|                                                  |   | 2,976                                   |   | 2,398                                   |   |
|                                                  |   |                                    |   |                                    |   |
| Net loss before minority interest                     |   | (2,967                                  | )      | (2,389                                  | )      |
|                                                  |   |                                    |   |                                    |   |
| MINORITY INTEREST                                     |   | 289                                     |   | 289                                     |   |
|                                                  |   |                                    |   |                                    |   |
| Net loss                                              |   | $                                       | (2,678 | )                                       | $      | (2,100 | ) |
| PER SHARE DATA:                                       |   |                                    |   |                                    |   |
| Basic and diluted loss per share                      |   | $                                       | (0.13  | )                                       | $      | (0.10 | ) |
| Weighted average number of common shares  outstanding |   | 21,154,874                              |   | 21,154,874                              |   |

 

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**MEDICSIGHT, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW**

 
|                                                                        |   | **Three  months ended  March 31, 2003** |   | **Three  months ended  March 31, 2003** |   |
|-----------------------------------------------------------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|
|                                                                        |   | **(as  previously reported)**           |   | **(as  restated)**                      |   |
|                                                                        |   | **$000’s**                         |   | **$000’s**                         |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                       |   |                                    |   |                                    |   |
| Net loss                                                                    |   | $                                       | (2,678 | )                                       | $      | (2,100 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities |   |                                    |   |                                    |   |
| Depreciation                                                                |   | 113                                     |   | 113                                     |   |
| Amortization of intangibles                                                 |   | 1,123                                   |   | —                                  |   |
| Minority interest in net loss of subsidiary                                 |   | (289                                    | )      | (289                                    | )      |
| (Increase)/decrease in assets                                               |   |                                    |   |                                    |   |
| Accounts receivable                                                         |   | (3                                      | )      | (3                                      | )      |
| Prepayments                                                                 |   | (79                                     | )      | (79                                     | )      |
| VAT receivable                                                              |   | (33                                     | )      | (33                                     | )      |
| Security deposits                                                           |   | (743                                    | )      | (743                                    | )      |
| Increase/(decrease) in liabilities                                          |   |                                    |   |                                    |   |
| Accounts payable                                                            |   | (166                                    | )      | (166                                    | )      |
| Accrued expenses                                                            |   | (9                                      | )      | (9                                      | )      |
| Accrued professional expenses                                               |   | —                                  |   | —                                  |   |
| Net cash used in operating activities                                       |   | (2,764                                  | )      | (3,309                                  | )      |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                       |   |                                    |   |                                    |   |
| Purchase of fixed assets                                                    |   | (576                                    | )      | (576                                    | )      |
| Software development costs                                                  |   | (545                                    | )      | —                                  |   |
| Net cash used in investing activities                                       |   | (1,121                                  | )      | (576                                    | )      |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                       |   |                                    |   |                                    |   |
| Principal payments under capital lease  obligations                         |   | (9                                      | )      | (9                                      | )      |
| Proceeds from MS-PLC sale of common stock                                   |   | 78                                      |   | 78                                      |   |
| Increase in short term debt - related party                                 |   | 2,122                                   |   | 2,122                                   |   |
| Net cash provided by financing activities                                   |   | 2,191                                   |   | 2,191                                   |   |
|                                                                        |   |                                    |   |                                    |   |
| Effects of exchange rates on cash and cash  equivalents                     |   | 59                                      |   | 59                                      |   |
|                                                                        |   |                                    |   |                                    |   |
| NET CHANGE IN CASH & CASH EQUIVALENTS                                   |   | $                                       | (1,635 | )                                       | $      | (1,635 | ) |
| CASH & CASH EQUIVALENTS, BEGINNING OF  PERIOD                           |   | 1,778                                   |   | 1,778                                   |   |
|                                                                        |   |                                    |   |                                    |   |
| CASH & CASH EQUIVALENTS, END OF PERIOD                                  |   | $                                       | 143    |                                    | $      | 143 |   |

 

3

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**March 31, 2003**

 

***Research and Development*****.**

 

Duringthe first six months of Fiscal 2003, in accordance with Statement of FinancialAccounting Standards (FAS) 86, *Accountingfor the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed*,the Company capitalized certain computer software development costs. Technicalfeasibility was established on completion of working models for MedicHeart,MedicLung and MedicColon software products in January 2003. Subsequently, theCompany capitalized costs of $545,000 in the three months ended March 31, 2003under FAS 86. These costs capitalized comprised staff, consultants, regulatoryand clinical trial costs specific to the three products.

 

Subsequentlythe Company decided that this accounting treatment was inappropriate because ofthe difficulty in assigning costs accurately to the various software productsand versions being developed as technical and development staff are moved fromproduct to product and version to version on a regular basis. The Company hasdecided to expend all research and development costs in Fiscal 2003. TheCompany’s research and development costs of $469,000 are comprised of staff andconsultancy costs expensed on the MedicsightTM system. The regulatory andclinical trial charges of $76,000 are expensed in “Selling, general andadministrative charges”.

 

***Depreciation and AmortizationExpense.***

 

DuringFiscal 2000, the Company acquired an intangible asset from the former parent ofInsights consisting of technology valued at $22,470,000. Under SFAS No.142,this is considered an intangible asset with a definite life of 5 years.Therefore the value of the asset was amortized on a straight-line basis overthis period*.*

 

TheCompany 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. During the third quarter of 2003 the Company reviewed the carrying valueof the core technology acquired from Insights and decided that the coretechnology should be fully impaired. This was based on the view that there were no further softwareapplications apart from the medical imaging applications currently beingdeveloped that could be derived from the core technology. The Company furtherdecided that the impairment should be recorded as at December 31, 2002. In thethree months ended March 31, 2003 the Company had an amortization charge of$1,123,000 expensed in “Selling, general and administrative charges” relatingto the fully impaired technology which is no longer applicable.

 

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**NOTE REGARDING FORWARD LOOKING STATEMENTS**

 

ThisQuarterly Report on Form 10-Q, including “Management’s Discussion and Analysisof Financial Condition and Results of Operations” in Item 2, 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 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 2 of thisreport, and that are otherwise described from time to time in the Company’sSecurities and Exchange Commission reports filed after this report. The Companyassumes no obligation and does not intend to update these forward-lookingstatements.

 

The Company’s main operatingcurrency is UK sterling (£).

 

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**PART 1**

 

**FINANCIALINFORMATION**

 

## **Item 1.****                      ****Financial Statements**

##  

Medicsight,Inc. and its subsidiaries are collectively referred to in this Report as the“Company”.  For purposes of thediscussion contained herein, all financial information is reported on aconsolidated basis. The financial statements for the Company’s fiscal quarterended March 31, 2004 are attached to this Report, commencing at page F-1.

 

## **Item 2.****                      ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

##  

**BACKGROUND**

 

Ourbusiness objective is to conceive, develop and commercialize innovative medicalapplications, such as computer-aided detection (“CAD”) of disease, derived fromour core technology through our majority-owned subsidiary, Medicsight PLC(“MS-PLC”).

 

Wewere originally incorporated as a Utah corporation in 1977. On December 19,2000, we entered into an Agreement and Plan of Merger with our wholly ownedsubsidiary HTTP Technology, Inc., a Delaware corporation, and thereby effecteda re-incorporation of the company from Utah to Delaware. All references in thisAnnual Report to  “the Company”, “we” or“us” refer to Medicsight, Inc., the Delaware corporation and subsidiaries, ifthe event occurred on or after December 19, 2000 or to HTTP Technology, Inc.,the Utah corporation and subsidiaries, if the event occurred prior to December19, 2000.  On July 31, 2003 the Companyreduced its authorized share capital from 100,000,000 shares to 25,000,000shares. On January 27, 2004 the Company increased its authorized share capitalfrom 25,000,000 shares to 40,000,000 shares.

 

Duringthe quarter ended March 31, 2004 the Company issued approximately 5,126,000restricted shares of stock raising $13.89m as part of a private placement.Subsequent to March 31, 2004 the Company has further issued approximately1,241,000 restricted shares of stock raising $3.35m.

 

Ourbusiness is focused solely on the medical imaging applications derived from ourcore technology.  We have concluded theprocess of incorporating all research, software development, and management andmarketing activities related to our medical imaging initiatives into MS-PLC. InNovember 2001 assets were transferred from our other subsidiaries to MS-PLC andthe costs incurred on the development of the MedicsightTM system(our state-of-the-art digital disease detection software system comprisingMedicColonTM, MedicHeartTM, and MedicLungTM)were reimbursed and assigned by way of a loan note from MS-PLC.  The amount of the loan note to Medicsight,Inc. was £3,659,104, and this loan note was converted into 57,868,582 ordinaryshares of MS-PLC issued to the Company and 15,000,000 ordinary shares of MS-PLCissued to the former parent of Insights in November 2001.

 

OnOctober 28, 2002, the Company’s name was changed from HTTP Technology, Inc. toMedicsight, Inc.

 

TheCompany maintains its corporate offices at 46 Berkeley Square, London, W1J 5AT,United Kingdom, telephone +44-20-7598-4070, facsimile: +44-20-7598-4071,Internet address: www.medicsight.com.

 

**BUSINESS STRATEGY**

 

Weare developers of software technology for medical diagnostic applications andprovide medical diagnostic services (Computer Aided Detection - “CAD”applications) in differing business models. We have four principal operatingsubsidiaries: Medicsight PLC (“MS-PLC”), Medicsight Asset Management Limited(“MAM”), Lifesyne UK Limited (“Lifesyne UK”) and Medicsight US, Inc (“MS-US”)(previously Lifesyne US).

 

6

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*MS-PLC.*  Our majority-owned subsidiary,MS-PLC, is currently engaged in commercializing a state-of-the-art digitalexpert recognition software system for digital data derived from medicalimaging hardware. At March 31, 2004, the Company owned 68,677,300 ordinaryshares in MS-PLC, constituting 81.4% of the outstanding shares.

 

*Lifesyne*.  Lifesyne is a wholly ownedsubsidiary of MS-PLC that was established in September 2002 for the purpose ofproviding a branded operating entity for the United Kingdom and Irelandmarkets. Lifesyne is the entity that operates the scanning centers located inthe United Kingdom. As the Company has decided to focus on the delivery of thesoftware no further development of the Lifesyne strategy is envisaged beyondthe Company’s current scanning requirements.

 

*MAM*.  MAM is also a wholly ownedsubsidiary of MS-PLC that was established in September 2002 for the purpose ofacquiring fixed assets on behalf of the operating entities in the group. MAMwill negotiate and acquire equipment and fund leasehold improvements anddevelopment, which in turn will be leased to the relevant operating entity.

 

*MS-US.*MS-US (previously Lifesyne US) is also a wholly owned subsidiary ofMS-PLC was established to co-ordinate operations in the United States ofAmerica and is based in Nashville, Tennessee.

 

Itis now widely accepted that the most effective way to achieve early detectionof the principal deadly diseases is through radiological scanning. TheMedicsightTM system analyzes digital data from the new generation of multi-slicecomputed tomography (“MSCT”) scanners and then provides information to enable theclinician to identify and characterize possible areas of abnormality. Webelieve that in the future the MedicsightTM system will be capable of reliablydetecting isolated pulmonary nodules in the lung, calcification of the coronaryarteries, polyps in the colon and other abnormalities indicative of disease.The potential advantage of the MedicsightTM system is that it increasesprecision and reliability while also providing scalability that will becost-effective. The system uses its technology to provide tools to radiologistsfor the identification of possible abnormalities. The clinician will then applyhis/her experience to determine the next steps in medical diagnosis andtreatment. We believe that the MedicsightTM system will:

 

•                  enable accurate and reliable scan analysis;

•                  provide a service that will be significantlycheaper than at present as it reduces the burden on radiologists who in currentpractice account for a significant proportion of the scan cost; and

•                  allow significant patient volume to beachieved because the analysis is semi automated and scanning volumes are notthen constrained by the finite number of radiologists.

 

Thestep change in technology that increases the potential of the MedicsightTMsystem is the 16 detector CT scanner. This allows sub-millimetercross-sectional slices to be captured with increased speed and reducedradiological dose when compared with traditional single slice machines. Thiscan provide over 600 images of the chest instead of 30-60 for single slicescanners. The amount of detail now available, while enabling early detection ofsmaller nodules and areas of calcification, increases the time required foranalysis by radiologists. Therefore the automation of scan analysis isessential.

 

MS-PLCopened LifesyneTM’s flagship center in Westminster, London in 2003. Due to theCompany concentrating on the development of the software products it hasconcluded that its development of the LifesyneTM Scanning Center concept cannotbe rolled out further. It represents one potential model, which will beavailable for licensees who see a commercial opportunity to package the concepttogether with our MedicsightTM software.  We are now prioritizing LifesyneTM on the rapid acquisition ofpatient scan data necessary to enable our expert software to hone itscharacterization skills.  In this role,we have reappraised our capacity requirements and have decided to focus productdevelopment activity on the flagship center in Westminster, which will act moreas a research institution.  This meansthe center at Ravenscourt is currently surplus to our core requirements and weare seeking a partner to operate the center as a commercial CT scanningbusiness.

 

7

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*Refining our business strategy*

 

Ouraim is to become a leading developer of CAD software in medical imaging.  The Company’s strategy is based upon thefollowing priorities:

 

•                  Focusing our resources on developing industryleading pattern recognition software in the medical imaging market.

•                  Targeting commercially valuable applicationswhere the accurate identification and measurement of abnormalities will lead toimproved diagnosis and treatment of life threatening diseases.

•                  Developing an international network ofmedical specialists, to support product development, clinical trials andcommercial delivery.

 

*Key Achievements during 2003*

 

•                  European CE and United States FDA 510(k)approvals were secured for Release One versions of Lung, Heart and Colonproducts.  These facilitate diseasetracking in symptomatic patients.

•                  U.S. operations were established inNashville, Tennessee.

•                  Beta test sites have been set up at St MarksHospital and London Chest Hospital, London, Vanderbilt University, U.S.A. andCHUV University Hospital, Switzerland.

 

*Medicsight Product Portfolio*

 

Ourproducts currently target 3 therapeutic areas, Colon, Lung and Heart.  In terms of clinical practice and thereforemarket segmentation, the products can be split between diagnostic treatment andscreening;

 

*Diagnostic or “Disease tracking” products*; these are products designed for symptomaticpatients to track disease progress and monitor treatment effectiveness. Theprimary applications in this area are Lung nodule tracking and Heart calciumscoring though the company believes there will be a growing requirement forpolyp tracking in the colon as CT colonography becomes more established

 

“*Screening” products*; for populationscreening of asymptomatic patients. There is much evidence to demonstrate thatthe early detection of colon, lung and heart disease leads to increased lifeexpectancy.  Computer aided detection(“CAD”) CT will provide a cost effective solution in identifying these diseasesearly enough to significantly alter the economics of population screeningprograms in these areas

 

*Business Development planned for 2004*

 

Wehave an integrated business development strategy – we aim to drive sales growthfrom proven products (validated by clinical trials), endorsed by InternationalAdvisory Boards, using routes to market (distribution partners), recognized anddemanded by the end users (informed by our marketing efforts).

 

Wecommenced building relationships with third party distributors at the end of2003 and already we have established strong levels of interest amongst bothpicture archivers (“PACS”) software companies and CT hardware manufacturers.Our aim is to have distribution coverage throughout North America and Europe bythe end of 2004.

 

Ourtarget is to have CE approval of our first CAD products before the end of theyear; these products will automatically drop into the distribution structurecreated above.

 

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*Milestones for 2004*

 

•                  Strategic partnerships to be signed withleading hospitals in the United States, United Kingdom and Far East in thefirst half of 2004.

•                  Commercial launch of first CAD product.

•                  Completion of first clinical trials.

•                  Establishment of International AdvisoryBoards comprising world experts in each therapeutic area.

•                  Product development partnership to be signedwith leading MRI research institute.

•                  Distribution partnership to be establishedwith a leading player.

 

*International Advisory Board*

 

TheCompany established a Medical Board to guide the early development of theCompany’s software for the pre-symptomatic detection of lung cancer, bowelcancer and coronary heart disease.  TheMedical Board advised on and monitored product development, clinical targetsand scanning operations and formed an important link with medical scientistsand clinicians. Chaired by Dr. John Costello, the Medical Board comprised:

 

•                  Sir Christopher Paine

•                  Dr. John Karani

•                  Dr. Mary Roddie

•                  Dr. Jamshid Dehmeshki

•                  Mr. Paul Samuel

 

TheMedical Board reported to MS-PLC’s Board through Dr Costello. Three specialistadvisory boards supported the Medical Board with responsibility for the lung,colon and heart products.

 

Asthe Company’s strategy evolved, in particular, following the decision toconcentrate our efforts on software development and international productdistribution, we have acted to align our medical advisory mechanisms to the newcircumstances.  The Company hastherefore set up three International Advisory Boards (“IAB”).  The IABs will recruit individuals with therelevant expertise to become members and encourage the involvement of theradiologists undertaking beta testing of our products, providing data forsoftware development and participating in our scientific program.

 

Somemembers of the original Medical Board have accepted appointments to the newIABs. New members will include persons with relevant expertise from the UnitedStates, Germany, France, Italy, and Japan. The IABs are co-chaired by Dr. Costello, who reports back to the MS-PLCBoard; however, much of the scientific advice and leadership will be providedthrough a co-chairman, chosen from the IAB members.

 

*Terms of Reference of the International AdvisoryBoard*

 

TheIABs will meet twice a year and fulfill the following roles:

 

•                  Advise on the development and application ofMedicsight CT image analysis software in the territories represented.

•                  Provide links to users of CT image analysissystems in their respective territories.

•                  Assist in investor relations on aninternational basis.

•                  Advise on, and participate in, clinicaldevelopment programs for the Company’s software.

•                  Act as advisors in relation to regulatorysubmissions for the Company’s products.

•                  Advise on sources of library data (CT scans)to support training and development of the Company’s software.

 

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*Objectives of the International Advisory Board*

 

Theobjectives of the meetings may be varied from time-to-time, as agreed withMS-PLC, but will include the following:

 

•                  Ensure that members have a full understandingof the Medicsight technology and are enthused to participate in its developmentand application, both locally and internationally.

•                  Ensure that the clinical development programis compatible with local clinical practice.

•                  Ensure that the clinical development programis compatible with local regulatory guidelines.

•                  Obtain insight into local issues with respectto marketing of the Company’s products.

 

Wecannot assure you that the Company will be successful in commercializing theMedicsightTM system, or if such system is commercialized, that its use will beprofitable to the Company. We face obstacles in commercializing our coretechnology and in generating operating revenues such as, but not limited to,successful development, testing of and gaining regulatory approval for thetechnology.

 

TheCompany does not believe that there is currently any comparable system that iscompetitive with the MedicsightTM system. There are computer-aided diagnosticsystems that work in the field, but, in our view, such existing systems areoverly dependent on human resources to carry out the analysis, as none have thecapability of the MedicsightTM system.

 

TheCompany has had only a limited operating history upon which an evaluation ofits prospects can be made. The Company’s prospects must be considered keepingin mind the risks, expenses and difficulties frequently encountered in theestablishment of a new business in an ever-changing industry. There can be noassurance that the Company will be able to achieve profitable operations.

 

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

 

*Technical Risks.*  TheMedicsightTM system may not deliver the levels of accuracy and reliabilityneeded, or the development of such accuracy and reliability may be delayed.

 

*Market Risks.*  Themarket for the MedicsightTM system 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 MedicsightTM system or be slower to accept itthan we expect. Revenues from the LifesyneTM scanning centers and the licensingof the MedicsightTM system may be delayed or costs may be higher than expectedwhich may result in the Company requiring additional funding.

 

*Regulatory Risks.*  TheMedicsightTM system is subject to regulatory requirements in both the UnitedStates and Europe. Approval may be delayed or incur additional cost to theMedicsightTM system.

 

*Competitive Risks.*There are a number of groups andorganizations, such as software companies in the medical imaging field, scannermanufacturers, screening companies and other healthcare providers, that have aninterest in developing a competitive offering to the MedicsightTMsystem.  In addition these competitorsmay have significantly greater resources than the Company. We cannot make anyassurance that they will not attempt to develop such offerings, that they willnot be successful in developing such offerings or that any offerings they dodevelop will not have a competitive edge versus the MedicsightTMsystem.

 

*Other Risks.*The Company’s ability to deliver the softwarecould be hindered by such risks as the loss of key personnel, the patents beingsuccessfully challenged or credit facilities reduced or called in.

 

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**RESULTS OF OPERATIONS**

 

*Revenues.* For the quarter ended March 31, 2004 and the quarter ended March 31,2003 (as restated), the Company’s gross revenues from operations were $152,000and $9,000, respectively.  The Company’srevenue in the quarters ended March 31, 2004 and 2003 were derived from theCompany’s LifesyneTM scanning operations.

 

*Selling, General and Administrative Expenses.*  TheCompany’s selling, general and administrative expenses for the quarter endedMarch 31, 2004, were $3,151,000 as compared to $1,929,000 for the quarter endedMarch 31, 2003 (as restated). Professional fees, including consulting services, were $437,000 for thequarter ended March 31, 2004 as compared to $380,000 for the quarter endedMarch 31, 2003 (as restated). Also included were salaries and directors’compensation of $1,363,000, service charges and rates for property leasingof  $78,000, and rent of $271,000.  The primary components of the increasedselling, general and administrative expenses for the quarter ended March 31,2004 were increases in staff costs, professional fees, marketing and clinicaltrials as the Company initiated its various marketing strategies.

 

*Research and Development cost.*The Company’s research and development costfor the quarter ended March 31, 2004, was $669,000 as compared to $469,000 forthe quarter ended March 31, 2003 (as restated). The Company’s research anddevelopment costs are comprised of staff and consultancy costs expensed on theMedicsightTM system.

 

*Net Loss and Net Loss per Share.*  Netloss was $3,534,000 for the quarter ended March 31, 2004 compared to a net lossof  $2,100,000 for the quarter endedMarch 31, 2003 (as restated).  Net lossper share for the quarter ended March 31, 2004 was $0.13, based on weightedaverage shares outstanding of 26,461,309, compared to a net loss per share of$0.10 for the three months ended March 31, 2003 (as restated), based onweighted average shares outstanding of 21,154,874. The increase in net loss forthe quarter ended March 31, 2004, are principally due to the increased selling,general and administrative expenses.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

*Working Capital.*  AtMarch 31, 2004, the Company had $11,002,000 in current assets. Cash and cashequivalents amounted to $9,816,000. Current liabilities were $5,139,000 atMarch 31, 2004.  At December 31, 2003,the Company had $2,144,000 in current assets and cash and cash equivalentsamounted to $845,000.  Currentliabilities were $6,540,000 at December 31, 2003. Working capitalsurplus/(deficit) at March 31, 2004 was $5,863,000, as compared to $(4,396,000) at December 31, 2003.  The ratio of current assets to currentliabilities was 2.14 to 1.0 at March 31, 2004 as compared to 0.33 to 1.0 atDecember 31, 2003. The increase is primarily due to the increase in cash andcash equivalents resulting from funds received in the Company’s privateoffering.

 

*Net Increase in Cash and Cash Equivalents.* During the three months ended March 31, 2004, the Company’s cash andcash equivalents increased by $8,971,000. This increase was primarily theresult of cash flows received from shares issued by the Company in excess ofthe net cash used in operating and investing activities and repayments of debt.The Company used net cash of $4,165,000 in operations. The Company received netcash of $13,190,000 in financing activities and used $45,000 in investingactivities.

 

*Net Cash Used in Operations.*  Theuse of cash in operations of  $4,165,000in the three months ended March 31, 2004, was attributable to the Company’srelatively minimal revenues at the same time that the Company incurredsignificant operating costs. These significant costs included professionalfees, salaries and director compensation, marketing, clinical trials andservice charges associated with rental property and

 

11

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rent.The Company used cash in operations in the three months ended March 31, 2003(as restated) of  $3,309,000.

 

*Net Cash Used in Investing Activities.*  Inthe three months ended March 31, 2004, the Company had a net cash outflow frominvesting activities of $45,000. The Company used these funds to purchaseadditional fixed assets. In the three months ended March 31, 2003 (as restated)the Company had a net cash outflow from investing activities of $576,000. TheCompany used the funds to purchase additional fixed assets.

 

*Net Cash Provided by Financing Activities.*  Inthe three months ended March 31, 2004, the Company had a net cash inflow fromfinancing activities of $13,190,000. The funds received in the three monthsended March 31, 2004, comprised of $13,907,000 from the Company’s privateofferings of which $493,000 was used to repay our debt facilities with Asia ITand the bank overdraft of $196,000 was also repaid. For the three months endedMarch 31, 2003 (as restated), the Company had a net cash inflow from financingactivities of $2,191,000. The funds received comprised of $78,000 received fromthe private offering of Medicsight stock and $2,122,000 received under our debtfacilities with Asia IT.

 

*Stockholders’ Equity.* The Company’s stockholders’ equity at March31, 2004 was $21,036,000, including an accumulated deficit of $(167,002,000),as compared to $10,489,000 at December 31, 2003, including an accumulateddeficit of $(163,468,000). Additional paid-in capital was $187,717,000 and$173,810,000, at March 31, 2004 and December 31, 2003 respectively. Theincrease in stockholders’ equity was a result of an increase in additionalpaid-in capital of $13,907,000 resulting from the placement of the Company’sstock offset by an increase in accumulated deficit of $3,534,000.

 

*Additional Capital.*  TheCompany will require additional capital during its fiscal year ending December31, 2004 to implement its business strategies, including cash for (i) paymentof increased operating expenses such as salaries for additional employees; and(ii) further implementation of those business strategies. Such additionalcapital may be raised through additional public or private financing, as wellas borrowings and other resources. Currently, the Company has two availablelines of credit.

 

OnDecember 15, 2000, the Company entered into an unsecured credit facility withAsia IT which provides a $20,000,000 line of credit. Such line of creditoriginally expired on December 31, 2001, but has been extended until June 30,2005. Interest on advances under the credit facility accrues at 2% above USLIBOR. 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). The Companyis restricted from borrowing funds, directly or indirectly, other than throughthe 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 ($16,000,000) creditfacility with MS-PLC.  Such facilitymatures in November 2005 and is secured by a lien on all assets ofMedicsight.  Interest on outstandingamounts accrues at 2% above GBP LIBOR. Pursuant to such credit facility, MS-PLC had covenanted to undertake apublic offering of its ordinary shares in an amount not less than £25,000,000not later than March 2002.  MS-PLC didnot complete such an offering but the facility nevertheless remains in place.The loan is convertible into ordinary shares in MS-PLC on announcement of anOffer to Subscribe, Placing or other public offering of its ordinary shares, atthe same price per share as the offering price. Due to the private offeringbeing undertaken by MS-PLC, the loan is currently convertible.

 

AtMarch 31, 2004, the Company had drawn down $2,377,000 under the $20,000,000 facility with Asia IT, and MS-PLC haddrawn down $nil under its £10,000,000 ($16,000,000) facility with Asia IT.

 

Tothe extent 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 obtain

 

12

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acceptablefinancing, our results of operations and financial conditions could bematerially and adversely affected.  Wemay be required to raise substantial additional funds through other means.   The products derived from our proprietarysoftware, including the MedicsightTM system, are expected to account forsubstantially all of our revenues from operations in the foreseeablefuture.  Our technology has not yet beenfully commercialized and we have not begun to receive any significant revenuesfrom commercial operations.  We cannotassure our stockholders that our technology and products will be commercializedsuccessfully, or that if so commercialized, that revenues will be sufficient tofund our operations.  If adequate fundsare not available to us, we may be required to curtail operations significantlyor to obtain funds through entering into arrangements with collaborativepartners or others that may require us to relinquish rights to certain of ourtechnologies or products that we would not otherwise relinquish.

 

*Critical Accounting Policies.*In December 2001 and January 2002, theSecurities and Exchange Commission requested that all registrants list theirthree to five most “critical accounting policies” in the Management’sDiscussion and Analyses of Financial Condition and Results of Operations. TheSecurities and Exchange Commission indicated a “critical accounting policy” isone which is both important to the portrayal of the company’s financialcondition and results and requires management’s most difficult, subjective orcomplex judgments, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain. We believe that the followingaccounting policies fit the definition of critical accounting policies.

 

*Revenue Recognition.*We expect to earn our revenue primarily fromsoftware licenses and related services. Our revenue is recognized in accordancewith Statement of Position 97-2 (SOP 97-2), as amended by Statement of Position98-9. Currently the Company’s revenues derive from its scanning servicesoperated by LifesyneTM. Scan revenue is recognized when the serviceis delivered.

 

Therecognition of revenues from software licenses and related services willrequire more difficult and complex judgments. The terms of the licensecontract, long-term (over 12 months), short-term, cancelable, non-cancelable orper scan for example will affect the recognition of revenues from services suchas up-front fees as installation, activation and up-front license fees,on-going license fees, termination fees and maintenance fees. Where fees arereceived prior to any service being delivered the fees are deferred until therelated service has been delivered successfully and the revenue can then berecognized. Again if there are fees that relate to any “milestone” agreementsthese are deferred until the “milestone” has passed and then the revenue can berecognized.

 

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

 

*Research and Development.*Costs incurred in connection with thedevelopment of software products that are intended for sale are accounted forin accordance with Statement of Financial Accounting Standards No. 86,“Accounting for the Costs of Computer Software to be Sold, Leased, or OtherwiseMarketed”. Costs incurred prior to technological feasibility being establishedfor the product are expensed as incurred. Technological feasibility isestablished upon completion of a detail program design or, in its absence,completion of a working model. Thereafter, all software production costs are capitalizedand subsequently reported at the lower of unamortized cost or net realizablevalue. Capitalized costs are amortized based on current and future revenue foreach product with an annual minimum equal to the straight-line amortizationover the remaining estimated economic life of the product. Amortizationcommences when the product is available for general release to customers.

 

13

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TheCompany decided that capitalizing such expenditure was inappropriate because ofthe difficulty in assigning costs accurately to the various software productsand versions being developed as technical and development staff are moved fromproduct to product and version to version on a regular basis. Therefore theCompany has decided to expense all research and development costs. TheCompany’s research and development costs are comprised of staff and consultancycosts expensed on the MedicsightTM system.

 

*Impairment of Long-lived Assets and Long-lived AssetsTo Be Disposed of*. TheCompany 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 the asset involves significant judgments and avariety of assumptions. Judgments that the Company makes concerning theintangible acquired include assessing time and cost involved for development,time to market, risks of regulatory failure or obsolescence (due to market,environmental or technological advances for example). For calculating fairvalue based on discounted cash flows, we forecast future operating results andfuture cash flows, which includes long-term forecasts of revenue growth, grossmargins and capital expenditures.

 

*Impairment of Excess of Purchase Price Over NetAssets Acquired.*TheCompany adopted SFAS No. 142 on January 1, 2002.  Under this standard, goodwill will no longer be amortized overits estimated useful life, but will be tested for impairment on an annual basisand whenever indicators of impairment arise. Under the provisions of SFAS No. 142, any impairment loss identifiedupon adoption of this standard is recognized as a cumulative effect of a changein accounting principle. Any impairment loss incurred subsequent to the initialadoption of SFAS No 142 is recorded as a charge 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 ofJanuary 1, 2002. The implementation involved the determination of the fairvalue of each reporting unit, where a reporting unit is defined as an operatingsegment or one level below.

 

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.

 

*Recent Accounting Pronouncements. *In January 2003, the FASB issued Interpretation No. 46, “Consolidationof Variable Interest Entities” (FIN No. 46), which addresses consolidation bybusiness enterprises of variable interest entities (“VIEs”).   FIN No.46 is applicable immediately forVIEs created after January 31, 2003 and are effective for reporting periodsending after December 15, 2003, for VIEs created prior to February 1, 2003. InDecember 2003, the FASB published a revision to FIN 46 (“FIN 46R”) to clarifysome of the provisions of the interpretation and to defer the effective date ofimplementation for certain entities. Under the guidance of FIN 46R, publiccompanies that have interests in VIE’s that are commonly referred to as specialpurpose entities are required to applythe provisions of FIN 46R for periodsending after December 15*,*2003. Apublic company that does not have any interests in special purpose entities butdoes have a variable interest in a VIE created before February 1, 2003, mustapply the provisions of FIN 46R by the end of the first interim or annualreporting period ending after March 14, 2004. The adoption of FIN No. 46 didnot have an effect on the consolidated financial statements.

 

14

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*Contractual Obligations*

 

The Company has thefollowing 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                 |   | $         | 389    |                        | $      | 100 |   | $ | 189 |   | $ | 100 |   | $ | — |   |
| Operating Lease Obligations               |   | 2,085     |   | 488                         |   | 1,013 |   | 584 |   | — |   |
| Total                                     |   | $         | 2,474  |                        | $      | 588 |   | $ | 1,202 |   | $ | 684 |   | $ | — |   |

 

## **Item 3.****                      ****Quantitative and QualitativeDisclosures 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 facilities,which are all repayable on demand:

 
| **Debt Holder**                 |   | **Facility** |       | **Draw Down** |   | **Interest rate** |   | **At March  31** |   |
|---------------------------------|--------|--------------|------------|---------------|--------|-------------------|--------|------------------|--------|
|                            |   |         |       |          |   |              |   |             |   |
| Asia IT Capital Investments Ltd |   | $            | 20,000,000 |          | $      | 2,377,000         |   | US Libor + 2     | %      | 3.34 | % |
|                            |   |         |       |          |   |              |   |             |   |
| Asia IT Capital Investments Ltd |   | $            | 16,000,000 |          | $      | nil               |   | GBP Libor + 2    | %      | 6.75 | % |

 

Ahypothetical 100 basis point increase in interest rates would increase interestcost by approximately $24,000 per annum assuming no further draw downs orrepayments are made.

 

**Foreign Exchange Risk**

 

TheCompany holds limited cash balances in British Pounds so any adverse movementsin the exchange rates are considered immaterial.

 

## **Item 4.****                      ****Controls and Procedures**

 

*Evaluation of Disclosure Controls and Procedures*

 

Wemaintain controls and procedures designed to ensure that information requiredto be disclosed in this report is recorded, processed, accumulated andcommunicated to our management, including our chief executive officer and ourchief financial officer, to allow timely decisions regarding the requireddisclosure. Management necessarily applied its judgment in assessing the costsand benefits of such controls and procedures, which, by their nature, canprovide only reasonable assurance regarding management’s control objectives. AtJune 30, 2003, our management, with the participation of our chief executiveofficer and chief financial officer, carried out an evaluation of theeffectiveness of the design and operation of these disclosure controls andprocedures. Our chief executive officer and chief financial officer concludedthat these disclosure controls and procedures are effective.

 

*Changes in Internal Controls*

 

Duringthe quarter ended March 31, 2004 the Company made no significant changes in ourinternal controls or in other factors that could significantly affect thesecontrols, nor did we take any corrective action, as the evaluation revealed nosignificant deficiencies or material weaknesses.

 

15

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# **PART II**

#  

| **Item 1.** | **Legal  Proceedings**                                   |
|-------------|----------------------------------------------------------|
|        |                                                     |
|        |                                                     | There are currently no pending legal proceedings. |
|        |                                                     |
| **Item 2.** | **Changes  in Securities and Use of Proceeds**           |
|        |                                                     |
|        |                                                     | (a) | None. |
|        |                                                     |   |   |
|        |                                                     | (b) | None. |
|        |                                                     |   |   |
|        |                                                     | (c) | None. |
|        |                                                     |   |   |
|        |                                                     | (d) | Not applicable. |
|        |                                                     |
| **Item 3.** | **Defaults  Upon Senior Securities**                     |
|        |                                                     |
|        |                                                     | None. |
|        |                                                     |
| **Item 4.** | **Submission  of Matters to a Vote of Security Holders** |
|        |                                                     |
|        |                                                     | None. |
|        |                                                     |
| **Item 5.** | **Other  Information**                                   |
|        |                                                     |
|        |                                                     | None. |
|        |                                                     |
| **Item 6.** | **Exhibits  and Reports on Form 8-K**                    |
|        |                                                     |
|        |                                                     | (a) | Exhibits |
|        |                                                     |   |   |
|        |                                                     | 31.1 | Certification pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer -  filed herewith). |
|        |                                                     |   |
|        |                                                     | 31.2 | Certification pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer -  filed herewith). |
|        |                                                     |   |
|        |                                                     | 32.1 | Certification pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer -  filed herewith). |
|        |                                                     |   |
|        |                                                     | 32.2 | Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial  Officer - filed herewith). |
|        |                                                     |   |   |
|        |                                                     | (b) | Reports on Form 8-K |

 

### OnJanuary 13, 2004 the Company filed a Current Report on Form 8-K announcing thatthe Company has concluded that a restatement of a previously recorded transactionis required.

###  

### OnJanuary 30, 2004, the Company filed a Current Report on Form 8-K announcing anamendment to its Certificate of Incorporation increasing the number of sharesthe Company is authorized to issue from 25,000,000 shares to 40,000,000 shares.

 

16

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**MEDICSIGHT, INC. AND SUBSIDIARIES**

** **

**INDEX TO CONDENSED CONSOLIDATED FINANCIAL**

**STATEMENTS (UNAUDITED)**

**AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2004**

** **
| Condensed  Consolidated Balance Sheets as of March 31, 2004 (Unaudited) and  December 31, 2003 (Audited)                                                                       | F-2          |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|
|                                                                                                                                                                           |         |
| Condensed  Consolidated Statements of Operations for the Three Months Ended  March 31, 2004 (Unaudited) and the Three Months Ended March 31, 2003 (As  restated and unaudited) | F-3          |
|                                                                                                                                                                           |         |
| Condensed  Consolidated Statement of Cash Flows for the Three Months Ended  March 31, 2004 (Unaudited) and the Three Months Ended March 31, 2003 (As  restated and unaudited)  | F-4          |
|                                                                                                                                                                           |         |
| Notes  to Condensed Consolidated Financial Statements                                                                                                                          | F-5  to F-12 |

 

F-1

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In $ thousands)**

** **
|                                                                                                                                       |   | **March 31,  2004** |   | **December  31,2003** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|-----------------------|--------|
|                                                                                                                                       |   | **(unaudited)**     |   | **(audited)**         |   |
| ASSETS                                                                                                                                     |   |                |   |                  |   |
| CURRENT ASSETS:                                                                                                                            |   |                |   |                  |   |
| Cash and cash equivalents                                                                                                                  |   | $                   | 9,816  |                  | $      | 845 |   |
| Accounts receivable                                                                                                                        |   | 37                  |   | 33                    |   |
| Other receivables                                                                                                                          |   | 179                 |   | 123                   |   |
| Prepaid expenses                                                                                                                           |   | 407                 |   | 539                   |   |
| Sales tax receivable                                                                                                                       |   | 563                 |   | 604                   |   |
| Total current assets                                                                                                                       |   | 11,002              |   | 2,144                 |   |
|                                                                                                                                       |   |                |   |                  |   |
| PROPERTY AND EQUIPMENT, at cost, net of  accumulated depreciation of $1,671 and $1,480, respectively                                       |   | 2,973               |   | 3,033                 |   |
|                                                                                                                                       |   |                |   |                  |   |
| INVESTMENTS, at cost                                                                                                                       |   | 429                 |   | 429                   |   |
|                                                                                                                                       |   |                |   |                  |   |
| SECURITY DEPOSITS                                                                                                                          |   | 860                 |   | 843                   |   |
|                                                                                                                                       |   |                |   |                  |   |
| EXCESS OF PURCHASE PRICE OVER NET  ASSETS  ACQUIRED                                                                                   |   | 11,200              |   | 11,200                |   |
|                                                                                                                                       |   |                |   |                  |   |
| Total assets                                                                                                                               |   | $                   | 26,464 |                  | $      | 17,649 |   |
|                                                                                                                                       |   |                |   |                  |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                 |   |                |   |                  |   |
| CURRENT LIABILITIES:                                                                                                                       |   |                |   |                  |   |
| Accounts payable                                                                                                                           |   | $                   | 1,875  |                  | $      | 2,342 |   |
| Accrued expenses                                                                                                                           |   | 454                 |   | 700                   |   |
| Accrued professional expenses                                                                                                              |   | 333                 |   | 326                   |   |
| Bank overdraft                                                                                                                             |   | —              |   | 196                   |   |
| Line of credit – related party                                                                                                        |   | 2,377               |   | 2,880                 |   |
| Current portion of obligations under  capital leases                                                                                       |   | 100                 |   | 96                    |   |
| Total current liabilities                                                                                                                  |   | 5,139               |   | 6,540                 |   |
| CAPITAL LEASE                                                                                                                              |   | 289                 |   | 306                   |   |
| Total liabilities                                                                                                                          |   | $                   | 5,428  |                  | $      | 6,846 |   |
|                                                                                                                                       |   |                |   |                  |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                 |   |                |   |                  |   |
| Common stock, $0.001 par value, 40,000,000 shares  authorized, 29,615,338 and 24,488,858 shares issued and outstanding,  respectively |   | 30                  |   | 24                    |   |
| Additional paid-in capital                                                                                                                 |   | 187,717             |   | 173,810               |   |
| Cumulative foreign currency translation  adjustment                                                                                        |   | 291                 |   | 123                   |   |
| Accumulated deficit                                                                                                                        |   | (167,002            | )      | (163,468              | )      |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                                            |   | 21,036              |   | 10,489                |   |
| Minority interest                                                                                                                          |   | 0                   |   | 314                   |   |
|                                                                                                                                       |   | 21,036              |   | 10,803                |   |
| Total liabilities and stockholders’ equity                                                                                            |   | $                   | 26,464 |                  | $      | 17,649 |   |

 

The accompanying notes are an integral part of these condensedstatements.

 

F-2

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(In $ thousands, except per share amounts)**

** **
|                                                  |   | **Three  Months  Ended  March 31, 2004** |   | **Three  Months  Ended  March 31, 2003**  |   |
|-------------------------------------------------------|--------|------------------------------------------|--------|-------------------------------------------|--------|
|                                                  |   | **(unaudited)**                          |   | **(as  restated and  unaudited)  Note 3** |   |
|                                                  |   |                                     |   |                                      |   |
| REVENUES                                              |   | $                                        | 152    |                                      | $      | 9 |   |
|                                                  |   |                                     |   |                                      |   |
| EXPENSES:                                             |   |                                     |   |                                      |   |
| Selling, general and administrative charges           |   | 3,151                                    |   | 1,929                                     |   |
| Research and development cost                         |   | 669                                      |   | 469                                       |   |
|                                                  |   |                                     |   |                                      |   |
|                                                  |   | 3,820                                    |   | 2,398                                     |   |
|                                                  |   |                                     |   |                                      |   |
| Net Loss before minority interest                     |   | (3,668                                   | )      | (2,389                                    | )      |
|                                                  |   |                                     |   |                                      |   |
| MINORITY INTEREST                                     |   | 134                                      |   | 289                                       |   |
|                                                  |   |                                     |   |                                      |   |
| Net loss                                              |   | $                                        | (3,534 | )                                         | $      | (2,100 | ) |
|                                                  |   |                                     |   |                                      |   |
| PER SHARE DATA:                                       |   |                                     |   |                                      |   |
| Basic and diluted loss per share                      |   | $                                        | (0.13  | )                                         | $      | (0.10 | ) |
|                                                  |   |                                     |   |                                      |   |
| Weighted average number of common shares  outstanding |   | 26,461,309                               |   | 21,154,874                                |   |

 

The accompanying notes are anintegral part of these condensed****statements.

 

F-3

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW**

**(In $thousands)**

** **
|                                                                        |   | **Three  Months  Ended  March 31, 2004** |   | **Three  Months  Ended  March 31, 2003**  |   |
|-----------------------------------------------------------------------------|--------|------------------------------------------|--------|-------------------------------------------|--------|
|                                                                        |   | **(unaudited)**                          |   | **(as  restated and  unaudited)  Note 3** |   |
|                                                                        |   |                                     |   |                                      |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                       |   |                                     |   |                                      |   |
| Net loss                                                                    |   | $                                        | (3,534 | )                                         | $      | (2,100 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities |   |                                     |   |                                      |   |
| Depreciation                                                                |   | 191                                      |   | 113                                       |   |
| Minority interest in net loss of subsidiary                                 |   | (134                                     | )      | (289                                      | )      |
| (Increase)/decrease in assets                                               |   |                                     |   |                                      |   |
| Accounts receivable                                                         |   | (4                                       | )      | (3                                        | )      |
| Prepaid expenses and other current assets                                   |   | (56                                      | )      | (79                                       | )      |
| Sales tax receivable                                                        |   | 132                                      |   | (33                                       | )      |
| Security deposits                                                           |   | —                                   |   | (743                                      | )      |
| Increase/(decrease) in liabilities                                          |   |                                     |   |                                      |   |
| Accounts payable                                                            |   | (521                                     | )      | (166                                      | )      |
| Accrued expenses                                                            |   | (246                                     | )      | (9                                        | )      |
| Accrued professional expenses                                               |   | 7                                        |   | —                                    |   |
| Net cash used in operating activities                                       |   | (4,165                                   | )      | (3,309                                    | )      |
|                                                                        |   |                                     |   |                                      |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                       |   |                                     |   |                                      |   |
| Purchase of fixed assets                                                    |   | (45                                      | )      | (576                                      | )      |
| Net cash used in investing activities                                       |   | (45                                      | )      | (576                                      | )      |
|                                                                        |   |                                     |   |                                      |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                       |   |                                     |   |                                      |   |
| Principal payments under capital lease  obligations                         |   | (18                                      | )      | (9                                        | )      |
| Decrease of bank overdraft                                                  |   | (196                                     | )      | —                                    |   |
| Proceeds from sale of common stock                                          |   | 13,907                                   |   | —                                    |   |
| Proceeds from sale of MS-PLC common stock                                   |   | —                                   |   | 78                                        |   |
| (Decrease)/increase in short term debt –  related party                |   | (503                                     | )      | 2,122                                     |   |
| Net cash provided by financing activities                                   |   | 13,190                                   |   | 2,191                                     |   |
|                                                                        |   |                                     |   |                                      |   |
| Effects of exchange rates on cash and cash  equivalent                      |   | (9                                       | )      | 59                                        |   |
|                                                                        |   |                                     |   |                                      |   |
| NET CHANGE IN CASH & CASH EQUIVALENTS                                   |   | 8,971                                    |   | (1,635                                    | )      |
|                                                                        |   |                                     |   |                                      |   |
| CASH & CASH EQUIVALENTS, BEGINNING OF  PERIOD                           |   | 845                                      |   | 1,778                                     |   |
|                                                                        |   |                                     |   |                                      |   |
| CASH & CASH EQUIVALENTS, END OF PERIOD                                  |   | $                                        | 9,816  |                                      | $      | 143 |   |
|                                                                        |   |                                     |   |                                      |   |
| NON CASH FINANCING ACTIVITIES                                               |   |                                     |   |                                      |   |
| Capital lease obligations for equipment                                     |   | —                                   |   | —                                    |   |

 

The accompanying notes are an integral part of these****condensed statements.

 

F-4

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

*(1)**                              **Formation and Business ofthe Company*

 

Medicsight,Inc. (formerly HTTP Technology, Inc.) and its subsidiaries are collectivelyreferred to in this Report as the “Company”. Our business objective is to conceive, develop and commercializeinnovative medical applications derived from our core technology through ourmajority-owned subsidiary, Medicsight PLC (“MS-PLC”).

 

Wewere originally incorporated as a Utah corporation in 1977. On December 19,2000, we entered into an Agreement and Plan of Merger with our wholly-ownedsubsidiary HTTP Technology, Inc., a Delaware corporation, and thereby effecteda re-incorporation of the company from Utah to Delaware. All references in thisAnnual Report to  “the Company”, “we” or“us” refer to Medicsight, Inc., the Delaware corporation and subsidiaries, ifthe event occurred on or after December 19, 2000 or to HTTP Technology, Inc.,the Utah corporation and subsidiaries, if the event occurred prior to December19, 2000.

 

Ourbusiness is focused solely on the medical imaging applications derived from ourcore technology.  We have concluded theprocess of incorporating all research, software development, and management andmarketing activities related to our medical imaging initiatives into MS-PLC. InNovember 2001 assets were transferred from our other subsidiaries to MS-PLC andthe costs incurred on the development of the MedicsightTM system(our state-of-the-art digital disease detection software system comprisingMedicColonTM, MedicHeartTM, and MedicLungTM)were reimbursed and assigned by way of a loan note from MS-PLC.  The amount of the loan note to Medicsight,Inc. was £3,659,104, and this loan note was converted into 57,868,582 ordinaryshares of MS-PLC issued to the Company and 15,000,000 ordinary shares of MS-PLCissued to the former parent of Insights in November 2001.

 

*(2)**                              **Basis of Presentation*

 

Theaccompanying unaudited consolidated financial statements of the Company havebeen prepared pursuant to the rules of the Securities and Exchange Commission(the “SEC”). Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples in the United States have been condensed or omitted pursuant to suchrules and regulations. These unaudited consolidated financial statements shouldbe read in conjunction with the audited consolidated financial statements andnotes thereto included in the Company’s Annual Report on Form 10-K for theFiscal years ended December 31, 2003, 2002 (restated), 2001 (restated) filed onApril 8, 2004. In the opinion of management, the accompanying unauditedconsolidated financial statements reflect all adjustments, which are of anormal recurring nature, necessary for a fair presentation of the results forthe periods presented. All significant inter-company transactions have beeneliminated in consolidation.

 

Theresults of operations presented for the three months ended March 31, 2004, arenot necessarily indicative of the results to be expected for any other interimperiod or any future fiscal year.

 

TheCompany has incurred significant operating losses since inception.  As a result, the Company has generatednegative cash flows from operations, and has an accumulated deficit at March31, 2004.  The Company 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.  The Company is currently seeking additionalfunding and are actively developing the technology in order to bring it tomarket.  While the Company is optimisticand believes appropriate actions are being taken, there can be no assurance,however, that the management’s efforts will be successful or that the productsit markets will be accepted by consumers.

 

F-5

----

 

*(3)**                              **Restatement of financialstatements*

 

DuringFiscal 2003, the Company identified certain errors in its previously issuedquarterly financial statements relating to the impairment of an intangibleassets and the Company also revised its treatment of software development costsin the third quarter of Fiscal 2003.

 

Asa result, the Company has restated its previously issued financial statementsfor the quarter ended March 31, 2003.  Asummary of the significant effects of the restatements is set forth below.

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 
|                                                  |   | **Three  months ended  March 31, 2003** |   | **Three  months ended  March 31, 2003** |   |
|-------------------------------------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|
|                                                  |   | **(as  previously reported)**           |   | **(as  restated)**                      |   |
|                                                  |   | **$000’s**                         |   | **$000’s**                         |   |
|                                                  |   |                                    |   |                                    |   |
| REVENUES                                              |   | $                                       | 9      |                                    | $      | 9 |   |
|                                                  |   |                                    |   |                                    |   |
| EXPENSES:                                             |   |                                    |   |                                    |   |
| Selling, general and administrative charges           |   | 2,976                                   |   | 1,929                                   |   |
| Research and development cost                         |   | —                                  |   | 469                                     |   |
|                                                  |   | 2,976                                   |   | 2,398                                   |   |
|                                                  |   |                                    |   |                                    |   |
| Net loss before minority interest                     |   | (2,967                                  | )      | (2,389                                  | )      |
|                                                  |   |                                    |   |                                    |   |
| MINORITY INTEREST                                     |   | 289                                     |   | 289                                     |   |
|                                                  |   |                                    |   |                                    |   |
| Net loss                                              |   | $                                       | (2,678 | )                                       | $      | (2,100 | ) |
| PER SHARE DATA:                                       |   |                                    |   |                                    |   |
| Basic and diluted loss per share                      |   | $                                       | (0.13  | )                                       | $      | (0.10 | ) |
| Weighted average number of common shares  outstanding |   | 21,154,874                              |   | 21,154,874                              |   |

 

F-6

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**MEDICSIGHT, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW**

 
|                                                                        |   | **Three  months ended  March 31, 2003** |   | **Three  months ended  March 31, 2003** |   |
|-----------------------------------------------------------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|
|                                                                        |   | **(as  previously reported)**           |   | **(as  restated)**                      |   |
|                                                                        |   | **$000’s**                         |   | **$000’s**                         |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                       |   |                                    |   |                                    |   |
| Net loss                                                                    |   | $                                       | (2,678 | )                                       | $      | (2,100 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities |   |                                    |   |                                    |   |
| Depreciation                                                                |   | 113                                     |   | 113                                     |   |
| Amortization of intangibles                                                 |   | 1,123                                   |   | —                                  |   |
| Minority interest in net loss of subsidiary                                 |   | (289                                    | )      | (289                                    | )      |
| (Increase)/decrease in assets                                               |   |                                    |   |                                    |   |
| Accounts receivable                                                         |   | (3                                      | )      | (3                                      | )      |
| Prepayments                                                                 |   | (79                                     | )      | (79                                     | )      |
| VAT receivable                                                              |   | (33                                     | )      | (33                                     | )      |
| Security deposits                                                           |   | (743                                    | )      | (743                                    | )      |
| Increase/(decrease) in liabilities                                          |   |                                    |   |                                    |   |
| Accounts payable                                                            |   | (166                                    | )      | (166                                    | )      |
| Accrued expenses                                                            |   | (9                                      | )      | (9                                      | )      |
| Accrued professional expenses                                               |   | —                                  |   | —                                  |   |
| Net cash used in operating activities                                       |   | (2,764                                  | )      | (3,309                                  | )      |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                       |   |                                    |   |                                    |   |
| Purchase of fixed assets                                                    |   | (576                                    | )      | (576                                    | )      |
| Software development costs                                                  |   | (545                                    | )      | —                                  |   |
| Net cash used in investing activities                                       |   | (1,121                                  | )      | (576                                    | )      |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                       |   |                                    |   |                                    |   |
| Principal payments under capital lease  obligations                         |   | (9                                      | )      | (9                                      | )      |
| Proceeds from MS-PLC sale of common stock                                   |   | 78                                      |   | 78                                      |   |
| Increase in short term debt – related party                            |   | 2,122                                   |   | 2,122                                   |   |
| Net cash provided by financing activities                                   |   | 2,191                                   |   | 2,191                                   |   |
|                                                                        |   |                                    |   |                                    |   |
| Effects of exchange rates on cash and cash  equivalents                     |   | 59                                      |   | 59                                      |   |
|                                                                        |   |                                    |   |                                    |   |
| NET CHANGE IN CASH & CASH EQUIVALENTS                                   |   | $                                       | (1,635 | )                                       | $      | (1,635 | ) |
| CASH & CASH EQUIVALENTS, BEGINNING OF  PERIOD                           |   | 1,778                                   |   | 1,778                                   |   |
|                                                                        |   |                                    |   |                                    |   |
| CASH & CASH EQUIVALENTS, END OF PERIOD                                  |   | $                                       | 143    |                                    | $      | 143 |   |

 

F-7

----

 

March 31, 2003

 

*Research and Development*.

 

Duringthe first six months of Fiscal 2003, in accordance with Statement of FinancialAccounting Standards (FAS) 86, *Accountingfor the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed*,the Company capitalized certain computer software development costs. Technicalfeasibility was established on completion of working models for MedicHeart,MedicLung and MedicColon software products in January 2003. Subsequently, theCompany capitalized costs of $545,000 in the three months ended March 31, 2003under FAS 86. These costs capitalized comprised staff, consultants, regulatoryand clinical trial costs specific to the three products.

 

Subsequentlythe Company decided that this accounting treatment was inappropriate because ofthe difficulty in assigning costs accurately to the various software productsand versions being developed as technical and development staff are moved fromproduct to product and version to version on a regular basis. The Company hasdecided to expend all research and development costs in Fiscal 2003. TheCompany’s research and development costs of $469,000 are comprised of staff andconsultancy costs expensed on the MedicsightTM system. The regulatory andclinical trial charges of $76,000 are expensed in “Selling, general andadministrative charges”.

 

*Depreciation and Amortization Expense.*

 

DuringFiscal 2000, the Company acquired an intangible asset from the former parent ofInsights consisting of technology valued at $22,470,000. Under SFAS No.142,this is considered an intangible asset with a definite life of 5 years.Therefore the value of the asset was amortized on a straight-line basis overthis period*.*

 

TheCompany 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. During the third quarter of 2003 the Company reviewed the carrying valueof the core technology acquired from Insights and decided that the coretechnology should be fully impaired. This was based on the view that there were no further softwareapplications apart from the medical imaging applications currently beingdeveloped that could be derived from the core technology. The Company furtherdecided that the impairment should be recorded as at December 31, 2002. In thethree months ended March 31, 2003 the Company had an amortization charge of$1,123,000 expensed in “Selling, general and administrative charges” relatingto the fully impaired technology which is no longer applicable.

 

*(4)**                              **Lines of Credit*

 

OnDecember 15, 2000, the Company entered into an unsecured credit facility withAsia IT, which provides a $20,000,000 line of credit. Such line of creditoriginally expired on December 31, 2001, but has been extended until June 30,2005. Interest on advances under the credit facility accrues at 2% above USLIBOR. 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 would be reduced upon the Company’s sale ofany of its investment assets. The amounts drawn and interest charged under thisfacility are repayable on demand or at the maturity of the facility.

 

OnNovember 20, 2001, MS-PLC entered into a £10,000,000 ($16,000,000) creditfacility with Asia IT.  Such facilitymatures in November 2005 and is secured by a lien on all assets ofMedicsight.  Interest on outstandingamounts accrues at 2% above GBP LIBOR. Pursuant to such credit facility, MS-PLC had

 

F-8

----

 

covenantedto undertake a public offering of its ordinary shares in an amount not lessthan £25,000,000 not later than March 2002. MS-PLC did not complete such an offering but the facility neverthelessremains in place. The loan is convertible into ordinary shares in MS-PLC onannouncement of an Offer to Subscribe, Placing or other public offering of itsordinary shares, at the same price per share as the offering price. Due to theprivate offering being undertaken by MS-PLC, the loan is currently convertible.

 

AtMarch 31, 2004, the Company had drawn down $2,377,000 under the $20,000,000facility with Asia IT, and MS-PLC had drawn down $nil under its £10,000,000($16,000,000) facility with Asia IT.

 

*(5)**                              **Stockholders’ Equity*

 

OnDecember 30, 2002, the Company effected a 1-for-3 reverse split (the “Split”)of its Common Stock.  As such, all shareand per share information in the accompanying financial statements have beenrestated to reflect the Split. On January 27, 2004 the Company increased itsauthorized share capital from 25,000,000 shares to 40,000,000 shares.

 

Duringthe quarter ended March 31, 2004 the Company issued approximately 5,126,000restricted shares of stock raising $13.9m as part of a private placement.

 

*(6)**                              **Accounting for Stock BasedCompensation*

 

OnMarch 20, 2003, the Board of Directors of MS-PLC approved a stock option planfor its employees and reserved 4,000,000 shares of its common stock forissuance upon exercise of options granted under this plan. On April 19, 2003,the Remuneration Committee of MS-PLC also approved the stock option plan andimplemented it on April 30, 2003 by issuing options over 2,828,600 shares toemployees of MS-PLC. At March 31, 2004 only 20% of the options issued wereexercisable under the plan.

 

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. SFAS No. 123, as amended by SFAS No. 148,requires disclosure of pro forma income and pro forma income per share as ifthe fair value based method had been applied in measuring compensation expense.

 
|                                           |   | **Three  Months  Ended  March 31, 2004** |   | **Three  Months  Ended  March 31, 2003** |   |
|------------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|
|                                           |   | **(unaudited)  $’000**              |   | **(as  restated and  unaudited)**        |   |
|                                           |   |                                     |   | **$’000**                           |   |
| Net loss as reported:                          |   | (3,534                                   | )      | (2,100                                   | )      |
|                                           |   |                                     |   |                                     |   |
| Fair value method of stock based  compensation |   | (22                                      | )      | —                                   |   |
|                                           |   |                                     |   |                                     |   |
| Proforma net loss                              |   | (3,556                                   | )      | (2,100                                   | )      |
|                                           |   |                                     |   |                                     |   |
| Reported earnings per common share             |   |                                     |   |                                     |   |
| Basic and diluted                              |   | (0.13                                    | )      | (0.10                                    | )      |
| Proforma earnings per common share             |   |                                     |   |                                     |   |
| Basic and diluted                              |   | (0.13                                    | )      | (0.10                                    | )      |

 

F-9

----

 

Thefair values of options granted were determined under the intrinsic value methodfor expense determined under the fair value based method, net of related taxeffects.

 

*(7)**                              **Goodwill and OtherIntangible Assets*

 

Goodwill

 

TheCompany adopted SFAS No. 142 effective January 1, 2002. Under this standard,goodwill will no longer be amortized over its estimated useful life, but willbe tested for impairment on an annual basis and whenever indicators ofimpairment arise.

 

TheGoodwill of $11,200,000 arose from the fair value attributable to the shareswap with General Nominees and Asia IT Nominees whereby the Company issued1,866,666 shares to General Nominees (1,674,894 shares) and Asia IT Nominees(191,772 shares) in return for 7,000,000 MS-PLC shares held by General Nominees(6,280,852 shares) and Asia IT Nominees (719,148 shares) respectively.

 

Priorto January 1, 2002, goodwill was amortized on a straight-line basis over 5years.

 

*(8)**                              **Security Deposits*

 

AsMS-PLC occupies approximately 95% of 46 Berkeley Square it acquired thesecurity deposit on the offices for cash from International Cellulose CompanyLtd in February 2003. The value of the security deposit is £470,000 ($781,000)and is interest-bearing.

 

*(9)**                              **Lease Commitments*

 

TheCompany has entered into property leases for the Westminster and Ravenscourt centers.Future minimum obligations under these lease arrangements are as follows:

 

| **For the 12 months ending  March 31,** |   | **Property  Leases** |   |
|-----------------------------------------|--------|----------------------|--------|
|                                    |   | **($’000)**     |   |
| 2004                                    |   | 492                  |   |
| 2005                                    |   | 505                  |   |
| 2006                                    |   | 509                  |   |
| 2007                                    |   | 417                  |   |
| 2008 and thereafter                     |   | 162                  |   |

 

*(10)**                       **Major Customers*

 

TheCompany’s revenue in the three months ended March 31, 2004 and 2003 was derivedfrom the Company’s LifesyneTM scanning operations.

 

*(11)**                       **Comprehensive Income*

 

Asof March 31, 2004 and 2003 and the quarter then ended, comprehensive income iscomprised of a net loss from operations and the net effect of foreign currencytranslation adjustments. This comprised a net loss of $3,534,000 and $2,100,000and foreign currency translation adjustments of $(168,000) and $(82,000),resulting in comprehensive loss of  $3,366,000and $2,018,000, respectively.

 

F-10

----

 

*(12)        RecentAccounting Pronouncements*

 

InJanuary 2003, the FASB issued Interpretation No. 46, “Consolidation of VariableInterest Entities” (FIN No. 46), which addresses consolidation by businessenterprises of variable interest entities (“VIEs”).   FIN No.46 is applicable immediately for VIEs created afterJanuary 31, 2003 and are effective for reporting periods ending after December15, 2003, for VIEs created prior to February 1, 2003. In December 2003, theFASB published a revision to FIN 46 (“FIN 46R”) to clarify some of theprovisions of the interpretation and to defer the effective date ofimplementation for certain entities. Under the guidance of FIN 46R, publiccompanies that have interests in VIE’s that are commonly referred to as specialpurpose entities are required to applythe provisions of FIN 46R for periodsending after December 15*,*2003. Apublic company that does not have any interests in special purpose entities butdoes have a variable interest in a VIE created before February 1, 2003, mustapply the provisions of FIN 46R by the end of the first interim or annualreporting period ending after March 14, 2004. The adoption of FIN No. 46 didnot have an effect on the consolidated financial statements.

 

F-11

----

 

SIGNATURE

 

Inaccordance with the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 

 
|   | MEDICSIGHT,  INC. |
|--------|-------------------|
|   |              |
|   | By:               | /s/  Stephen  Forsyth |   |
|   |              | Stephen  Forsyth |
|   |              | Chief  Executive Officer |
|   |              |   |
|   | By:               | /s/  Paul  Gothard |   |
|   |              | Paul  Gothard |
|   |              | Chief  Financial Officer |

 

 

May 13, 2004

 

F-12

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