**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

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**FORM 10-Q**

**(Mark One)**
| **x**                                                   | ** ** | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                              | ** ** | ** **                                                                                              |
| **For the  quarterly period ended March 31, 2006** |
| ** **                                              |
| **o**                                                   | ** ** | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |

 

**For the transition period from                    to**

**Commission file number  0-26886**

**MEDICSIGHT, INC.**

(Exact name of registrantas specified in its charter)

 

| Delaware                                                         | ** ** | **13-4148725**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

| 46 Berkeley Square,  London, W1J 5AT, UNITED KINGDOM              |
|-------------------------------------------------------------------|
| **(Address of principal executive  offices, including zip code)** |

 
| **011-44-20-7598-4070**                                        |
|----------------------------------------------------------------|
| **(Registrant’s telephone number,  including area code)** |

 

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

 

**Indicateby check whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days:**

** **

|  | Yes x |   | No  ̈ |   |
|--|------------|--------|----------------|--------|

 

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer (as defined in Rule 12b-2of the Exchange Act):

 

| Large Accelerated  Filer o   | Accelerated  filer o | Non-accelerated  Filer x |
|---------------------------------------------|---------------------------|-------------------------------|

** **

**Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act):**

** **

|  | Yes  ̈ |   | No x |   |
|--|-----------------|--------|-----------|--------|

 

Thenumber of shares outstanding of the registrant’s common stock as ofMay 12, 2006 was 37,667,883.

 

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**NOTE REGARDINGFORWARD LOOKING STATEMENTS**

ThisQuarterly Report on Form 10-Q, including “Management’s Discussionand Analysis of Financial Condition and Results of Operations” in Item 2,contains forward-looking statements that involve risks and uncertainties, aswell as assumptions that, if they never materialize or prove incorrect, couldcause the results of Medicsight, Inc and its consolidated subsidiaries (the “Company”)to differ materially from those expressed or implied by such forward-lookingstatements. All statements other than statements of historical fact arestatements that could be deemed forward-looking statements, including anyprojections of revenue, gross margin, expenses, earnings or losses fromoperations, synergies or other financial items; any statements of the plans,strategies and objectives of management for future operations, including theexecution of restructuring plans; any statement concerning developments,performance or industry rankings relating to products or services; any statementsregarding future economic conditions or performance; any statements ofexpectation or belief; and any statements of assumptions underlying any of theforegoing. The risks, uncertainties and assumptions referred to above includethe performance of contracts by suppliers, customers and partners; employeemanagement issues; the difficulty of aligning expense levels with revenuechanges; and other risks that are described herein, including but not limitedto the specific risks areas discussed in “Management’s Discussion and Analysisof Financial Condition and Results of Operations” in Item 2 of thisreport, and that are otherwise described from time to time in the Company’sSecurities and Exchange Commission reports filed after this report. The Companyassumes no obligation and does not intend to update these forward-lookingstatements.

The Company’s mainoperating currency is UK sterling (£).

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**PART 1**

**FINANCIALINFORMATION**

**Item 1.**                          FinancialStatements

Medicsight, Inc.and its subsidiaries are collectively referred to in this Report as the “Company”.For purposes of the discussion contained herein, all financial information isreported on a consolidated basis. The financial statements for the Company’sfiscal quarter ended March 31, 2006 are attached to this Report,commencing at page F-1.

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

**BACKGROUND**

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

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

 

·                  Toestablish a global online community for medical imaging professionals (to beknown as MedicExchange) with a rich selection of specialist clinical contentfor registered users combined with a product marketplace where medical imagingvendors can sell their solutions online.

 

Duringthe quarter ended March 31, 2006 the Company raised $4,590,000 (net of commissionand expenses) by issuing 1,275,000 restricted shares of common stock. Theseprivate placements were underwritten by Asia IT Capital Investments Limited (“AsiaIT”), a related party. Asia IT received commissions of $510,000 on the theseprivate placements. This amount is inclusive of the common stock subscribed butunissued of $3,600,000 at December 31, 2005.

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

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

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

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

**BUSINESS STRATEGY**

We havefour principal operating subsidiaries: Medicsight PLC (“MS-PLC”), MedicsightU.S.A., Inc (“MS-US”) (previously Lifesyne U.S.A.), Medicsight (International)Limited (“MIL”) and Medic Exchange, Inc (“MDX”) (previously known as MedicsightOn-line, Inc (“MOL”).

LifesyneUK Limited (“Lifesyne”) was sold to an independent third party in November 2005and is reported as discontinued operations in the quarter ended March 31,2005. In addition Medicsight Asset Management Limited (“MAM”) ceased operationsduring the year.

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*MS-PLC.*   Ourmajority-owned subsidiary, MS-PLC, is currently engaged in efforts tocommercialize the groups CAD products (“Medicsight CAD”). At December 31,2005 and December 31, 2004, the Company owned 70,677,300 ordinary sharesin MS-PLC, constituting 81.8% of the outstanding shares.

*MS-US.**  *MS-US (previously Lifesyne US) isalso a wholly owned subsidiary of MS-PLC, was established to co-ordinateoperations in the United States of America and is based in Nashville,Tennessee.

*MIL.*   MIL,a wholly owned subsidiary of MS-PLC, was established to co-ordinate operationsoutside the United States of America and Europe and is based in Geneva,Switzerland.

*MDX.**  *MDX, a majority-owned subsidiary, incorporated inDelaware (with initial capital of 1,500 shares of common stock, par value$1.00) is currently engaged in developing the online business — “MedicExchange”and began operating in January 2006. The Company owns 90% of MDX and 10%is owned by Compile Nominees Limited, a company registered in Gibraltar, who isassisting MDX with the development of the portal.

*Lifesyne.*   Lifesynewas a wholly owned non-core subsidiary of MS-PLC that was established in September 2002to provide scanning services and thereby acquire patient CT scan data necessaryto test and validate the Medicsight CAD software. Lifesyne operated one scanningcenter in Westminster, London. On November 10, 2005, we sold Lifesyne toan independent third party for approximately $450,000. At that time the netassets of Lifesyne totaled approximately $844,000 leading to an impairment lossof approximately $394,000.

Revenues and operating losses for Lifesyne follow:

 

|                   | ** ** | **$(000)**                   | ** ** | ** **                   |
|-------------------|------------|------------------------------|------------|------------------------------|
| ** **        | ** ** | **Three months**        | ** ** | **Three months**        | ** ** | ** ** |
| ** **        | ** ** | **Ended**                    | ** ** | **Ended**                    | ** ** | ** ** |
| ** **        | ** ** | **March 31, 2006** | ** ** | **March 31, 2005** | ** ** | ** ** |
| Revenues          |       | $                            | —     |                         | $ | 150 |   |   |
| Operating  losses |       | $                            | —     |                         | $ | 246 |   |   |

 

*MAM.*   MAMis also a wholly owned subsidiary of MS-PLC that was established in September 2002for the purpose of acquiring fixed assets on behalf of the operating entitiesin the group. As Lifesyne’s strategy changed MAM’s business was limited so allassets were transferred to MS-PLC or Lifesyne at market value or fully impairedon December 31, 2004. MAM had ceased trading once all of its assets hadbeen disposed of.

***MedicExchange***

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

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

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*Product Benefits*

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

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

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

*Market Opportunity*

Radiologistsexpect frequency of computed tomography (“CT”) procedures to grow by over 35%over the next five years (source: Frost & Sullivan research).Traditional original equipment manufacturers (“OEM”) typically control theaccess to these applications and charge high per unit price points (typically$50,000 to $200,000). These high pricepoints create long sales cycles. The “per use” pricing model removes thisobstacle to purchase. Online product purchasing and downloads create aflexible, on demand usage model.

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

*What differentiates the company?*

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

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

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

***Medicsight CAD***

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

Todate, MS-PLC has focused on two of the leading causes of premature death, lungcancer and colorectal cancer. Between them, these diseases are responsible forover 8.5 million premature deaths globally. There is increasing evidence thatearly detection leads to an improved life expectancy. Developing technologythat enables early detection of lung and colorectal cancers has been a corefocus of our product development. However, MS-PLC’s technology is scalable tomany other disease areas. We have plans to further extend our technologies tonew areas of abdominal imaging such as liver during 2006.

TheCompany’s CAD products include ColonCAD Application Programming Interface (“API”), the first CAD technologyavailable for CT colonography, and LungCAD API. Medicsight CAD software is 

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provided to medicalimaging partners as an integrated solution and will also be available onlinethrough MedicExchange directly to clinicians.

*Product benefits*

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

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

*“Diagnostic” products; incidental “disease detection” and “disease tracking”*.   These products have been designed to be used insymptomatic patients but to detect other diseases incidental to those for whichthe investigation was originally requested. Subsequently, these incidentallyidentified lesions may be tracked so that their progress may be monitored bymeasurement.

“*Screening” products*; *population screening of asymptomatic patients*.   CADCT seeks to provide a cost effective solution to identify certain diseasessufficiently early to make population screening programs more cost effective interms of life years saved.

***Business Development***

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

TeraReconhas successfully integrated MS-PLC’s ColonCAD and LungCAD software intoTeraRecon’s flagship Aquarius family of medical imaging. The combined TeraRecon/ Medicsight imaging system made its debut in November 2005 at the annualmeeting of the Radiological Society of North America (“RSNA”) in Chicago,Illinois.

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

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

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

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

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

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*Regulatory Process*

Inorder to release new products into a specific market, MS-PLC must gainregulatory approvals for its Medicsight CAD products. In the U.S., the Food andDrug Administration (“FDA”) is the regulatory authority. In Europe, regulatoryapproval is gained through Conformité Europeène (“CE”) marking. The procedureused and timescales involved differ depending on the region but fundamentallyeach region requires evidence of products being developed under a strictquality management system. In October 2005 we gained ISO 13485:2003certification confirming the MS-PLC’s compliance with international qualitystandards. All of our products are designed, built, distributed and supportedto this level of quality control.

MS-PLCcan follow one of two routes to obtain FDA approval for its products: apre-market notification (“510(k)”) or a pre-market assessment (“PMA”). A 510(k) applicationis submitted when the product is substantially equivalent to an existinglegally marketed device. A PMA is required for higher risk products and is themore stringent route which requires scientific evidence to demonstrate that theproduct is safe and effective for its intended use.

ForEuropean CE approvals, a company is required to be regularly audited by anexternal notified body to demonstrate an effective quality system. Ifsuccessful, the company may then label its products with CE mark.

Marketssuch as China and Japan have their own regulatory bodies but these oftenrequire companies outside of these markets to show evidence of an existing CEor FDA approval for a product before gaining approval in the local market.

MS-PLChas a significant amount of experience in preparing, submitting and gainingregulatory approvals for its products. In the US, MS-PLC has existing FDA 510(k) approvalsfor its LungCAR and ColonCAR products and has approvals pending for the recentColonCAD and LungCAD releases. In Europe, MS-PLC has CE approval for allreleased products and is regularly audited by an external notified body. MS-PLCis seeking approvals for its ColonCAD and LungCAD products in Japan and China.As each new product is prepared for release, MS-PLC’s internal regulatory teamprepares the regulatory documentation for each market in order to allow thatproduct to be marketed and sold.

BecauseMS-PLC manages the approval process, its business partners can rapidlyintegrate and release their own products containing Medicsight CAD technologymore quickly than if they had to gain all the approvals independently.

Weregard our extensive experience in successfully obtaining European and FDAapprovals as a valuable asset of the Company. We believe this experience willbe useful in our efforts to obtain approval for our products in new marketssuch as China and Japan.

*Risk Factors*

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

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

TheCompany has had only a limited operating history and no revenues from itscontinuing operations upon which an evaluation of its prospects can be made.The Company’s prospects must be considered keeping in mind the risks, expensesand difficulties frequently encountered in the establishment of a new businessin 

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constantly changing industry.There can be no assurance that the Company will be able to achieve profitableoperations in the foreseeable future or at all.

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

*Technical Risks.**  *The Medicsight CAD system may not deliver the levelsof accuracy and reliability needed, or the development of such accuracy andreliability may be delayed.

*Market Risks.**  *The market for the Medicsight CAD products andMedicExchange may be slower to develop or smaller than estimated or it may bemore difficult to build the market than anticipated. The medical community mayresist the Medicsight CAD and MedicExchange products or be slower to acceptthem than we expect. Revenues from Medicsight CAD and MedicExchange may bedelayed or costs may be higher than expected which may result in the Companyrequiring additional funding.

*Regulatory Risks.**  *The Medicsight CAD system is subject to regulatoryrequirements in the United States Europe, Japan, China and our other targetedmarkets. Necessary regulatory approvals may not be obtained or may be delayed. Wemay incur substantial additional cost in obtaining regulatory approvals for ourproducts in our targeted markets.

*Competitive Risks.**  *There are a number of groups and organizations, suchas software companies in the medical imaging field, scanner manufacturers,screening companies and other healthcare providers that may develop acompetitive offering to the Medicsight CAD and MedicExchange. In addition thesecompetitors may have significantly greater resources than the Company. Wecannot make any assurance that they will not attempt to develop such offerings,that they will not be successful in developing such offerings or that anyofferings they do develop will not have a competitive edge over Medicsight CADand MedicExchange.

*Financial Risk.**  *The Company has incurredsignificant operating losses since inception and has generated no revenues fromcontinuing operations. As a result, the Company has generated negative cashflows from operations and has an accumulated deficit at March 31, 2006. TheCompany is operating in a developing industry based on new technology and itsprimary source of funds to date has been through the issuance of securities andborrowed funds. The Company is currently seeking additional funding and isactively developing the technology in order to bring it to market. While theCompany is optimistic and believes appropriate actions are being taken, therecan be no assurance that management’s efforts will be successful or that theproducts the Company develops and markets will be accepted by consumers.

*Corporate Structure.**  *The Company’s corporate structuremay make it more difficult or costly to take certain actions. The Companyconducts substantially all its business through MS-PLC, a U.K. public companywhich is 81.8% owned by the Company, and through MS-PLC’s subsidiaries in theUnited Kingdom and the United States and through MDX, which is 90% owned by theCompany. Although the Company and MS-PLC share directors and management,they are required to comply with corporate governance and other laws and rules applicableto public companies in the United Kingdom and the United States. Should theCompany propose to take any action, such as a transfer or allocation of assetsor liabilities between the Company and MS-PLC, the Company would have to takeinto consideration the potentially conflicting interests of the Company’sstockholders and the minority stockholders of MS-PLC. This may deter theCompany from taking such actions that might otherwise be in the best interestof the Company or cause the Company to incur additional costs in taking suchactions. MS-PLC would not be able to pay dividends or make other distributionsof profits or assets to the Company without making pro rata payments ordistributions to the minority stockholders of MS-PLC. Although neither MS-PLCnor the Company has plans to pay dividends or make distributions toits shareholders, the Company’s corporate structure may deter MS-PLC and theCompany from doing so in the future. This risk will also apply to MDX asit begins its operations this year as the Company owns 90% of MDX’s equity.

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*Foreign Exchange Risks.**  *As the Company’s operating currencyis UK sterling (£) and its financial statements are reported in US Dollars, theCompany’s assets and liabilities and its results of operations are affected bymovements in the $: £ exchange rate.

*Other Risks.**  *The Company’s ability to deliverits software could be hindered by risks such as the loss of key personnel orthe patents and trademarks being successfully challenged or credit facilitiesbeing reduced or terminated by lenders.

**RESULTSOF OPERATIONS**

*Revenues.*   Forthe quarters ended March 31, 2006 and March 31, 2005 the Company’sgross revenues from continuing operations were $nil.

TheCompany’s only revenues for the quarter ended March 31, 2005 were derivedfrom the Company’s discontinued LifesyneTM scanning operations — see “*Discontinued Operations*” below.

*Selling, General andAdministrative Expenses.*   The Company’s selling,general and administrative expenses from continuing operations for quartersended March 31, 2006 and March 31, 2005, were $2,468,000 and$2,223,000 respectively.

The significant elements of the Selling, General andAdministrative Expenses from continuing operations are outlined in the tablebelow:

|                                            | ** ** | **($000’s)**            | ** ** |
|--------------------------------------------|------------|------------------------------|------------|
| ** **                                 | ** ** | **Quarter  ended**           | ** ** | **Quarter  ended** | ** ** |
| ** **                                 | ** ** | **March 31, 2006** | ** ** | **March 31, 2005** | ** ** |
| Salaries and  directors’ compensation |       | 834                          |       | 844 |   |
|                                       |       |                         |       |   |   |
| Payroll taxes  and other staff costs       |       | 100                          |       | 88 |   |
|                                       |       |                         |       |   |   |
| Professional  fees                         |       | 341                          |       | 339 |   |
|                                       |       |                         |       |   |   |
| Property rent                              |       | 156                          |       | 153 |   |
|                                       |       |                         |       |   |   |
| Travel and  conferences                    |       | 344                          |       | 329 |   |
|                                       |       |                         |       |   |   |
| Software licenses                          |       | 161                          |       | 204 |   |

 

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*Research and DevelopmentCost.**  *TheCompany’s research and development cost for quarters ended March 31, 2006and March 31, 2005, was $627,000 and $639,000 respectively.

*Discontinued Activities.**  *During thethird quarter of 2005 a plan was initiated for the disposal of the Lifesynebusiness and Lifesyne was subsequently sold on November 10, 2005. Inaccordance with Statement of Financial Accounting Standards No. 144 *Accounting for Impairment or disposal of Long-LivedAssets* Lifesyne has been accounted for as discontinued operations. Accordingly,our financial statements for the quarter ended March 31, 2005 has beenrestated to reflect the Lifesyne Segment as a discontinued operation in ourconsolidated statements of operations and cash flows.**

Revenues and operating losses for Lifesyne follow:

|                  | ** ** | **$(000)**                   | ** ** |
|------------------|------------|------------------------------|------------|
| ** **       | ** ** | **Three months  Ended** | ** ** | **Three months  Ended** | ** ** |
| ** **       | ** ** | **March 31, 2006** | ** ** | **March 31, 2005** | ** ** |
| Revenues         |       | $                            | —     |   | $ | 150 |   |
| Operating losses |       | $                            | —     |   | $ | 246 |   |

 

*Net Loss and Net Loss perShare.**  *Netloss was $3,030,000 and $3,094,000 respectively for the quarters ended March 31,2006 and March 31, 2005. Net loss per share for the quarters ended March 31,2006 and March 31, 2005 was $0.08 and $0.09, respectively, based onweighted average shares outstanding of 37,291,216 and 33,302,325 respectively.

**LIQUIDITY ANDCAPITAL RESOURCES**

*Working Capital Information as March 31:*

|                                                 | ** ** | **($000’s)**            | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|
|                                                 | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
| Cash and Cash Equivalents        |       | 7,364                        |       | 7,249 |   |
|                                            |       |                         |       |   |   |
| Current Assets                                  |       | 8,014                        |       | 11,867 |   |
|                                            |       |                         |       |   |   |
| Current  Liabilities                            |       | (1,015                       | )          | (2,746 | ) |
|                                            |       |                         |       |   |   |
| Working Capital  Surplus                        |       | 6,999                        |       | 9,121 |   |
|                                            |       |                         |       |   |   |
| Ratio of Current  Assets to Current Liabilities |       | 7.90                         |       | 4.32 |   |

 

*Net Increase in Cash andCash Equivalents.*   During the quarter ended March 31,2006, the Company’s cash and cash equivalents increased by $115,000. Thisincrease was primarily the result of cash flows received from shares issued bythe Company exceeding the net cash used in operating activities. The Company used

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net cash of $4,632,000 incontinuing operations. The Company received net cash of $985,000 in financingactivities and received $3,912,000 from investing activities.

*Net Cash Used inOperations.*   The Company used cash in continuingoperations of $4,632,000 in the quarter ended March 31, 2006, as theCompany incurred significant operating and software research and developmentcosts. These significant costs included professional fees, salaries and directorcompensation, marketing, regulatory costs and property service charges and rentand the payment of $1,151,000 to Asia IT for the commissions due to them on theCompany’s private placements. The Company used cash in continuing operations inthe quarter ended March 31, 2005 of $2,069,000.

*Net Cash provided byInvesting Activities.*   In the quarter ended March 31,2006, the Company had a net cash inflow from investing activities of$3,912,000. The main component was the release of $4,000,000 received by theCompany in December 2005 following the issuance of the common stock in January 2006.Additionally, the Company purchased $88,000 in fixed assets in the same period.In the quarter ended March 31, 2005, the Company had a net cash outflowfrom investing activities of $20,000. The Company used the funds to purchaseadditional fixed assets.

*Net Cash Provided byFinancing Activities.*   In the quarter ended March 31,2006, the Company had a net cash inflow from financing activities of $985,000.The funds received consisted mainly of $990,000 from the Company’s privateofferings. For the quarter ended March 31, 2005, the Company had a netcash inflow from financing activities of $1,781,000. The funds receivedconsisted of $1,813,000 received from the private offering of the Company’sstock.

*Stockholders’ Equity.*   TheCompany’s stockholders’ equity at March 31, 2006 was $19,586,000, includingan accumulated deficit of $(193,744,000), as compared to $21,734,000 at December 31,2005, including an accumulated deficit of $(190,714,000). Additional paid-incapital was $213,373,000 and $208,684,000, at March 31, 2006 and December 31,2005 respectively.

*Additional Capital.*   TheCompany will require additional capital during the balance of 2006 and 2007 toimplement its business strategies, including cash for payment of increasedoperating expenses such as salaries for additional employees. Such additionalcapital may be raised through additional public or private equity offerings, aswell as borrowings and other resources. Currently, the Company has twoavailable lines of credit.

Duringthe quarter ended March 31, 2006 the Company raised $4,590,000 (net ofcommission and expenses) by issuing 1,275,000 restricted shares of commonstock. These private placements were underwritten by Asia IT CapitalInvestments Limited (“Asia IT”), a related party. Asia IT received commissionsof $510,000 on the above private placements.

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

On November 20,2001, Asia IT entered into a £10,000,000 ($18,000,000) credit facility withMS-PLC. Such facility matures on June 30, 2007 and is secured by a lien onall assets of MS-PLC. Interest on outstanding amounts accrues at 2% above GBPLIBOR. The loan is convertible into ordinary shares in MS-PLC on announcementof an Offer to Subscribe, Placing or other public offering of its ordinaryshares, at the same price per share as the offering price.

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At March 31,2006, the Company had not drawn down any funds under the $20,000,000 facilitywith Asia IT, and MS-PLC had not drawn down any funds under its £10,000,000($18,000,000) facility with Asia IT.

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

*Critical Accounting Policies*

TheSecurities and Exchange Commission requested that all registrants list theirmost critical accounting policies in the Management’s Discussion and Analysesof Financial Condition and Results of Operations. The Securities and ExchangeCommission indicated a “critical accounting policy” is one which is bothimportant to the portrayal of the company’s financial condition and results andrequires management’s most difficult, subjective or complex judgments, often asa result of the need to make estimates about the effect of matters that areinherently uncertain. We believe that the following accounting policies fit thedefinition of critical accounting policies.

*Revenue Recognition.**  *We expect to earn our revenueprimarily from software licenses and related services. Our revenue will berecognized in accordance with Statement of Position 97-2 (SOP 97-2),as amended by Statement of Position 98-9. The Company’s revenueswere derived from its discontinued scanning services operated by Lifesyne. Scanrevenue is recognized when the service is delivered.

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

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

12

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*Research and Development.**  *Costs incurred in connection with the development ofsoftware products that are intended for sale are accounted for in accordancewith Statement of Financial Accounting Standards No. 86, “Accounting forthe Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”.Costs incurred prior to technological feasibility being established for theproduct are expensed as incurred. Technological feasibility is established uponcompletion of a detail program design or, in its absence, completion of a workingmodel. Thereafter, all software production costs are capitalized andsubsequently reported at the lower of unamortized cost or net realizable value.Capitalized costs are amortized based on current and future revenue for eachproduct with an annual minimum equal to the straight-line amortization over theremaining estimated economic life of the product. Amortization commences whenthe product is available for general release to customers.

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

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

Calculatingthe estimated fair value of an asset involves significant judgments and avariety of assumptions. Judgments that the Company makes concerning the valueof its intangible assets include assessing time and cost involved fordevelopment, time to market, and risks of regulatory failure or obsolescence,(due to market, environmental or technological advances for example). For calculatingfair value based on discounted cash flows, we forecast future operating resultsand future cash flows, which include long-term forecasts of revenue growth,gross margins and capital expenditures.

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

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

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

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

*Recent AccountingPronouncements*

None.

13

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

**Interest Rate Risk**

The Company’s exposure to market risk associated withchanges in interest rates relates to its debt obligations. The Company has thefollowing debt facilities, which are all repayable on demand:

| Debt Holder                      | ** ** | ** **  | ** ** | **Facility** | ** ** | **Draw Down** | ** ** | **Interest rate** | ** ** | **At March 31** | ** ** |
|----------------------------------|------------|-------------|------------|--------------|------------|---------------|------------|-------------------|------------|----------------------|------------|
| Asia IT Capital  Investments Ltd |       | $20,000,000 |       | $nil         |       | US Libor + 2  | %          | 7.29              | %          |
| Asia IT Capital  Investments Ltd |       | $18,000,000 |       | $nil         |       | GBP Libor + 2 | %          | 6.78              | %          |

 

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

**Foreign Exchange Risk**

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

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

14

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**Item4.**                          Controlsand Procedures

*Evaluation of Disclosure Controls and Procedures*

Asrequired by Rule 13a-15(b) under the Exchange Act, ourmanagement carried out an evaluation of the effectiveness of the design andoperation of the Company’s “disclosure controls and procedures” as of March 31,2006. This evaluation was carried out under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer. As defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act, disclosure controls and procedures are controls and otherprocedures of the Company that are designed to ensure that information requiredto be disclosed by the Company in the reports it files or submits under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed bythe Company in the reports it files or submits under the Exchange Act isaccumulated and communicated to the Company’s management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure.

Basedupon that evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of March 31,2006. It should be noted that the design of any system of controls is based inpart upon certain assumptions about the likelihood of future events, and therecan be no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions, regardless of how remote.

*Changes in Internal Control over Financial Reporting*

Asrequired by Rule 13a-15(d) under the Exchange Act, ourmanagement, including our Chief Executive Officer and Chief Financial Officer,also conducted an evaluation of our internal control over financial reportingto determine whether any change occurred during the quarter ended March 31,2006, that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting. Based on that evaluationduring the quarter ended March 31, 2006 there has been no change in ourinternal control over financial reporting that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

TheCompany is currently undergoing a comprehensive effort in preparation forcompliance with Section 404 of the Sarbanes-Oxley Act of 2002. This willinvolve the documentation, testing and review of our internal controls underthe direction of senior management.

15

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**PART II**

**Item 1.**                          LegalProceedings

Thereare currently no pending legal proceedings.

**Item 2.**                          UnregisteredSales of Equity Securities and Use of Proceeds

BetweenJanuary 1, 2006 and March 31, 2006 the Company issued approximately1,275,000 shares of common stock at $4.00 per share to a number of institutionalinvestors and private individuals as part of a private placement raisingapproximately $4,590,000 net of commissions payable to Asia IT, a relatedparty. The shares of common stock were issued without registration in relianceupon the exemption provided by Section 4(2) of the Securities Act of1933.

**Item 3.**                          DefaultsUpon Senior Securities

None.

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

None.

**Item 5.**                          OtherInformation

None.

16

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**Item6.**                          Exhibitsand Reports on Form 8-K

(a)             Exhibits

31.1                             Certification pursuant toSection 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer -filed herewith).

31.2                             Certificationpursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief FinancialOfficer - filed herewith).

32.1                             Certificationpursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief ExecutiveOfficer - filed herewith).

32.2                             Certificationpursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief FinancialOfficer - filed herewith).

(b)            Reports on Form 8-K

None

 

17

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**MEDICSIGHT,INC. AND SUBSIDIARIES**

**INDEXTO CONDENSED CONSOLIDATED**FINANCIAL STATEMENTSAS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2006
| Condensed Consolidated  Balance Sheets as of March 31, 2006 (Unaudited) and December 31,  2005                                                                |   | F-2         |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|
|                                                                                                                                                                    |   |        |
| Condensed Consolidated Statements of Operations for  the Three Months Ended March 31, 2006 (Unaudited) and the Three Months  Ended March 31, 2005 (Unaudited) |   | F-3         |
|                                                                                                                                                                    |   |        |
| Condensed Consolidated Statement of Cash Flows for the  Three months Ended March 31, 2006 (Unaudited) and the Three months Ended  March 31, 2005 (Unaudited)  |   | F-4         |
|                                                                                                                                                                    |   |        |
| Notes to Condensed Consolidated Financial Statements                                                                                                                    |   | F-5 to F-10 |

 

F-1

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**MEDICSIGHT, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**($ thousands, exceptper share data)

 
| ** **                                                                                                                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                          | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ** **                                                                                                                          | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| ASSETS                                                                                                                              |       |               |       |                  |       |
| CURRENT ASSETS:                                                                                                                     |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                          |       | $                  | 7,364      |                  | $          | 7,249 |   |
| Cash held for common  stock subscribed but unissued                                                                                 |       | —             |       | 4,000                 |       |
| Other receivables                                                                                                                   |       | 322                |       | 344                   |       |
| Prepaid expenses                                                                                                                    |       | 211                |       | 213                   |       |
| Value-Added Tax  receivable                                                                                                         |       | 117                |       | 61                    |       |
| Total current  assets                                                                                                               |       | 8,014              |       | 11,867                |       |
|                                                                                                                                |       |               |       |                  |       |
| PROPERTY AND EQUIPMENT,  at cost, net of accumulated depreciation of $1,481 and $1,542 respectively                                 |       | 225                |       | 252                   |       |
|                                                                                                                                |       |               |       |                  |       |
| INVESTMENTS, at cost                                                                                                                |       | 359                |       | 359                   |       |
|                                                                                                                                |       |               |       |                  |       |
| SECURITY DEPOSITS                                                                                                                   |       | 808                |       | 808                   |       |
|                                                                                                                                |       |               |       |                  |       |
| EXCESS OF PURCHASE  PRICE OVER                                                                                                      |       |               |       |                  |       |
| NET ASSETS ACQUIRED                                                                                                                 |       | 11,200             |       | 11,200                |       |
|                                                                                                                                |       |               |       |                  |       |
| Total assets                                                                                                                        |       | $                  | 20,606     |                  | $          | 24,486 |   |
|                                                                                                                                |       |               |       |                  |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                          |       |               |       |                  |       |
|                                                                                                                                |       |               |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                |       |               |       |                  |       |
| Accounts payable                                                                                                                    |       | $                  | 764        |                  | $          | 1,172 |   |
| Accounts payable —  related party                                                                                              |       | —             |       | 1,151                 |       |
| Accrued expenses                                                                                                                    |       | 236                |       | 404                   |       |
| Current portion of  obligations under capital leases                                                                                |       | 15                 |       | 19                    |       |
| Total current  liabilities                                                                                                          |       | 1,015              |       | 2,746                 |       |
|                                                                                                                                |       |               |       |                  |       |
| Obligations under  capital leases, net of current portion                                                                           |       | 5                  |       | 6                     |       |
| Total  liabilities                                                                                                                  |       | 1,020              |       | 2,752                 |       |
|                                                                                                                                |       |               |       |                  |       |
| Commitments and  contingencies                                                                                                      |       |               |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                                          |       |               |       |                  |       |
| Common stock, $0.001  par value, 40,000,000 shares authorized, 37,667,883 and 36,392,883shares  issued and outstanding respectively |       | 38                 |       | 36                    |       |
| Additional paid-in  capital                                                                                                         |       | 213,373            |       | 208,684               |       |
| Common stock subscribed  but unissued, net                                                                                          |       | —             |       | 3,600                 |       |
| Accumulated  comprehensive income                                                                                                   |       | (81                | )          | 128                   |       |
| Accumulated deficit                                                                                                                 |       | (193,744           | )          | (190,714              | )          |
| TOTAL STOCKHOLDERS’  EQUITY                                                                                                    |       | 19,586             |       | 21,734                |       |
|                                                                                                                                |       |               |       |                  |       |
| Total liabilities and stockholders’ equity                                                                                     |       | $                  | 20,606     |                  | $          | 24,486 |   |

 

The accompanying notes are an integral part of thesecondensed statements.

F-2

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**MEDICSIGHT,INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS($ thousands, except per share amounts)**
| ** **                                           | ** ** | **Three Months**        | ** ** | **Three Months**        | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                           | ** ** | **Ended**                    | ** ** | **Ended**                    | ** ** |
| ** **                                           | ** ** | **March 31, 2006** | ** ** | **March 31, 2005** | ** ** |
| ** **                                           | ** ** | **(unaudited)**              | ** ** | **(unaudited)**              | ** ** |
| ** **                                           |       |                         |       |                         |       |
| REVENUES                                             |       | $                            | —     |                         | $          | — |   |
|                                                 |       |                         |       |                         |       |
| EXPENSES:                                            |       |                         |       |                         |       |
| Selling, general  and administrative charges         |       | 2,468                        |       | 2,223                        |       |
| Research and  development cost                       |       | 627                          |       | 639                          |       |
|                                                 |       | 3,095                        |       | 2,862                        |       |
|                                                 |       |                         |       |                         |       |
| Operating  loss                                      |       | (3,095                       | )          | (2,862                       | )          |
|                                                 |       |                         |       |                         |       |
| OTHER  INCOME                                        |       |                         |       |                         |       |
| Interest and other income                            |       | 65                           |       | 14                           |       |
|                                                 |       |                         |       |                         |       |
| LOSS  FROM CONTINUING OPERATIONS                     |       | (3,030                       | )          | (2,848                       | )          |
|                                                 |       |                         |       |                         |       |
| DISCONTINUED  OPERATIONS:                            |       |                         |       |                         |       |
| Loss from operations of Lifesyne                     |       | —                       |       | (246                         | )          |
|                                                 |       |                         |       |                         |       |
| NET  LOSS                                            |       | $                            | (3,030     | )                            | $          | (3,094 | ) |
|                                                 |       |                         |       |                         |       |
| LOSS  PER SHARE:                                     |       |                         |       |                         |       |
| Basic  and diluted:                                  |       |                         |       |                         |       |
| Loss from continuing operations                      |       | $                            | (0.08      | )                            | $          | (0.09 | ) |
| Loss from discontinued operations                    |       | $                            | (0.00      | )                            | $          | (0.00 | ) |
|                                                 |       |                         |       |                         |       |
| Net loss                                             |       | $                            | (0.08      | )                            | $          | (0.09 | ) |
|                                                 |       |                         |       |                         |       |
| Weighted average number of common shares outstanding |       | 37,291,216                   |       | 33,302,325                   |       |

** **

**The accompanying notes are an integralpart of these**condensedstatements.

F-3

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**MEDICSIGHT,INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS(In $ thousands)**
| ** **                                                                  | ** ** | **Three months**        | ** ** | **Three months**        | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                  | ** ** | **ended**                    | ** ** | **ended**                    | ** ** |
| ** **                                                                  | ** ** | **March 31, 2006** | ** ** | **March 31, 2005** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                      |       |                         |       |                         |       |
| Net loss                                                                    |       | $                            | (3,030     | )                            | $          | (3,094 | ) |
|                                                                        |       |                         |       |                         |       |
|                                                                        |       |                         |       |                         |       |
|                                                                        |       |                         |       |                         |       |
| Adjustments to  reconcile net loss to net cash used in operating activities |       |                         |       |                         |       |
| Loss from discontinuing operations                                          |       | —                       |       | 246                          |       |
| Share-based compensation                                                    |       | 96                           |       | —                       |       |
| Depreciation and amortization                                               |       | 61                           |       | 127                          |       |
| (Increase)/decrease in assets                                               |       |                         |       |                         |       |
| Prepaid expenses and other receivables                                      |       | 24                           |       | (238                         | )          |
| VAT receivable                                                              |       | (56                          | )          | 503                          |       |
| Increase/(decrease) in liabilities                                          |       |                         |       |                         |       |
| Accounts payable                                                            |       | (408                         | )          | 744                          |       |
| Accounts payable — related party                                       |       | (1,151                       | )          | —                       |       |
| Accrued expenses                                                            |       | (168                         | )          | (357                         | )          |
| Net cash used in operating activities                                       |       | (4,632                       | )          | (2,069                       | )          |
|                                                                        |       |                         |       |                         |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                      |       |                         |       |                         |       |
| Cash held for  common stock subscribed but unissued                         |       | 4,000                        |       | —                       |       |
| Purchase of  property and equipment                                         |       | (88                          | )          | (20                          | )          |
| Net cash (used in)/provided by investing activities                         |       | 3,912                        |       | (20                          | )          |
|                                                                        |       |                         |       |                         |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                      |       |                         |       |                         |       |
| Principal  payments under capital lease obligations                         |       | (5                           | )          | (32                          | )          |
| Proceeds from  sale of common stock (net of commissions)                    |       | 990                          |       | 1,813                        |       |
| Net cash provided by financing activities                                   |       | 985                          |       | 1,781                        |       |
|                                                                        |       |                         |       |                         |       |
| Cash flows of  discontinued operations                                      |       |                         |       |                         |       |
| Net cash used in operating activities                                       |       | —                       |       | (174                         | )          |
| Net cash (used in) financing activities                                     |       | —                       |       | (5                           | )          |
|                                                                        |       | —                       |       | (179                         | )          |
|                                                                        |       |                         |       |                         |       |
| Effects of  exchange rates on cash and cash equivalents                     |       | (150                         | )          | (220                         | )          |
|                                                                        |       |                         |       |                         |       |
| NET CHANGE IN  CASH & CASH EQUIVALENTS                             |       | 115                          |       | (707                         | )          |
|                                                                        |       |                         |       |                         |       |
| CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD                            |       | 7,249                        |       | 5,276                        |       |
|                                                                        |       |                         |       |                         |       |
| CASH &  CASH EQUIVALENTS, END OF PERIOD                            |       | $                            | 7,364      |                         | $          | 4,569 |   |
|                                                                        |       |                         |       |                         |       |
| SUPPLEMENTAL  DISCLOSURES OF CASH PAID                                      |       |                         |       |                         |       |
| Interest                                                                    |       | $                            | 1          |                         | $          | 2 |   |
|                                                                        |       |                         |       |                         |       |
| NON CASH  FINANCING ACTIVITIES                                              |       |                         |       |                         |       |
| Issuance of  stock subscribed                                               |       | $                            | 3,600      |                         | $          | — |   |

 

F-4

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**MEDICSIGHT,INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

*(1)*                               Formationand Business of the Company

Medicsight, Inc. was originally incorporated as aUtah corporation in 1977 and was re-incorporated in Delaware in 2000. All referencesin this report to “the Company”, “we” or “us” refer to Medicsight, Inc.and subsidiaries. The Company has two primary business objectives:

*·*                  To conceive, develop and commercialize innovativemedical imaging applications derived from our core technology known asMedicsight CAD.

*·*                  To establish a global online community for medicalimaging professionals (to be known as MedicExchange) with a rich selection ofspecialist clinical content for registered users combined with a productmarketplace where medical imaging vendors can sell their solutions online.

*(2)*                               Basisof Presentation and liquidity

The accompanying unaudited condensed consolidatedfinancial statements of the Company have been prepared pursuant to the rules ofthe Securities and Exchange Commission (the “SEC”). Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles in the United Stateshave been condensed or omitted pursuant to such rules and regulations.These unaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for theFiscal year ended December 31, 2005. In the opinion of management, theaccompanying unaudited condensed consolidated financial statements reflect alladjustments, which are of a normal recurring nature, necessary for a fairpresentation of the results for the periods presented.

The results of operations for the quarter ended March 31,2006 are not necessarily indicative of the results expected for the full fiscalyear or for any future period.

The unaudited condensed consolidated include theaccounts of Medicsight, Inc. and its subsidiaries in which it has acontrolling interest. All inter-company accounts have been eliminated inconsolidation. The Company has ceased recognizing the minority interest in itsconsolidated subsidiaries losses because the losses have exceeded the minorityshareholders equity interest in those subsidiaries.

The Company has incurred significant operating lossessince inception. As a result, the Company has generated negative cash flowsfrom operations, and has an accumulated deficit at March 31, 2006. The Companyis operating in a developing industry based on new technology and its primarysource of funds to date has been through the issuance of securities andborrowed funds. The Company is currently seeking additional funding and isactively developing the technology in order to bring it to market. While theCompany is optimistic and believes appropriate actions are being taken, therecan be no assurance that management’s efforts will be successful or that theproducts the Company develops and markets will be accepted by consumers.

*(3)*                               Linesof Credit

On December 15, 2000, the Company entered into anunsecured credit facility with Asia IT, a related party, which provides a$20,000,000 line of credit. Such line of credit originally expired on December 31,2001, but has been extended until June 30, 2007. Interest on advancesunder the credit facility accrues at 2% above US LIBOR. The Company can drawdown on this credit facility for its financing requirements, upon approval bythe Company’s Board of Directors and subject to approval by Asia IT (such

F-5

----

approval not to be unreasonably withheld). The Companyis restricted from borrowing funds, directly or indirectly, other than throughthe credit facility with Asia IT, without the consent of Asia IT. Theavailability of the credit facility 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.

On November 20, 2001, MS-PLC entered into a£10,000,000 ($18,000,000) credit facility with Asia IT. Such facility matureson June 30, 2007 and is secured by a lien on all assets of MS-PLC. Intereston outstanding amounts accrues at 2% above GBP LIBOR. The loan is convertibleinto ordinary shares in MS-PLC on announcement of an Offer to Subscribe,Placing or other public offering of its ordinary shares, at the same price pershare as the offering price.

At March 31, 2006, the Company had not drawn downany funds under the $20,000,000 facility with Asia IT, and MS-PLC had not drawndown any funds under its £10,000,000 ($18,000,000) facility with Asia IT.

*(4)*                               DiscontinuedActivities

During the third quarterof 2005 a plan was initiated for the disposal of the Lifesyne business andLifesyne was subsequently sold on November 10, 2005. In accordance withStatement of Financial Accounting Standards No. 144 *Accounting for Impairment or disposal of Long-LivedAssets* Lifesyne has been accounted for as discontinued operations. Accordingly,our financial statements for the quarter ended March 31, 2005 has beenrestated to reflect the Lifesyne Segment as a discontinued operation in ourconsolidated statements of operations and cash flows.

On November 10,2005 Lifesyne was sold to an independent third party for approximately$450,000. On August 18, 2005 MS-PLC entered into an option agreement withthe purchaser to acquire Lifesyne for a non-refundable deposit of approximately$90,000 as the purchaser needed further time to arrange the financing for theacquisition. This deposit constituted part of the sale proceeds on completionof the acquisition. At that time the net assets of Lifesyne totaledapproximately $844,000 leading to an impairment loss of approximately $394,000.

Revenues and operatinglosses for Lifesyne follow:

$(000)

|                   | ** ** | **Three months**        | ** ** | **Three months**        | ** ** |
|-------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **        | ** ** | **Ended**                    | ** ** | **Ended**                    | ** ** |
| ** **        | ** ** | **March 31, 2006** | ** ** | **March 31, 2005** | ** ** |
| ** **        |       |                         |       |                         |       |
| Revenues          |       | $                            | —     |                         | $          | 150 |   |
| Operating  losses |       | $                            | —     |                         | $          | 246 |   |

 

*(5)*                               Stockholders’Equity

During the quarter ended March 31, 2006 theCompany raised $4,590,000 (net of commission and expenses) by issuing 1,275,000restricted shares of common stock. These private placements were underwrittenby Asia IT, a related party. Asia IT received commissions of $510,000 on theseprivate placements. This amount is inclusive of the common stock subscribed butunissued of $3,600,000 at December 31, 2005.

F-6

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*(6)*                               Accountingfor Stock Based Compensation

Effective January 1, 2006, we adopted Statementof Financial Accounting Standards No. 123 (revised), “Share-Based Payment”(SFAS 123(R)), utilizing the modified prospective approach. Prior to theadoption of SFAS 123(R), we accounted for stock option grants in accordancewith Accounting Principle Board (“APB”) Opinion No. 25, “Accounting forStock Issued to Employees” (the intrinsic value method) and, accordingly,recognized no compensation expense for stock option grants if the intrinsicvalue of a grant was zero or less.

Under the modified prospective approach, SFAS 123(R) appliesto new awards and to awards that were outstanding on January 1, 2006 thatare subsequently modified, repurchased or cancelled. Under the modifiedprospective approach, compensation cost recognized in the first quarter of 2006includes compensation cost for all share-based payments granted prior to, butnot yet vested as of, January 1, 2006, based on the grant-date fair valueestimated in accordance with the original provisions of SFAS 123, andcompensation cost for all share-based payments granted subsequent to January 1,2006, based on the grant-date fair value estimated in accordance with theprovisions of SFAS 123(R). Prior periods were not restated to reflect theimpact of adopting the new standard.

As a result of adopting SFAS 123(R) on January 1,2006, the net loss for the quarter ended March 31, 2006 was $96,000 higherthan if we had continued to account for stock-based compensation under APBOpinion No. 25 for our stock option grants.

On March 20, 2003, the Board of Directors ofMS-PLC approved a stock option plan “A” for its employees and reserved4,000,000 shares of its common stock for issuance upon exercise of optionsgranted under this plan. On April 19, 2003, the Remuneration Committee ofMS-PLC also approved the stock option plan and implemented it on April 30,2003 granted options over 2,828,600 shares to employees of MS-PLC. At March 31,2006 there were 1,833,000 options outstanding and 100% of the options issuedwere exercisable under this plan.

On September 30, 2004 MS-PLC granted options over3,400,500 shares to its employees under the stock option plan “B”. Subsequentlyon August 15, 2005, the Board of Directors of MS-PLC approved the stockoption plan “B”. At March 31, 2006 there were 2,043,700 optionsoutstanding and 70% of the options issued were exercisable under this planafter MS-PLC had passed certain vesting criteria.

On June 30, 2005 MS-PLC initially granted optionsover 200,000 shares to its employees under the stock option plan “C”.Subsequently on August 15, 2005, the Board of Directors of MS-PLC approveda stock option plan “C”. At March 31, 2006 there were 245,000 optionsoutstanding and none of the options issued were exercisable. Options issuedunder this plan vest equally after employees have been employed for 12, 24 and36 months.

F-7

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The following table illustrates the effect onoperating results and per share information if the Company had accounted forstock-based compensation in accordance with SFAS 123(R) for the threemonths ended March 31, 2005:

|                                               | ** ** | **Quarter ended**                    | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **March 31, 2005  (unaudited)** | ** ** |
| ** **                                    | ** ** | **$’000**                            | ** ** |
| Net loss as reported:                         |       | (3,094                                    | )          |
|                                          |       |                                      |       |
| Fair value method of stock based compensation |       | (20                                       | )          |
|                                          |       |                                      |       |
| Proforma net loss                             |       | (3,114                                    | )          |
|                                          |       |                                      |       |
| Reported earnings per common share            |       |                                      |       |
| Basic and diluted                             |       | (0.09                                     | )          |
| Proforma earnings per common share            |       |                                      |       |
| Basic and diluted                             |       | (0.09                                     | )          |

 

Weused the Black-Scholes option-pricing model to estimate the fair value ofMS-PLC’s stock-based awards with the following weighted-average assumptions forthe indicated periods:

|                                        | ** ** | **March 31, 2006** | ** ** |
|----------------------------------------|------------|------------------------------|------------|
|                                   |       |                         |       |
| Dividend yield                         |       | 0.0                          | %          |
| Expected volatility                    |       | 65.1                         | %          |
| Risk-free rate                         |       | 4.6                          | %          |
| Expected life of options               |       | 2.0                          |       |
| Weighted-average grant-date fair value |       | $                            | 1.65       |   |
|                                   |       |                         |       |
|                                        |            |                              |            |  |

 

Theassumptions above are based on multiple factors including 10 year UnitedKingdom treasury bonds for the risk-free rate, expected future exercisingpatterns (we cannot base the estimate on the historical exercise patterns as nooptions have been exercised) and the volatility of the Company’s own stockprice stock price as MS-PLC’s stock is not liquid.

*(7)*                               Goodwilland Other Intangible Assets

The Company adopted SFAS No. 142 effective January 1,2002. Under this standard, goodwill will no longer be amortized over itsestimated useful life, but will be tested for impairment on an annual basis andwhenever indicators of impairment arise.

*(8)*                               SecurityDeposits

As MS-PLC occupies approximately 95% of 46 BerkeleySquare it acquired the security deposit on the offices for cash from ICCProperties Limited (“ICCP”) (previously Yang Cellulose Company Limited andInternational Cellulose Company Limited) in February 2003. The value ofthe security deposit is £470,000 ($808,000) and is interest-bearing.

F-8

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*(9)*                               Investments

The Company accounts for its investments innon-marketable securities under the cost method of accounting as it owns lessthan a 20% interest in each of the companies and does not have significantinfluence over the entities. The Company reviews each investment continually toassess for other-than-temporary decreases in value in its investments. TheCompany reviews all available financial and non-financial data in assessing theextent of any impairment.

At March 31, 2006, the Company held the followinginvestment:

A 6% holding in EurindiaPLC, a company that seeks to invest in small Indian IT services companies.Following information received from Eurindia’s management the Company estimatesthe current value of the investment to be approximately $790,000.

*(10)*                        LeaseCommitments

The Company had entered into property leases for the Westminsterand Ravenscourt centers through its Lifesyne subsidiary. Following the sale ofLifesyne the Company has no outstanding formal property lease agreements.

The Company’s corporate offices are at 46 BerkeleySquare, London W1J 5AT, United Kingdom. The office is comprised of 9,642 squarefeet. Until June 30, 2003, rent was paid quarterly in advance to aproperty management company, Berkeley Square Ventures Limited, which in turncollects the rent for ICCP, the entity that holds the lease on the property.Subsequent to June 30, 2003, rent has been paid directly to ICCPL. In November 2001,ICCP was acquired by Macniven and Cameron Equity Holdings Limited (“M&C”)(previously STG Holdings PLC), a major shareholder of the Company. The rentpayable is based on the amount of space each company occupies. There are noformal leases between the Company and ICCP.

*(11)*                        ComprehensiveIncome

As of March 31, 2006and the quarter then ended, comprehensive income is comprised of a net lossfrom operations and the net effect of foreign currency translation adjustments.This comprised a net loss of $3,030,000 and foreign currency translationadjustments of $(209,000) resulting in comprehensive loss of  $3,239,000.

*(12)        Recent Accounting Pronouncements*

None.

F-9

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*(13)        Related Party Transactions*

On December 29, 2000, the Company acquired all ofthe issued and outstanding shares of HTTP Insights Limited (“Insights”). AsiaIT Capital Investments Limited (“Asia IT”) was a shareholder in Insights aswell as the Company at the time of the acquisition, and has provided a creditfacility for up to $20,000,000. The credit facility expired on December 31,2001, but has been extended to June 30, 2007. All advances under thecredit facility accrue interest at 2% above US LIBOR. The Company is restrictedfrom borrowing funds, directly or indirectly, other than through the creditfacility, without the consent of Asia IT.

On November 20, 2001, Asia IT entered into a10,000,000 ($18,000,000) credit facility with MS-PLC. Such facilityceases on June 30, 2007 and is secured by a lien on all of the assets ofMS-PLC. Interest on outstanding amounts accrues at 2% above SterlingLIBOR. Pursuant to such credit facility, MS-PLC had covenanted toundertake a public offering of its ordinary shares in an amount not less than25,000,000 ($45,000,000) not later than March 2002. MS-PLC did notcomplete such an offering and the facility nevertheless remains in place.

In addition to the loan facilities made available byAsia IT to the Company and MS-PLC, Asia IT received commissions on sharesissued under private placements in the fiscal quarter ended March 31,2006, and in the fiscal years ended December 31, 2005 and 2004. A directorof Asia IT is a brother of Tim Paterson-Brown who was appointed to theBoard on December 8, 2003 and to the Board of MS-PLC on September 5,2003.

During the quarter ended March 31, 2006 theCompany raised $4,590,000 (net of commission and expenses) by issuing 1,275,000restricted shares of common stock. These private placements were underwrittenby Asia IT, a related party. Asia IT received commissions of $510,000 on theseprivate placements. This amount is inclusive of the common stock subscribed butunissued of $3,600,000 at December 31, 2005.

The Company’s corporate offices are at 46 BerkeleySquare, London W1J 5AT, United Kingdom. The office is comprised of 9,642 squarefeet. Until June 30, 2003, rent was paid quarterly in advance to aproperty management company, Berkeley Square Ventures Limited, which in turncollects the rent for ICCP, the entity that holds the lease on the property.Subsequent to June 30, 2003, rent has been paid directly to ICCPL. In November 2001,ICCP was acquired by Macniven and Cameron Equity Holdings Limited (“M&C”)(previously STG Holdings PLC), a major shareholder of the Company. The rentpayable is based on the amount of space each company occupies. There are noformal leases between the Company and ICCP. The Company paid rent of $156,000in the quarter ended March 31, 2006, and $153,000 in the quarter endedMarch 31, 2005.

F-10

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**SIGNATURE**

In accordance with the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.
|   | MEDICSIGHT, INC. |
|--------|------------------|
|   |             |
|   |             |
|   |             |
|   | By:              | /s/ TIM PATERSON-BROWN |
|   |             | Tim Paterson-Brown |
|   |             | Chief Executive Officer |
|   |             |   |
|   |             |   |
|   | By:              | /s/ GLYN THOMAS |
|   |             | Glyn Thomas |
|   |             | Chief Financial Officer |

 

May 12, 2006

 

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