| **UNITED  STATES  SECURITIES AND EXCHANGE COMMISSION** |   | OMB  APPROVAL                                         |
|--------------------------------------------------------|--------|-------------------------------------------------------|
| OMB Number: 3235-0416                                  |
| **Washington, D.C. 20549**                             |   | Expires: April  30, 2003                              |
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|                                                        |   |
| **FORM 10-Q**                                          |   |                                                  |

 

 

**(MarkOne)**

 
|   | ý | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | **For the quarterly period ended June 30, 2003**                                                                                                                                                  |
|   |   |                                                                                                                                                                                              |
|   | o      | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                     |
|   |   | **For the transition period  from             to             ** |

 

**Commission filenumber   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)**                          |
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| **(Former name, former address and  former fiscal year, if changed since last report)** |

 

Indicate by check whether the registrant: (1)has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 daysYes       ý        No         o

 

Indicate by check whether the registrant isan accelerated filer (as defined in Rule 12b-2 of the Exchange Act): Yes       o        No         ý

 

**APPLICABLE ONLY TO ISSUERS INVOLVED INBANKRUPTCYPROCEEDINGS DURING THE PRECEDING FIVE YEARS**

 

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

 

**APPLICABLE ONLY TO CORPORATE ISSUERS**

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date:  As of July 31,2003:  21,155,189 shares of CommonStock, par value $0.001 per share.

 

 

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**PART I**

# **FINANCIALINFORMATION**

 

**Item 1.****                       FinancialStatements**

 

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 June 30, 2003 are attached to this Report, commencing at page F-1.

 

**Item 2.****                       Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**NOTEREGARDING FORWARD LOOKING STATEMENTS**

** **

Some of thestatements in this Quarterly Report are forward-looking statements within themeaning of the federal securities laws. Generally forward-looking statementscan be identified by the use of terms like “believe,” “may,” “will,” “expect,”“anticipate,” “plan,” “hope” and similar words, although this is not a completelist and we may express some forward-looking statements differently.Discussions relating to our plan of operation, our business strategy and ourcompetition, among others, contain such statements. Actual results may differmaterially from those contained in our forward-looking statements for a varietyof reasons. We have based these forward-looking statements on our currentexpectations and projections about future events.  These forward-looking statements are subject to risks,uncertainties and assumptions about the Company, discussed elsewhere in thisReport.

 

We undertakeno obligation to update publicly or revise any forward-looking statements,whether as a result of new information, future events or otherwise.  In light of these risks, uncertainties andassumptions, the forward-looking events contained or incorporated by referencein this Prospectus might not occur.

 

The Company’smain operating currency is UK sterling (£).

 

**BACKGROUND**

** **

Medicsight, Inc.was originally incorporated as a Utah corporation in 1977. On December 19,2000, the Company entered into an Agreement and Plan of Merger with itswholly-owned subsidiary HTTP Technology, Inc., a Delaware corporation, andthereby effected a re-incorporation of the Company from Utah to Delaware. Allreferences in this Report to “the Company” refer to Medicsight, Inc., theDelaware corporation, if the event occurred on or after December 19, 2000or to HTTP Technology, Inc., the Utah corporation, if the event occurred priorto December 19, 2000. On October 28, 2002, the Company’s name was changedfrom HTTP Technology, Inc. to Medicsight, Inc. On July 31, 2003 the Companyreduced its authorized share capital from 100,000,000 shares to 25,000,000shares.

 

The Company maintains its corporate offices at 46 Berkeley Square,London, W1J 5AT, United Kingdom, telephone +44 (0) 207-598-4070,facsimile: +44 (0) 207-598-4071, Internet address:http://www.medicsight.com.

 

**BUSINESSSTRATEGY**

 

We aredevelopers of software technology for medical diagnostic applications and providemedical diagnostic services in differing business models. We have fourprincipal operating subsidiaries: Medicsight PLC (“MS-PLC”), Medicsight AssetManagement Limited (“MAM”), Lifesyne UK Limited (“Lifesyne UK”) and LifesyneUS, Inc (“Lifesyne US”). HTTP Insights Ltd (“Insights”) and HTTP Software PLC(“Software”), formerly subsidiaries of the Company, were sold to independentthird parties during the fourth quarter of 2002.

 

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*MS-PLC.*  Our majority-owned subsidiary, MS-PLC, iscurrently engaged in commercializing a state-of-the-art digital expertrecognition software system for digital data derived from medical imaginghardware. At June 30, 2003, the Company owned 67,127,300 ordinary shares in MS-PLC,constituting 83.3% of the outstanding shares. MS-PLC undertook a privateoffering outside the United States of an additional 6,131,398 ordinary shares,which was closed on December 31, 2002. As part of this offering, inDecember 2002 we acquired a further 1,258,718 shares in MS-PLC for £1,258,718($ 2,014,000). On December 23, 2002, we entered into a share swap withGeneral Nominees and Asia IT Nominees whereby the Company issued 1,866,666shares to General Nominees (1,674,894 shares) and Asia IT Nominees (191,772shares) 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. In thesix months to June 30, 2003 MS-PLC issued a further 595,000 shares toindependent third parties at approximately $1.60 per share.

 

*Lifesyne UK and Lifesyne US.*  Lifesyne UK and US are wholly ownedsubsidiaries of MS-PLC that were established in September 2002 and June2003 respectively for the purpose of providing branded CT scanning operatingentities for the United Kingdom and United States markets.

 

*MAM.*  MAM is also a wholly owned subsidiary ofMS-PLC that was established in September 2002 for the purpose of acquiringfixed assets on behalf of the operating entities in the group. MAM will negotiateand acquire equipment and fund leasehold improvements and development, which inturn will be leased to the relevant operating entity.

 

Werestructured our business in 2001 to focus on the medical imaging applicationsderived from our core technology. We have concluded the process ofincorporating research, software development, management and marketingactivities related to our medical imaging initiatives into MS-PLC. InNovember 2001, assets were transferred from our other subsidiaries toMS-PLC and the costs incurred on the development of the MedicsightTM system (ourexpert recognition software system for the analysis of digital data derivedfrom medical imaging hardware) were reimbursed and assigned by way of a loannote 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 ordinary shares ofMS-PLC issued to the Company and 15,000,000 ordinary shares of MS-PLC issued tothe former parent of Insights in November 2001.

 

It is now widelyaccepted that the most effective way to achieve early detection of theprincipal deadly diseases is through radiological scanning. The MedicsightTMsystem analyzes digital data from the new generation of multi-slice computedtomography (“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 accurateand reliable scan analysis;

 

•                  provide aservice that will be significantly cheaper than at present as it reduces theburden on radiologists who in current practice account for a significantproportion of the scan cost; and

 

•                  allowsignificant patient volume to be achieved because the analysis is semiautomated and scanning volumes are not then constrained by the finite number ofradiologists.

 

The stepchange in technology that increases the potential of the MedicsightTM system isthe 16 detector CT scanner. This allows sub-millimeter cross-sectional slicesto be captured with increased speed and reduced radiological dose when comparedwith traditional single slice machines. This can provide over 600 images

 

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of the chestinstead of 30-60 for single slice scanners. The amount of detail now available,while enabling early detection of smaller nodules and areas of calcification,increases the time required for analysis by radiologists. Therefore theautomation of scan analysis is essential. MS-PLC has identified GE MedicalSystems, part of the General Electric Company of America, as a supplier of thenew 16 detector CT scanners.

 

We are nowsupported by some of the most prominent names in European medicine. TheCompany’s Medical Board has been substantially expanded to include threeSpecialist Boards, each consisting of recognized authorities in the fields ofheart, lung and colon, bringing a significant level of expertise to thedevelopment of our products and services.

 

We intend toestablish a number of service centers to provide a referral-only service forthe early detection of coronary heart disease, lung and colorectal cancer.Referring medical practitioners will send high-risk individuals or thosedisplaying non-specific signs of ill health to the center for a specific scan.No self-referrals will be accepted. MS-PLC will operate its new scanningcenters under the LifesyneTM brand name. The first LifesyneTM center was commissionedin the fourth quarter of 2002 and was followed by the scanning of our firsttarget group at the end of Fiscal 2002. This center currently scans primarilyfor the earliest signs of heart disease and lung cancer. The center is locatedin West London within the Hammersmith Hospitals NHS Trust (“NHS Trust”). Thesecond development phase was completed in February 2003. This phase includedthe creation of private pre-scan rooms for the recording of patientinformation, providing customer changing facilities as well as containingpatient video education films and information related to the health andwell-being of our customers.  This feature will also be available inall future LifesyneTM Centers.   The Center has now been fullybranded as LifesyneTM and has begun to generate revenues from scanning services.

 

It isMedicsight’s intention to establish two further LifesyneTM centers within thecoming months and lease negotiations are concluding in The City of London andManchester. In addition our flagship center in Westminster, London is expectedto open in September 2003. The success of LifesyneTM is largely dependent uponthe effective implementation of its strategic marketing plan.  A number of strategic programs have been launched,all of which are supported by an integrated promotions campaign.  These programs include a series of directmailings to over 2,000 clinicians within the London area to introduce them tothe Company and its services, and advertisements in target medicaljournals.  The Company has recentlycompleted recruitment of a medical sales force for London.  These people comprise primary and secondaryhealthcare specialists who will call on doctors in London to provide them witheducation and information about scan analysis while promoting Lifesyne’sservices.

 

Thecharacteristics of markets around the world directly affect how MS-PLC willcommercialize its technology. In the UK there is a shortage of diagnosticimaging capacity and under-investment in the health system. The vast majorityof all diagnostic procedures are carried out in a hospital environment makingthem inefficient, inconvenient and costly. It is therefore commerciallyattractive and necessary to establish owned and operated diagnostic centers.However, in the United States and Western Europe, many diagnostic proceduresalready take place outside of a hospital environment and are carried out inprivately owned clinics or diagnostic imaging centers. For these markets, it isunnecessary for LifesyneTM to establish new operating units, which would ineffect compete with the existing market. Therefore, MS-PLC anticipates that itwill create licensees or franchises to achieve rapid penetration of the marketat lower capital expenditure and risk.

 

Operationaland development costs for Fiscal 2003 are estimated at approximately$8.5 million. MS-PLC has raised approximately $8.8 million duringFiscal 2002 by way of a private placement of 6.1 million shares (of whichthe Company has purchased 1,258,718 shares for consideration of $2 million)which was underwritten by Asia IT Capital Investments Limited (“Asia IT”).Additionally, MS-PLC has entered into a £10.0 million (approximately$16.0 million) secured credit facility with Asia IT that ceases inNovember 2004. MS-PLC expects to become financially self-sufficient during2004.

 

Besides theCompany-operated LifesyneTM scanning centers in the United Kingdom, we willoperate partnerships with industry leaders to achieve rapid market penetrationacross our target regions.

 

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MS-PLC’s progressin the UK market is vital to the early success of the Company’s business.  However, the largest market opportunity isin the United States.  With this inmind, the Company is concluding negotiations with a university-affiliatedmedical center to open the first US LifesyneTM center within their environs bythe end of this year.  This physical presence and endorsement in the US isdesigned to promote the LifesyneTM concept and the MedicsightTM system as onelicense package.

 

Revenuestreams for the MedicsightTM system are expected to include scan analysis feesand license fees. However, we have yet to derive any revenue from theMedicsightTM system. We cannot assure you that MS-PLC will be successful incommercializing the MedicsightTM system, or if such system is commercialized,that its use will be profitable to MS-PLC. We face obstacles in commercializingour core technology and in generating operating revenues such as, but notlimited to, successful development, testing of and gaining regulatory approval forthe technology.

 

MS-PLC doesnot believe that there is currently any direct comparative competition to theMedicsightTM system. There are computer-aided diagnostic systems that work inthe field, but, in our view, such existing systems are overly dependent onhuman resources to carry out the analysis, as none have the capability of theMedicsightTM system.

 

The Companyhas had only a limited operating history upon which an evaluation of itsprospects can be made. The Company’s prospects must be considered keeping inmind 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.

 

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

 

*Technical Risks.*  The MedicsightTM system may not deliver thelevels of accuracy and reliability needed, or the development of such accuracyand reliability may be delayed.

 

*Market Risks.*  The market for the MedicsightTM system may beslower to develop or smaller than estimated or it may be more difficult tobuild the market than anticipated. The medical community may resist theMedicsightTM system or be slower to accept it than we expect. Revenues from theLifesyneTM scanning centers and the licensing of the MedicsightTM system may bedelayed or costs may be higher than expected which may result in the Companyrequiring additional funding.

 

*Regulatory Risks.*  The MedicsightTM system is subject toregulatory requirements in both the United States and Europe. Approval may bedelayed or incur additional cost to the MedicsightTM system.

 

*Competitive Risks.*  There are a number of organizations, such assoftware companies in the medical imaging field and scanner manufacturers thathave an interest in developing a competitive offering to the MedicsightTMsystem. We cannot make any assurance that they will not attempt to develop suchofferings, that they will not be successful in developing such offerings orthat any offerings they do successfully develop will not have a competitiveedge versus the MedicsightTM system.

 

**RESULTSOF OPERATIONS**

 

*Revenues.* For thesix months ended June 30, 2003 and the six months ended June 30, 2002, theCompany’s gross revenues from operations were $54,000 and $37,000,respectively.  For the quarter endedJune 30, 2003 and the quarter ended June 30, 2002, the Company’s gross revenuesfrom operations were $44,000 and $21,000, respectively.  The Company’s revenue in the six months andquarter ended June 30, 2003 was derived from the Company’s LifesyneTM scanningoperations. The Company’s revenue in the six months

 

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and quarterended June 30, 2002 was derived from the Company’s consulting activitiesprovided by Software.

 

*Research and Development*.  The Company’s research and developmentexpenses for the six months and quarter ended June 30, 2003 were $nil and $nilrespectively as compared to $554,000 and $355,000 for the six months andquarter ended June 30, 2002 respectively. In Fiscal 2003, in accordance withStatement of Financial Accounting Standards (FAS) 86, *Accounting for the Costs of ComputerSoftware to be Sold, Leased, or Otherwise Marketed*, the Companycapitalized certain computer software development costs.  Technical feasibility was established oncompletion of working models for MedicHeart, MedicLung and MedicColon softwareproducts in January 2003. Subsequently, the Company capitalized costs of$1,249,000 under FAS 86. These costs capitalised comprise staff, consultants,regulatory and clinical trial costs specific to the three products. In Fiscal2002, the Company’s research and development costs were comprised of staff andconsultancy costs expensed on the MedicsightTM system.

 

*Selling, General and Administrative Expenses.*  The Company’s selling, general andadministrative expenses for the six months and quarter ended June 30, 2003,were $6,569,000 and $3,592,000 respectively as compared to $4,977,000 and$2,609,000 for the six months and quarter ended June 30, 2002.  Professional fees, including consultingservices, were $568,000 and $188,000 for the six months and quarter ended June30, 2003 respectively as compared to $669,000 and $426,000 respectively for thesix months and quarter ended June 30, 2002. Also included in the six months andquarter ended June 30, 2003 were salaries and directors’ compensation(including sub-contractors) of $1,762,000 and $1,198,000, service charges andrates for property leasing of $267,000 and $130,000, and rent of $316,000 and$149,000 respectively.  The primarycomponents of the increased selling, general and administrative expenses forthe six months and quarter ended June 30, 2003 was an increase in staff cost(including directors and sub-contractors) of $400,000 and $406,000 respectivelyand marketing costs of $338,000 and $233,000 respectively as the Companyinitiated its various marketing strategies. Staff cost (including directors and sub-contractors) amounted to$1,362,000 and $792,000 respectively in the six months and quarter ended June 30,2002 and no marketing costs were incurred in the six months ended June 30,2002.

 

*Depreciation and Amortization Expense.* During Fiscal 2000, the Company acquired anintangible asset from the former parent of Insights consisting of technologyvalued at $22,470,000. Under SFAS No.142, this is considered an intangibleasset with a definite life of 5 years. Therefore the value of the asset isamortized on a straight-line basis over this period*.*  The amortization charge for the six months and quarters endedJune 30, 2003 and June 30, 2002 was $2,247,000 and $1,124,000respectively.  The Company evaluates thecarrying value of long-lived assets for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not be recoverable.The Company’s assessment for impairment of an asset involves estimating theundiscounted cash flows expected to result from use of the asset and itseventual disposition. An impairment loss recognized is measured as the amountby which the carrying amount of the asset exceeds the fair value of theasset.  No impairment of intangibles wasrecorded in the six months and quarter ended June 30, 2003.

 

*Impairment of excess of purchase price overnet assets acquired. *Forthe six months and quarters ended June 30, 2003 and June 30, 2002, the Companyhad excess of purchase price over net assets acquired of $100,119,000 and$88,919,000 respectively. The increase in the six months ended June 30, 2003 of$11,200,000 was due to the Company acquiring an additional 7,000,000 shares inMS-PLC in December 2002. The excess of purchase price over net assets acquiredof $88,919,000 was primarily attributable to the Company’s acquisition ofInsights. As stated above, the Company adopted SFAS No. 142 onJanuary 1, 2002. Under this standard, goodwill will no longer be amortizedover its estimated useful life, but instead will be tested for impairment on anannual basis or whenever indicators of impairment arise. The Company completedits annual impairment tests as of January 1, 2003 and no impairment was recorded.Prior to January 1, 2002, goodwill was tested for impairment in a mannerconsistent with property, plant and equipment and intangible assets with adefinite life.

 

*ImpairmentLoss of Investment.*For the six months and quarterended June 30, 2003, the Company incurred an impairment loss on investments of$nil. For the six months and quarter ended June 30, 2002, the Company incurredan impairment loss on investments of $30,000 related to the impairment in thecarrying

 

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value of oneof the Company’s minority investments, Top Tier, Inc. Based on the financialstatus of Top Tier, Inc, the investment was permanently impaired, and theCompany has recorded an impairment for the entire carrying value of this investment.

 

*Impairment ofVendor Guarantee* In the six months and quarter endedJune 30, 2003 the Company recorded a reduction in the impairment of theguarantee of $697,000 to reflect its estimated realizable value. An impairmentof a vendor guarantee in the amount of $6,720,000 was incurred in the sixmonths and quarter ended June 30, 2002. These adjustments relate to theguarantee provided by Dr. Alexander Nill as to the fair value of certain assetsacquired under the Company’s acquisition of Core Ventures Limited (“Core”) inSeptember 2000. The vendor guarantee represents the fair value of Dr Nill’sstock in the Company, the proceeds of the sale of which are to be remitted tothe Company. In the six months and quarter ended June 30, 2003 the Company receivedproceeds under the guarantee of $2,259,000 from the sale of 579,000 shares.These funds were used to reduce Medicsight, Inc’s $20m facility with Asia IT.The vendor guarantee represents the fair value of the remaining 616,000 sharesat June 30, 2003 and 1,195,000 shares at June 30, 2002.

 

*Net Loss andNet Loss per Share.*  Net loss was $5,124,000 and$2,446,000 for the six months and quarter ended June 30, 2003 respectivelycompared to a net loss of $11,549,000 and $9,249,000 respectively for the sixmonths and quarter ended June 30, 2002. Net loss per share for the six months and quarter ended June 30, 2003was $0.24 and $0.12 respectively, based on weighted average shares outstandingof 21,155,189 and 21,155,032 respectively, compared to a net loss per share of$0.60 and $0.48 respectively for the six months and quarter ended June 30,2002, based on weighted average shares outstanding of 19,289,361. The increasein net loss for the quarter ended June 30, 2003, are principally due to theincreased selling, general and administrative expenses.

 

**LIQUIDITY AND CAPITAL RESOURCES**

* *

*Working Capital.*  At June 30, 2003, the Company had $1,130,000in current assets. Cash and cash equivalents amounted to $nil. Currentliabilities were $11,355,000 at June 30, 2003.  At December 31, 2002, the Company had $2,284,000 in current assetsand cash and cash equivalents amounted to $1,778,000.  Current liabilities were $8,945,000 at December 31, 2002. Workingcapital deficit at June 30, 2003 was $(10,225,000), as compared to $(6,661,000) at December 31, 2002. The ratio of current assets to current liabilities was 0.1 to 1.0 atJune 30, 2003 as compared to 0.25 to 1.0 at December 31, 2002. The decrease isprimarily due to the decrease in cash and cash equivalents and increase inshort term debt.

 

*Net Decrease in Cash and Cash Equivalents.*  During the six months ended June 30, 2003,the Company’s cash and cash equivalents decreased by $1,778,000. This decreasewas primarily the result of cash flows received from shares issued by MS-PLC,cash received under the vendor guarantee and the increase in short term debtbeing exceeded by net cash used in operating and investing activities as AsiaIT’s significant cash balances held on behalf of MS-PLC at December 31, 2002were drawn on. The Company used net cash of $4,576,000 in operations. TheCompany received net cash of $4,633,000 in financing activities and used  $1,775,000 in investing activities.

 

*Net Cash Used in Operations.*  The use of cash in operations of  $4,576,000 in the six months ended June 30,2003, was attributable to the Company’s relatively minimal revenues at the sametime that the Company incurred significant operating costs. These significantcosts included professional fees, salaries and director compensation, marketingcosts and service charges associated with rental property and rent. The Companyused cash in operations in the six months ended June 30, 2002 of  $2,872,000.

 

*Net Cash Used in Investment Activities.*  In the six months ended June 30, 2003, theCompany had a net cash outflow from investment activities of $1,775,000. TheCompany used $526,000 to purchase additional fixed assets and $1,249,000 ondevelopment of its software products. In the six months ended June 30, 2002,the Company had a net cash outflow from investment activities of $29,000. TheCompany used the funds to purchase additional fixed assets.

 

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*Net Cash Provided by Financing Activities.*  In the six months ended June 30, 2003, theCompany had a net cash inflow from financing activities of $4,633,000. Thefunds received in the six months ended June 30, 2003, comprised of $919,000received from the private offering of Medicsight stock, $2,259,000 receivedunder the vendor guarantee and $1,401,000 drawn from our debt facilities withAsia IT. For the six months ended June 30, 2002, the Company had a net cashinflow from financing activities of $5,857,000. The funds received comprised of $5,232,000 received from theprivate offering of Medicsight stock and $644,000 received under our debtfacilities with Asia IT.

 

*Stockholders’ Equity.*  The Company’s stockholders’ equity at June30, 2003 was  $104,892,000, including anaccumulated deficit of $(77,298,000), as compared to $107,807,000 at December31, 2002, including an accumulated deficit of $(72,174,000). Additional paid-incapital was $183,931,000 and $182,897,000, at June 30, 2003 andDecember 31, 2002 respectively. The reduction in stockholders’ equity wasa result of an increase in accumulated deficit of $5,124,000 offset by anincrease in additional paid-in capital of $1,034,000 resulting from theplacement of Medicsight stock (par value approximately $0.08 per share) at apremium of  $1.52 per share.

 

*Additional Capital.*  The Company will require additional capitalduring its fiscal year ending December 31, 2003 to implement its businessstrategies, including cash for (i) payment of increased operating expensessuch as salaries for additional employees; and (ii) further implementationof those business strategies. Such additional capital may be raised throughadditional public or private financing, as well as borrowings and otherresources. Currently, the Company has two available lines of credit.

 

On December15, 2000, the Company entered into an unsecured credit facility with Asia ITwhich provides a $20,000,000 line of credit. Such line of credit originallyexpired on December 31, 2001, but has been extended until June 30, 2004.Interest on advances under the credit facility accrues at 2% above US LIBOR.The Company can draw down on this credit facility for its financingrequirements, upon approval by the Company’s Board of Directors and subject toapproval by Asia IT (such approval not to be unreasonably withheld). TheCompany is restricted from borrowing funds, directly or indirectly, other thanthrough the credit facility with Asia IT, without the consent of Asia IT. Theavailability of the credit facility reduces upon the Company’s sale of any ofits investment assets. The amounts drawn and interest charged under thisfacility are repayable on demand or at the maturity of the facility.

 

During the sixmonths ended June 30, 2003 the Company received $2,259,000 for the sale of579,000 shares as per the oral agreement reached with Dr Nill under the vendorguarantee. These funds were used to reduce Asia IT’s facility with the Company.

 

On November20, 2001, Asia IT entered into a £10,000,000 ($16,000,000) credit facility withMS-PLC.  Such facility matures inNovember 2004 and is secured by a lien on all assets of Medicsight.  Interest on outstanding amounts accrues at2% above GBP LIBOR.  Pursuant to suchcredit facility, MS-PLC had covenanted to undertake a public offering of itsordinary shares in an amount not less than £25,000,000 not later than March2002.  MS-PLC did not complete such anoffering but the facility nevertheless remains in place. The loan isconvertible into ordinary shares in MS-PLC on announcement of an Offer toSubscribe, Placing or other public offering of its ordinary shares, at the sameprice per share as the offering price. Due to the private offering beingundertaken by MS-PLC, the loan is currently convertible.

 

At June 30,2003, the Company had drawn down $2,553,000 under the $20,000,000 facility with Asia IT, and MS-PLC haddrawn down $1,180,000 under its £10,000,000 ($16,000,000) facility with AsiaIT.

 

To the extentthat additional capital is raised through the sale of equity or equity-relatedsecurities of the Company or its subsidiaries, the issuance of such securitiescould result in dilution to the Company’s stockholders. No assurance can begiven, however, that the Company will have access to the capital markets in thefuture, or that financing will be available on acceptable terms to satisfy theCompany’s cash requirements to implement its business strategies. If we areunable to access the capital markets or obtain acceptable financing, ourresults of operations and financial conditions could be materially andadversely affected.  We may be requiredto raise substantial additional funds through other means.   The products derived from our proprietarysoftware, including the MedicsightTM system, are expected to account for

 

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substantiallyall of our revenues from operations in the foreseeable future.  Our technology has not yet been fully commercializedand we have not begun to receive any significant revenues from commercialoperations.  We cannot assure ourstockholders 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.*InDecember 2001 and January 2002, the Securities and Exchange Commissionrequested that all registrants list their three to five most “criticalaccounting policies” in the Management’s Discussion and Analyses of FinancialCondition and Results of Operations. The Securities and Exchange Commissionindicated a “critical accounting policy” is one which is both important to theportrayal of the company’s financial condition and results and requiresmanagement’s most difficult, subjective or complex judgments, often as a resultof the need to make estimates about the effect of matters that are inherentlyuncertain. We believe that the following accounting policies fit the definitionof critical accounting policies.

 

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

 

Impairment of Excess of Purchase Price Over Net Assets 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 impairmentloss incurred subsequent to the initial adoption of SFAS No 142 is recorded asa charge to current period earnings. Under the transitional provisions of SFAS No. 142, the Company’sgoodwill was tested for impairment as of January 1, 2002.  The Company completed its annual impairmenttests as of January 1, 2003 and no impairment was recorded.

 

Software Development Costs*.*Costs incurred inconnection with the development of software products that are intended for saleare accounted for in accordance with Statement of Financial AccountingStandards No. 86, “Accounting for the Costs of Computer Software to be Sold,Leased, or Otherwise Marketed”. Costs incurred prior to technologicalfeasibility being established for the product are expensed as incurred. For theCompany, technical feasibility was established on completion of working modelsfor MedicHeart, MedicLung and MedicColon software products in January 2003.Thereafter, all software production costs are capitalized and subsequentlyreported at the lower of unamortized cost or net realizable value. Capitalizedcosts are amortized based on current and future revenue for each product with anannual minimum equal to the straight-line amortization over the remainingestimated economic life of the product. Amortization commences when the productis available for general release to customers.

 

Managementregularly reviews the carrying value of its software development costs toassess whether or not there has been an impairment in its carrying value. Whenthe carrying values of these assets exceed their estimated net recoverableamounts, an impairment provision is recorded.

 

*Recent Accounting Pronouncements. *In May 2003, theFASB issued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity.” SFAS No. 150 specifies thatfreestanding financial instruments within its scope constitute obligations ofthe issuer and that, therefore, the issuer must classify them as liabilities.Such freestanding financial instruments include mandatorily redeemablefinancial instruments, obligations to repurchase the issuer’s equity shares bytransferring assets, and certain obligations to issue a variable number ofshares. SFAS No. 150 is effective immediately for all financial instrumentsentered into or modified after May 31, 2003. For all other

 

9

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instruments,SFAS No. 150 is effective at the beginning of the third quarter of 2003. TheCompany has determined that the statement will not have a material impact onthe consolidated financial position, results of operations and cash flows ofthe Company.

 

*Contractual Obligations*

 

The Companyhas the following contractual obligations:

 
|                                      |   |      |   | **Payments  Due By Period** |   |
|-------------------------------------------|--------|-----------|--------|-----------------------------|--------|
| **Contractual Obligations ($000’s)** |   | **Total** |   | **Less than  1 year**       |   | **1-3 years** |   | **3-5 years** |   | **More than  5 years** |   |
|                                      |   |      |   |                        |   |   |   |   |   |   |   |
| Long-Term Debt                            |   | 3,250     |   | 3,250                       |   | — |   | — |   | — |   |
| Capital Lease Obligations                 |   | 95        |   | 47                          |   | 48 |   | — |   | — |   |
| Operating Lease Obligations               |   | 739       |   | 131                         |   | 262 |   | 262 |   | 84 |   |
| Total                                     |   | 4,084     |   | 3,428                       |   | 310 |   | 262 |   | 84 |   |

 

**Item 3.****                       Quantitativeand Qualitative Disclosures About Market Risk**

 

**Interest Rate Risk**

 

The Company’sexposure to market risk associated with changes in interest rates relates toits debt obligations. The Company has the following debt facilities allrepayable on demand:

 
| **Debt Holder**                 |   | **Facility** |       | **Balance** |   | **Interest rate** |   | **At June 30** |   |
|---------------------------------|--------|--------------|------------|-------------|--------|-------------------|--------|----------------|--------|
|                            |   |         |       |        |   |              |   |           |   |
| Nightingale Technologies Ltd    |   | $            | 10,000,000 |        | $      | 3,250,000         |   | Nil            |   | 0.00 | % |
|                            |   |         |       |        |   |              |   |           |   |
| Asia IT Capital Investments Ltd |   | $            | 20,000,000 |        | $      | 2,553,000         |   | US Libor + 2%  |   | 3.20 | % |
|                            |   |         |       |        |   |              |   |           |   |
| Asia IT Capital Investments Ltd |   | $            | 16,000,000 |        | $      | 1,180,000         |   | GBP Libor + 2% |   | 4.06 | % |

 

A hypothetical100 basis point adverse movement in interest rates would increase interest costby approximately $37,000 per annum assuming no further drawdowns or repaymentsare made.

 

**Foreign Exchange Risk**

 

The Company’sexposure to market risk associated with changes in exchange rates relate to itsdebt facility with Nightingale Technologies Ltd. This US$3.25m facility istranslated into British Pounds as Medicsight Finance Ltd (“Finance”) accountsfor its transactions in British Pounds and is therefore exposed to fluctuationsbetween British Pounds and U.S. Dollar rates. A hypothetical 100 basis pointadverse movement ($1.50 to $1.49 to £1.00) would increase the principal torepaid by  $16,000.

 

The Companyholds limited cash balances in British Pounds so any adverse movements in theexchange rates are considered immaterial.

 

**Item 4.****                       Controlsand Procedures**

 

*Evaluation of Disclosure Controls andProcedures*

 

We maintaincontrols and procedures designed to ensure that information required to bedisclosed in this report is recorded, processed, accumulated and communicatedto our management, including our chief executive officer and our chieffinancial officer, to allow timely decisions regarding the required disclosure.Management necessarily applied its judgment in assessing the costs and benefitsof such controls and procedures, which, by their nature, can provide onlyreasonable assurance regarding management’s control objectives. At June 30,2003, our management, with the participation of our chief executive officer and

 

10

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chieffinancial officer, carried out an evaluation of the effectiveness of the designand operation of these disclosure controls and procedures. Our chief executiveofficer and chief financial officer concluded that these disclosure controlsand procedures are effective.

 

*Changes in Internal Controls*

 

During thequarter ended June 30, 2003 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.

 

11

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**PART II**

 

**Item 1.****                       LegalProceedings**

 

There arecurrently no pending legal proceedings.

 

**Item 2.****                       Changes inSecurities and Use of Proceeds**

 

(a)                                  None.

 

(b)                                 None.

 

(c)                                  None.

 

(d)                                 Notapplicable.

 

**Item 3.****                       DefaultsUpon Senior Securities**

 

None.

 

**Item 4.****                       Submissionof Matters to a Vote of Security Holders**

 

On July 31,2003, an amendment to the Certificate of Incorporation, reducing the number ofshares the Company is authorized to issue from 100,000,000 shares to 25,000,000shares was approved by a majority of the shareholders of the Company.

 

**Item 5.****                       OtherInformation**

 

### None.

 

**Item 6.****                       Exhibitsand Reports on Form 8-K**

 
|   | (a)    |   | Exhibits                                                                                                                                                                             |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                 |
|   | 3      |   | Composite Certificate of Incorporation, as amended and currently in  effect (incorporated by reference to Exhibit 3 to the Company’s Report on  Form 8-K filed August 5, 2003). |
|   |   |   |                                                                                                                                                                                 |
|   | 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                                                                                                                                                                 |

 

There were no reports on Form 8-K filed during the period April 1, 2003through June 30, 2003. The Company filed a Form 8-K on August 5, 2003,announcing a reduction in the number of shares the Company is authorized to issuefrom 100,000,000 shares to 25,000,000 shares.

 

12

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**MEDICSIGHT, INC. AND SUBSIDIARIESINDEX TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)AS OF AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30,2003**

** **
| Consolidated Balance Sheets  as of June 30, 2003 (Unaudited) and December 31, 2002 (Audited)                                                      | F2     |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                              |   |
| Consolidated  Statements of Operations for the Three Months Ended June 30, 2003 (Unaudited)  and the Three Months Ended June 30, 2002 (Unaudited) | F3     |
|                                                                                                                                              |   |
| Consolidated Statements of  Operations for the Six Months Ended June 30, 2003 (Unaudited) and the Six  Months Ended June 30, 2002 (Unaudited)     | F4     |
|                                                                                                                                              |   |
| Consolidated  Statement of Cash Flows for the Six Months Ended June 30, 2003 (Unaudited) and  the Six Months Ended June 30, 2002 (Unaudited)      | F5     |
|                                                                                                                                              |   |
| Notes to  Consolidated Financial Statements                                                                                                       | F6-F11 |

 

F-1

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**MEDICSIGHT, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCESHEETS**

**(In $ thousands)**

** **
|                                                                                                                                  |   | **June 30, 2003** |    | **December 31, 2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|-----------------------|--------|
|                                                                                                                                  |   | **(unaudited)**   |    | **(audited)**         |   |
| ASSETS                                                                                                                                |   |              |    |                  |   |
| CURRENT ASSETS:                                                                                                                       |   |              |    |                  |   |
| Cash and cash equivalents                                                                                                             |   | $                 | —  |                  | $      | 1,778 |   |
| Accounts receivable                                                                                                                   |   | 13                |    | 1                     |   |
| Other receivables                                                                                                                     |   | 51                |    | 1                     |   |
| Prepaid expenses                                                                                                                      |   | 554               |    | 222                   |   |
| Sales tax receivable                                                                                                                  |   | 512               |    | 282                   |   |
| Total current assets                                                                                                                  |   | 1,130             |    | 2,284                 |   |
|                                                                                                                                  |   |              |    |                  |   |
| PROPERTY AND EQUIPMENT, at  cost, net of accumulated depreciation of $644 and $480, respectively                                      |   | 1,940             |    | 1,416                 |   |
|                                                                                                                                  |   |              |    |                  |   |
| OTHER ASSETS, software development  costs, at cost                                                                                    |   | 1,249             |    | —                |   |
|                                                                                                                                  |   |              |    |                  |   |
| INVESTMENTS, at cost                                                                                                                  |   | 525               |    | 525                   |   |
|                                                                                                                                  |   |              |    |                  |   |
| SECURITY DEPOSITS                                                                                                                     |   | 781               |    | 5                     |   |
|                                                                                                                                  |   |              |    |                  |   |
| INTANGIBLE ASSET, at cost, net  of accumulated amortization of $11,235 and $8,988, respectively                                       |   | 11,235            |    | 13,482                |   |
|                                                                                                                                  |   |              |    |                  |   |
| EXCESS OF PURCHASE PRICE OVER  NET ASSETS ACQUIRED                                                                                    |   | 100,119           |    | 100,119               |   |
|                                                                                                                                  |   |              |    |                  |   |
| Total assets                                                                                                                          |   | $                 | 116,979 |                  | $      | 117,831 |   |
|                                                                                                                                  |   |              |    |                  |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                             |   |              |    |                  |   |
| CURRENT LIABILITIES:                                                                                                                  |   |              |    |                  |   |
| Accounts payable                                                                                                                      |   | $                 | 3,465   |                  | $      | 2,468 |   |
| Accrued expenses                                                                                                                      |   | 623               |    | 704                   |   |
| Accrued professional expenses                                                                                                         |   | 196               |    | 191                   |   |
| Bank overdraft                                                                                                                        |   | 88                |    | —                |   |
| Short-term debt                                                                                                                       |   | 6,983             |    | 5,582                 |   |
| Total current liabilities                                                                                                             |   | 11,355            |    | 8,945                 |   |
| CAPITAL LEASE                                                                                                                         |   | 95                |    | 74                    |   |
| Total liabilities                                                                                                                     |   | $                 | 11,450  |                  | $      | 9,019 |   |
|                                                                                                                                  |   |              |    |                  |   |
| STOCKHOLDERS’ EQUITY:                                                                                                            |   |              |    |                  |   |
| Common stock, $0.001 par value,  25,000,000 shares authorized, 21,155,189 and 21,154,874 shares issued and  outstanding, respectively |   | 21                |    | 21                    |   |
| Additional paid-in capital                                                                                                            |   | 183,931           |    | 182,897               |   |
| Vendor guarantee                                                                                                                      |   | (1,664            | )       | (3,227                | )      |
| Cumulative foreign currency  translation adjustment                                                                                   |   | (98               | )       | 290                   |   |
| Accumulated deficit                                                                                                                   |   | (77,298           | )       | (72,174               | )      |
| Total stockholders’ equity                                                                                                       |   | 104,892           |    | 107,807               |   |
|                                                                                                                                  |   |              |    |                  |   |
| MINORITY INTEREST                                                                                                                     |   | 637               |    | 1,005                 |   |
|                                                                                                                                  |   | 105,529           |    | 108,812               |   |
| Total liabilities and  stockholders’ equity                                                                                      |   | $                 | 116,979 |                  | $      | 117,831 |   |

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATEDFINANCIAL STATEMENTS.

 

F-2

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**MEDICSIGHT, INC. AND SUBSIDIARIES**

** **

**CONSOLIDATED STATEMENTS OF OPERATIONS(In $ thousands, except per share amounts)**

** **
|                                                  |   | **Three Months  Ended  June 30, 2003** |   | **Three Months  Ended  June 30, 2002** |   |
|-------------------------------------------------------|--------|----------------------------------------|--------|----------------------------------------|--------|
|                                                  |   | **(unaudited)**                        |   | **(unaudited)**                        |   |
|                                                  |   |                                   |   |                                   |   |   |   |
| REVENUES                                              |   | $                                      | 44     |                                   | $      | 21 |   |
|                                                  |   |                                   |   |                                   |   |
| EXPENSES:                                             |   |                                   |   |                                   |   |
| Selling, general and  administrative charges          |   | 3,592                                  |   | 2,609                                  |   |
| Research and development cost                         |   | —                                 |   | 355                                    |   |
| Impairment of investment                              |   | —                                 |   | 30                                     |   |
| Impairment of vendor guarantee                        |   | (697                                   | )      | 6,720                                  |   |
|                                                  |   | 2,895                                  |   | 9,714                                  |   |
|                                                  |   |                                   |   |                                   |   |
| Operating loss                                        |   | (2,851                                 | )      | (9,693                                 | )      |
|                                                  |   |                                   |   |                                   |   |
| OTHER INCOME:                                         |   |                                   |   |                                   |   |
| Interest and other income                             |   | —                                 |   | 3                                      |   |
|                                                  |   |                                   |   |                                   |   |
| Net Loss before minority  interest                    |   | (2,851                                 | )      | (9,690                                 | )      |
|                                                  |   |                                   |   |                                   |   |
| MINORITY INTEREST                                     |   | 405                                    |   | 441                                    |   |
|                                                  |   |                                   |   |                                   |   |
| Net loss                                              |   | $                                      | (2,446 | )                                      | $      | (9,249 | ) |
|                                                  |   |                                   |   |                                   |   |
| PER SHARE DATA:                                       |   |                                   |   |                                   |   |
| Basic and diluted loss per  share                     |   | $                                      | (0.12  | )                                      | $      | (0.48 | ) |
|                                                  |   |                                   |   |                                   |   |
| Weighted average number of  common shares outstanding |   | 21,155,189                             |   | 19,289,361                             |   |

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATEDFINANCIAL STATEMENTS.

 

F-3

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

** **

**CONSOLIDATEDSTATEMENTS OF****OPERATIONS(In $ thousands, except per share amounts)**

 
|                                                  |   | **Six Months  Ended  June 30, 2003** |   | **Six Months  Ended  June 30, 2002** |   |
|-------------------------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|
|                                                  |   | **(unaudited)**                      |   | **(unaudited)**                      |   |
|                                                  |   |                                 |   |                                 |   |   |   |
| REVENUES                                              |   | $                                    | 54     |                                 | $      | 37 |   |
|                                                  |   |                                 |   |                                 |   |
| EXPENSES:                                             |   |                                 |   |                                 |   |
| Selling, general and administrative  charges          |   | 6,569                                |   | 4,977                                |   |
| Research and development cost                         |   | —                               |   | 554                                  |   |
| Impairment of investment                              |   | —                               |   | 30                                   |   |
| Impairment of vendor guarantee                        |   | (697                                 | )      | 6,720                                |   |
|                                                  |   | 5,872                                |   | 12,281                               |   |
|                                                  |   |                                 |   |                                 |   |
| Operating loss                                        |   | (5,818                               | )      | (12,244                              | )      |
|                                                  |   |                                 |   |                                 |   |
| OTHER INCOME:                                         |   |                                 |   |                                 |   |
| Interest and other income                             |   | —                               |   | 3                                    |   |
|                                                  |   |                                 |   |                                 |   |
| Net Loss before minority  interest                    |   | (5,818                               | )      | (12,241                              | )      |
|                                                  |   |                                 |   |                                 |   |
| MINORITY INTEREST                                     |   | 694                                  |   | 692                                  |   |
|                                                  |   |                                 |   |                                 |   |
| Net loss                                              |   | $                                    | (5,124 | )                                    | $      | (11,549 | ) |
|                                                  |   |                                 |   |                                 |   |
| PER SHARE DATA:                                       |   |                                 |   |                                 |   |
| Basic and diluted loss per  share                     |   | $                                    | (0.24  | )                                    | $      | (0.60 | ) |
|                                                  |   |                                 |   |                                 |   |
| Weighted average number of  common shares outstanding |   | 21,155,032                           |   | 19,289,361                           |   |

** **

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATEDFINANCIAL STATEMENTS.

 

F-4

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

** **

**CONSOLIDATED STATEMENTS OF CASH FLOW(In $ thousands)**

** **
|                                                                        |   | **Six Months****Ended  June 30, 2003** |   | **Six Months****Ended  June 30, 2002** |   |
|-----------------------------------------------------------------------------|--------|----------------------------------------|--------|----------------------------------------|--------|
|                                                                        |   | **(unaudited)**                        |   | **(unaudited)**                        |   |
|                                                                        |   |                                   |   |                                   |   |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                      |   |                                   |   |                                   |   |
| Net loss                                                                    |   | $                                      | (5,124 | )                                      | $      | (11,549 | ) |
| Adjustments to reconcile net  loss to net cash used in operating activities |   |                                   |   |                                   |   |
| Depreciation                                                                |   | 164                                    |   | 115                                    |   |
| Amortization of intangible  assets                                          |   | 2,247                                  |   | 2,247                                  |   |
| Impairment of investment                                                    |   | —                                 |   | 30                                     |   |
| (Write back)/Impairment of  vendor guarantee                                |   | (697                                   | )      | 6,720                                  |   |
| Minority interest in net  earnings of subsidiary                            |   | (694                                   | )      | (693                                   | )      |
| Changes in operating assets and  liabilities                                |   |                                   |   |                                   |   |
| (Increase)/decrease in accounts  receivable                                 |   | (12                                    | )      | 3                                      |   |
| (Increase)/decrease in prepaid  expenses and other current assets           |   | (382                                   | )      | 144                                    |   |
| (Increase)/decrease in sales  tax receivable                                |   | (230                                   | )      | 23                                     |   |
| (Increase) in security deposits                                             |   | (743                                   | )      | (1                                     | )      |
| Increase/(decrease) in accounts  payable                                    |   | 970                                    |   | (300                                   | )      |
| (Decrease)/increase in accrued  expenses                                    |   | (81                                    | )      | 379                                    |   |
| Increase in accrued  professional expenses                                  |   | 6                                      |   | 10                                     |   |
| Net cash used in operating  activities                                      |   | $                                      | (4,576 | )                                      | $      | (2,872 | ) |
|                                                                        |   |                                   |   |                                   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                      |   |                                   |   |                                   |   |
| Purchase of fixed assets                                                    |   | (526                                   | )      | (29                                    | )      |
| Software development costs                                                  |   | (1,249                                 | )      | —                                 |   |
| Net cash used in investing  activities                                      |   | $                                      | (1,775 | )                                      | $      | (29 | ) |
|                                                                        |   |                                   |   |                                   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                      |   |                                   |   |                                   |   |
| Repayments on capitalized lease                                             |   | (34                                    | )      | (19                                    | )      |
| Increase of bank overdraft                                                  |   | 88                                     |   | —                                 |   |
| Increase of debt                                                            |   | 1,401                                  |   | 644                                    |   |
| Shares in Medicsight issued for  cash                                       |   | 919                                    |   | 5,232                                  |   |
| Funds received under vendor  guarantee                                      |   | 2,259                                  |   | —                                 |   |
| Net cash provided by financing  activities                                  |   | $                                      | 4,633  |                                   | $      | 5,857 |   |
|                                                                        |   |                                   |   |                                   |   |
| Effects of exchange rates on  cash and cash equivalent                      |   | (60                                    | )      | 2                                      |   |
|                                                                        |   |                                   |   |                                   |   |
| NET (DECREASE)/INCREASE IN CASH                                             |   | (1,778                                 | )      | 2,959                                  |   |
|                                                                        |   |                                   |   |                                   |   |
| CASH & CASH EQUIVALENTS,  BEGINNING OF PERIOD                           |   | 1,778                                  |   | 203                                    |   |
|                                                                        |   |                                   |   |                                   |   |
| CASH & CASH EQUIVALENTS,  END OF PERIOD                                 |   | $                                      | — |                                   | $      | 3,161 |   |

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATEDFINANCIAL STATEMENTS.

 

F-5

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

*(1)**                               Formationand Business of the 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”).

 

We wereoriginally incorporated as a Utah corporation in 1977. On December 19, 2000, weentered into an Agreement and Plan of Merger with our wholly-owned subsidiaryHTTP Technology, Inc., a Delaware corporation, and thereby effected areincorporation 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, if the event occurredon or after December 19, 2000 or to HTTP Technology, Inc., the Utahcorporation, if the event occurred prior to December 19, 2000.  As of July 31, 2003 we are authorized toissue 25,000,000 shares of Common Stock.

 

In April 2000,we acquired Radical Technology PLC, now known as HTTP Software PLC(“Software”), which provided us with a business dedicated to systemsintegration and software development. In December 2000, we acquired Nightingale Technologies Ltd, now known asHTTP Insights Ltd (“Insights”), which provided us with proprietary technologycalled a Stochastic Perception Engine. A Stochastic Perception Engine processes and classifies unstructureddata into meaningful outputs, enabling it to be viewed, interpreted or furthermanipulated by the user of the application. Similar technologies sit at thecore of many of today’s major software applications.  Our Stochastic Perception Engine is comprised of four principalmodules: cluster analysis, statistical modeling, classification and prediction.This technology has the ability to offer unprecedented processing speed,accuracy and comprehensiveness of results when compared to existing dataclassification technologies. We believe that our Stochastic Perception Enginehas significant potential uses in a wide variety of fields, including medicalimage analysis, the design of pharmaceuticals, environmental mapping,handwriting recognition, robotics and surveillance.

 

We haverestructured our business to focus more closely on the medical imagingapplications derived from our core technology. We have concluded the process of incorporating all research, softwaredevelopment, management and marketing activities related to our medical imaginginitiatives into MS-PLC. In November 2001 assets were transferred from ourother subsidiaries to MS-PLC and the costs incurred on the development of theMedicsightTM system (our state-of-the-art digital disease detectionsoftware system) were reimbursed and assigned by way of a loan note fromMS-PLC.  The amount of the loan note toMedicsight, Inc. was £3,659,104, and this loan note was converted into 57,868,582ordinary shares of MS-PLC issued to the Company and 15,000,000 ordinary sharesof MS-PLC issued to the former parent of Insights in November 2001.

 

F-6

----

 

*(2)**                               Basisof 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 year ended December 31, 2002, filed on April 14, 2003. In the opinion ofmanagement, the accompanying unaudited consolidated financial statementsreflect all adjustments, which are of a normal recurring nature, necessary fora fair presentation of the results for the periods presented. All significantinter-company transactions have been eliminated in consolidation.

 

The results ofoperations presented for the six months ended June 30, 2003, are notnecessarily indicative of the results to be expected for any other interimperiod or any future fiscal year.

 

*(3)**                               Lines of Credit*

 

On December15, 2000, the Company entered into an unsecured credit facility with Asia IT,which provides a $20,000,000 line of credit. Such line of credit originallyexpired on December 31, 2001, but has been extended until June 30, 2004.Interest on advances under the credit facility accrues at 2% above US LIBOR.The Company can draw down on this credit facility for its financingrequirements, upon approval by the Company’s Board of Directors and subject toapproval by Asia IT (such approval not to be unreasonably withheld). TheCompany is restricted from borrowing funds, directly or indirectly, other thanthrough the credit facility with Asia IT, without the consent of Asia IT. Theavailability of the credit facility 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.

 

During the sixmonths ended June 30, 2003 the Company received $2,259,000 for the sale of579,000 shares as per the oral agreement reached with Dr Nill under the vendorguarantee. These funds were used to reduce Asia IT’s facility with the Company.

 

On November20, 2001, MS-PLC entered into a £10,000,000 ($16,000,000) credit facility withAsia IT.  Such facility matures inNovember 2004 and is secured by a lien on all assets of Medicsight.  Interest on outstanding amounts accrues at2% above GBP LIBOR.  Pursuant to suchcredit facility, MS-PLC had covenanted to undertake a public offering of itsordinary shares in an amount not less than £25,000,000 not later than March2002.  MS-PLC did not complete such anoffering but the facility nevertheless remains in place. The loan isconvertible into ordinary shares in MS-PLC on announcement of an Offer toSubscribe, Placing or other public offering of its ordinary shares, at the sameprice per share as the offering price. Due to the private offering beingundertaken by MS-PLC, the loan is currently convertible.

 

At June 30,2003, the Company had drawn down $2,553,000 under the $20,000,000 facility withAsia IT, and MS-PLC had drawn down $1,180,000 under its £10,000,000($16,000,000) facility with Asia IT.

 

F-7

----

 

*(4)**                               Short-term Debt*

* *

The Companyacquired Insights in December 2000.  Atthe time of such acquisition, Insights had outstanding $6,006,000 of long-termdebt.  This debt was part of theoriginal loan of $10,000,000 that Insights owed to its parent company relatingto the acquisition of patent applications for its Stochastic Perception Enginetechnology.  The loan did bear interestat 2% above US LIBOR and is unsecured. All interest on the loan was forgivenprior to the principal being transferred to Medicsight Finance Ltd (“Finance”)on December 6, 2002. The principal of the loan does not mature until December6, 2004 and is interest free.  As ofJune 30, 2003 and December 31, 2002, the balance of this loan was$3,250,000.   The terms of the loan noteinclude a provision whereby the lender can require repayment of the principalby giving two months notice of demand. No notice has been given as of June 30, 2003 and management does not expectthe notice to be given.

 

*(5)**                               Stockholders’ Equity*

 

On December30, 2002, the Company effected a 1-for-3 reverse split (the “Split”) of itsCommon Stock.  As such, all share andper share information in the accompanying financial statements have beenrestated to reflect the Split. On July 31, 2003 the Company reduced itsauthorized share capital from 100,000,000 shares to 25,000,000 shares.

 

*(6)**                               Accounting for StockBased Compensation*

 

On March 20,2003, the Board of Directors of MS-PLC approved a stock option plan for itsemployees and reserved 4,000,000 shares of its common stock for issuance uponexercise of options granted under this plan. On April 19, 2003, theRemuneration Committee of MS-PLC also approved the stock option plan andimplemented it on April 30, 2003 by issuing options over 2,828,600 shares toemployees of MS-PLC. At June 30, 2003 only 20% of the options issued wereexercisable under the plan.

 

The Companyhas elected to adopt the disclosure only provisions of Statement of Financial AccountingStandards No. 123, “Accounting for Stock-Based Compensation” as amended by SFASNo. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure -an amendment of FASB Statement No. 123”, and measures the cost for MS-PLC’semployee stock compensation plan by using the accounting methods prescribed byAPB Opinion No. 25, “Accounting for Stock Issued to Employees”, which allowsthat no compensation cost be recognized unless the exercise price of theoptions granted is greater than the fair market value of the Company’s stock atdate of grant. Accordingly, no stock-based employee compensation cost isreflected in net income, as all options granted had an exercise price equal tothe market value of the underlying common stock on the date of grant. SFASNo. 123, as amended by SFAS No. 148, requires disclosure of pro formaincome and pro forma income per share as if the fair value based method hadbeen applied in measuring compensation expense.

 
|                                           |   | **Three Months  Ended  June 30, 2003** |   | **Six Months  Ended  June 30, 2002** |   |
|------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                           |   | **(unaudited)  $’000**            |   | **(unaudited)  $’000**          |   |
| Net income as reported:                        |   | (2,446                                 | )      | (5,124                               | )      |
|                                           |   |                                   |   |                                 |   |
| Fair value method of stock  based compensation |   | (25                                    | )      | (25                                  | )      |
|                                           |   |                                   |   |                                 |   |
| Proforma net income                            |   | (2,471                                 | )      | (5,149                               | )      |
|                                           |   |                                   |   |                                 |   |
| Reported earnings per common  share            |   |                                   |   |                                 |   |
| Basic and diluted                              |   | (0.12                                  | )      | (0.24                                | )      |
|                                           |   |                                   |   |                                 |   |
| Proforma earnings per common  share            |   | (0.12                                  | )      | (0.24                                | )      |
| Basic and diluted                              |   |                                   |   |                                 |   |

 

F-8

----

 

The fair values of options granted were estimated on the date of theirgrant using the Black-Scholes option pricing model based on the followingassumptions:

 
| Expected life, in years |   | 2   |   |
|-------------------------|--------|-----|--------|
| Risk-free interest rate |   | 3.5 | %      |
| Volatility              |   | 60  | %      |
| Dividend yield          |   | 0   | %      |

 

*(7)**                               Goodwilland Other Intangible Assets*

 

Goodwill

 

The Company adopted SFAS No. 142 effective January 1, 2002. Under thisstandard, goodwill will no longer be amortized over its estimated useful life,but will be tested for impairment on an annual basis and whenever indicators ofimpairment arise. The Company completed its impairment tests as of January 1,2003 and no impairment was recorded. Prior to January 1, 2002, goodwill wasamortized on a straight-line basis over 5 years.

 

Other Intangible Assets

 

The Company acquired an intangible asset from Insights consisting oftechnology valued at $22,470,000 during Fiscal 2000. Under SFAS No.142, this isconsidered an intangible asset with a definite life of 5 years. Therefore thevalue of the asset will be amortized on a straight-line basis over this period.

 

The carryingamount and accumulated amortization of acquired intangible assets follows:

 
|                         |   | **Jan 1,  2003** |       | **June 30,  2003** |   |
|------------------------------|--------|------------------|------------|--------------------|--------|
|                         |   |             |       |               |   |
| Technology                   |   | $                | 22,470,000 |               | $      | 22,470,000 |   |
|                         |   |             |       |               |   |
| Accumulated amortization     |   | $                | (8,988,000 | )                  | $      | (11,235,000 | ) |
|                         |   |             |       |               |   |
| Total intangible assets, net |   | $                | 13,482,000 |               | $      | 11,235,000 |   |

 

The table below shows expected amortization expense for acquiredintangible assets recorded as of January 1, 2002.

 
|                               |   | **2003** |   | **2004** |   | **2005** |   |
|------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                               |   |     |   |     |   |     |   |
| Amortization expense ($ thousands) |   | 4,494    |   | 4,494    |   | 4,494    |   |

 

The above amortization expense forecast is an estimate. Actual amountsof amortization expense may differ from estimated amounts due to additionalintangible asset acquisitions, impairment of intangible assets, acceleratedamortization of intangible assets, and other events.

 

F-9

----

 

*(8)**                               OtherAssets – Software Development Costs*

 

In accordance with Statement of Financial Accounting Standards (FAS)86, *Accountingfor the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed*,the Company has capitalized certain computer software development costs.Technical feasibility was established on completion of working models forMedicHeart, MedicLung and MedicColon software products in January 2003.Subsequently, the Company capitalized costs of $1,249,000 under FAS 86. Thesecosts capitalized comprise staff, consultants, regulatory and clinical trialcosts specific to the three products.

 

Amortization will be provided based on the greater of the ratios that currentgross revenues for a product bear to the total of current and anticipatedfuture gross revenues for that product, or the straight line method over theestimated useful life of the product. Amortization will commence when theproduct is available for general release to customers.

 

Management regularly reviews the carrying value of its softwaredevelopment costs to assess whether or not there has been an impairment in itscarrying value. When the carrying values of these assets exceed their estimatednet recoverable amounts, an impairment provision is recorded.

* *

*(9)**                               SecurityDeposits*

* *

As MS-PLC occupies approximately 95% of 46 Berkeley Square it acquiredthe security deposit on the offices for cash from International CelluloseCompany Ltd in February 2003. The value of the security deposit is £470,000($781,000) and is interest-bearing.

* *

*(10)**                        Lease Commitments*

* *

The Company has entered into an operating lease for a scanner. Futureminimum obligations under these lease arrangements are as follows:

 
| **For the year ending  December 31,** |   | **Operating  Leases** |   | **Total**      |   |
|---------------------------------------|--------|-----------------------|--------|----------------|--------|
|                                  |   | **$’000**        |   | **$’000** |   |
| 2003                                  |   | 131                   |   | 131            |   |
| 2004                                  |   | 131                   |   | 131            |   |
| 2005                                  |   | 131                   |   | 131            |   |
| 2006                                  |   | 131                   |   | 131            |   |
| 2007 and thereafter                   |   | 215                   |   | 215            |   |

 

*(11)**                        Major Customers*

* *

The Company’s revenue in the six months ended June 30, 2003 was derivedfrom the Company’s LifesyneTM scanning operations. During the six months June30, 2002, the Company had two customers who represented a significantproportion of its revenues. The customers were Commonwealth Secretariat, whichaccounted for approximately 43% and Texaco Ltd., which accounted forapproximately 57%.  These revenues werederived from Software’s consulting and support services.

* *

*(12)**                        Comprehensive Income*

* *

As of June 30, 2003 and for the six months and quarter then ended,comprehensive income is comprised of a net loss from operations and the neteffect of foreign currency translation adjustments. This comprised a net lossof $5,124,000 and $2,446,000 and foreign currency translation adjustments of$388,000 and $375,000, resulting in comprehensive loss of  $5,512,000 and $2,821,000, respectively.

 

F-10

----

 

*(13)**                        Contingent Liability*

* *

As discussed in the notes to the financial statements of our AnnualReport on Form 10-K for the fiscal year ended December 31, 2002 (filed April14, 2003), during 2001 and 2002 the Company transferred assets of twopreviously acquired UK subsidiaries, Insights and Software to other whollyowned UK subsidiaries in order to simplify the Company’s organizationalstructure.

 

As a result of the above, potential tax liabilities in both the US andUK arise.  The Company is pursuing thenecessary elections to mitigate any potential liability.  Based on the current facts and circumstancesthe Company does not believe it probable that a significant tax liability willbe incurred as a result of these past transactions.

 

F-11

----

 

SIGNATURE

 

In accordance with the requirements of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
|                                          | MEDICSIGHT, INC.        |
|-----------------------------------------------|-------------------------|
|                                          |                    |
|                                          |                    |
|                                          | By:                     | /s/ SIMON ZUANIC |   |
|                                          | Simon Zuanic            |
|                                          | Chief Executive Officer |
|                                          |                    |
|                                          |                    |
|                                          | By:                     | /s/ PAUL GOTHARD |   |
|                                          | Paul Gothard            |
|                                          | Chief Financial Officer |
|                                          |                    |
|                                          |                    |
| Date:     August 13, 2003 |                    |

 

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