**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM10-Q**
| **x**                                                  |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
| ** **                                             |   | ** **                                                                                    |
| **For the quarterly period ended June 30, 2006.** |
| ** **                                             |
| **OR**                                                 |
| ** **                                             |
| **o**                                                  |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

**For the transition period from             to            **

**Commissionfile number: 0-26886**

**MEDICSIGHT,INC.**

(Exact name of Registrant as specified in its charter)

| **Delaware**              |   | **13-4148725**                        |
|---------------------------|--------|---------------------------------------|
| (State of  Incorporation) |   | (I.R.S. Employer  Identification No.) |

**46Berkeley Square, London, W1J 5AT, UNITED KINGDOM**

(Address of principal executive offices, including zip code)

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

Indicate by checkwhether the Registrant (1) has filed all reports to be filed bySection 13 or 15(d) of the Securities and Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    Yes    x    No    o

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

Large Accelerated Filer o     Acceleratedfiler o     Non-acceleratedFiler x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).    Yes  o    No  x

The number ofshares of the registrant’s common stock, $0.001 par value, outstanding as ofAugust 10, 2006 was 38,027,883.

 

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**Forward-LookingStatements**

ThisQuarterly Report on Form 10-Q and the information incorporated herein byreference contain forward-looking statements that involve a number of risks anduncertainties. Although our forward-looking statements reflect the good faithjudgment of our management, these statements can only be based on facts andfactors currently known by us. Consequently, forward-looking statements areinherently subject to risks and uncertainties, and actual results and outcomesmay differ materially from results and outcomes discussed in theforward-looking statements.

Forward-lookingstatements can be identified by the use of forward-looking words such as “believe,”“expect,” “hope,” “may,” “will,” “plan,” “intend,” “estimate,” “could,” “should,”“would,” “continue,” “seek,” “pro forma” or “anticipate,” or other similarwords (including their use in the negative), or by discussions of futurematters such as our future clinical or product development, regulatory reviewof our products or product candidates, commercialization of our products, ourfinancial performance, possible changes in legislation and other statementsthat are not historical. These statements include but are not limited tostatements under the captions “Risk Factors” and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” as well as othersections in this report. You should be aware that the occurrence of any of theevents discussed under the heading “Risk Factors” and elsewhere in this reportcould substantially harm our business, results of operations and financialcondition and that if any of these events occurs, the trading price of ourcommon stock could decline and you could lose all or a part of the value ofyour shares of our common stock.

Thecautionary statements made in this report are intended to be applicable to allrelated forward-looking statements wherever they may appear in this report. Weurge you not to place undue reliance on these forward-looking statements, whichspeak only as of the date of this report. We undertake no obligation topublicly update any forward-looking statements, whether as a result of newinformation, future events or otherwise.

Our main operatingcurrency is UK sterling.

2

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**INDEX**
| **PART I – FINANCIAL INFORMATION** | ** **                                                                                              |
|-----------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                              | ** **                                                                                              |
| Item 1                                  | Condensed Consolidated Balance Sheets – June 30, 2006 and  December 31, 2005                       |   |
|                                    |                                                                                                    |   |
|                                    | Condensed Consolidated Statements of Operations – for  the quarters ended June 30, 2006 and 2005   |   |
|                                    |                                                                                                    |   |
|                                    | Condensed Consolidated Statements of Operations – for  the six months ended June 30, 2006 and 2005 |   |
|                                    |                                                                                                    |   |
|                                    | Condensed Consolidated Statements of Cash Flows – for  the six months ended June 30, 2006 and 2005 |   |
|                                    |                                                                                                    |   |
|                                    | Notes to Condensed Consolidated Financial Statements                                                    |   |
|                                    |                                                                                                    |   |
| Item 2                                  | Management’s Discussion and Analysis of Financial  Condition and Results of Operations             |   |
|                                    |                                                                                                    |   |
| Item 3                                  | Quantitative and Qualitative Disclosure About Market  Risk                                              |   |
|                                    |                                                                                                    |   |
| Item 4                                  | Controls & Procedures                                                                               |   |
|                                    |                                                                                                    |   |
| **PART  II – OTHER INFORMATION**   | ** **                                                                                              |
| ** **                              | ** **                                                                                              |
| Item  1                                 | Legal  Proceedings                                                                                      |   |
|                                    |                                                                                                    |   |
| Item 1A                                 | Risk Factors                                                                                            |   |
|                                    |                                                                                                    |   |
| Item 2                                  | Unregistered Sale of Equity Securities and Use of  Proceeds                                             |   |
|                                    |                                                                                                    |   |
| Item 3                                  | Default Upon Senior Securities                                                                          |   |
|                                    |                                                                                                    |   |
| Item 4                                  | Submission of Matters to a Vote of Security Holders                                                     |   |
|                                    |                                                                                                    |   |
| Item  5                                 | Other  Information                                                                                      |   |
|                                    |                                                                                                    |   |
| Item 6                                  | Exhibits                                                                                                |   |
|                                    |                                                                                                    |   |
| SIGNATURES                              |                                                                                                    |

 

3

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**MEDICSIGHT,INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(inthousands, except share and per share amounts)**
| ** **                                                                                                                           | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                           | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| ASSETS                                                                                                                               |       |                    |       |                        |       |
| CURRENT ASSETS:                                                                                                                      |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                            |       | $                       | 2,728      |                        | $          | 7,249 |   |
| Marketable securities                                                                                                                |       | 2,011                   |       | —                      |       |
| Cash held for common stock subscribed but unissued                                                                                   |       | 1,340                   |       | 4,000                       |       |
| Prepaid expenses                                                                                                                     |       | 112                     |       | 213                         |       |
| Value-Added Tax receivable                                                                                                           |       | 144                     |       | 61                          |       |
| Other current assets                                                                                                                 |       | 355                     |       | 344                         |       |
| Total current assets                                                                                                                 |       | 6,690                   |       | 11,867                      |       |
|                                                                                                                                 |       |                    |       |                        |       |
| PROPERTY  EQUIPMENT, at cost, net of accumulated depreciation of $1,750 and $3,227  respectively                                     |       | 194                     |       | 252                         |       |
| INVESTMENTS                                                                                                                          |       | 359                     |       | 359                         |       |
| SECURITY  DEPOSITS                                                                                                                   |       | 854                     |       | 808                         |       |
| EXCESS OF  PURCHASE PRICE OVER NET ASSETS ACQUIRED                                                                                   |       | 11,200                  |       | 11,200                      |       |
|                                                                                                                                 |       |                    |       |                        |       |
| Total assets                                                                                                                         |       | $                       | 19,297     |                        | $          | 24,486 |   |
|                                                                                                                                 |       |                    |       |                        |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                            |       |                    |       |                        |       |
|                                                                                                                                 |       |                    |       |                        |       |
| CURRENT  LIABILITIES:                                                                                                                |       |                    |       |                        |       |
| Accounts payable                                                                                                                     |       | $                       | 1,231      |                        | $          | 1,172 |   |
| Accounts payable - related party                                                                                                     |       | 134                     |       | 1,151                       |       |
| Accrued expenses                                                                                                                     |       | 850                     |       | 404                         |       |
| Current portion of obligations under capital leases                                                                                  |       | 16                      |       | 19                          |       |
| Total current liabilities                                                                                                            |       | 2,231                   |       | 2,746                       |       |
| Obligations  under capital leases, net of current portion                                                                            |       | —                  |       | 6                           |       |
| Total liabilities                                                                                                                    |       | 2,231                   |       | 2,752                       |       |
|                                                                                                                                 |       |                    |       |                        |       |
| STOCKHOLDERS’  EQUITY:                                                                                                          |       |                    |       |                        |       |
|                                                                                                                                 |       |                    |       |                        |       |
| Common stock,  $0.001 par value, 40,000,000 shares authorized 37,667,883 and 36,392,883  shares issued and outstanding, respectively |       | 38                      |       | 36                          |       |
| Additional paid-in capital                                                                                                           |       | 213,455                 |       | 208,684                     |       |
| Common stock subscribed but unissued, net                                                                                            |       | 1,206                   |       | 3,600                       |       |
| Accumulated other comprehensive income                                                                                               |       | 112                     |       | 128                         |       |
| Accumulated deficit                                                                                                                  |       | (197,745                | )          | (190,714                    | )          |
| Total stockholders’ equity                                                                                                      |       | 17,066                  |       | 21,734                      |       |
|                                                                                                                                 |       |                    |       |                        |       |
| Total  stockholders’ equity & liabilities                                                                                   |       | $                       | 19,297     |                        | $          | 24,486 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

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**MEDICSIGHT,INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(inthousands, except share and per share amounts)**

**(unaudited)**
| ** **                                           | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| REVENUES                                             |       | $                                                   | —     |   | $ | — |   |
|                                                 |       |                                                |       |   |   |
| EXPENSES:                                            |       |                                                |       |   |   |
| Selling, general and administrative charges          |       | 3,521                                               |       | 2,396 |   |
| Research and development cost                        |       | 513                                                 |       | 524 |   |
|                                                 |       | 4,034                                               |       | 2,920 |   |
|                                                 |       |                                                |       |   |   |
| Operating loss                                       |       | (4,034                                              | )          | (2,920 | ) |
|                                                 |       |                                                |       |   |   |
| INTEREST AND  OTHER INCOME                           |       | 33                                                  |       | 38 |   |
|                                                 |       |                                                |       |   |   |
| Net loss before  income taxes                        |       | (4,001                                              | )          | (2,882 | ) |
|                                                 |       |                                                |       |   |   |
| Income taxes                                         |       | —                                              |       | 883 |   |
|                                                 |       |                                                |       |   |   |
| Net loss from  continuing activities                 |       | (4,001                                              | )          | (1,999 | ) |
|                                                 |       |                                                |       |   |   |
| DISCONTINUED  OPERATIONS:                            |       |                                                |       |   |   |
| Net loss from operations of Lifesyne                 |       | —                                              |       | (365 | ) |
|                                                 |       |                                                |       |   |   |
| Net loss                                             |       | $                                                   | (4,001     | ) | $ | (2,364 | ) |
|                                                 |       |                                                |       |   |   |
| PER SHARE DATA:                                      |       |                                                |       |   |   |
| Net loss from continuing activities                  |       | $                                                   | (0.11      | ) | $ | (0.06 | ) |
| Net loss from discontinued activities                |       | $                                                   | —     |   | $ | (0.01 | ) |
|                                                 |       |                                                |       |   |   |
| Basic and diluted loss per share                     |       | $                                                   | (0.11      | ) | $ | (0.07 | ) |
|                                                 |       |                                                |       |   |   |
| Weighted average number of common shares outstanding |       | 37,667,883                                          |       | 33,626,070 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financial statements

5

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**MEDICSIGHT,INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(inthousands, except share and per share amounts)**

**(unaudited)**
| ** **                                            | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| REVENUES                                              |       | $                                                 | —     |   | $ | — |   |
|                                                  |       |                                              |       |   |   |
| EXPENSES:                                             |       |                                              |       |   |   |
| Selling, general and administrative charges           |       | 5,989                                             |       | 4,619 |   |
| Research and development cost                         |       | 1,140                                             |       | 1,163 |   |
|                                                  |       | 7,129                                             |       | 5,782 |   |
|                                                  |       |                                              |       |   |   |
| Operating loss                                        |       | (7,129                                            | )          | (5,782 | ) |
|                                                  |       |                                              |       |   |   |
| INTEREST AND  OTHER INCOME                            |       | 98                                                |       | 52 |   |
|                                                  |       |                                              |       |   |   |
| Net loss before  income taxes                         |       | (7,031                                            | )          | (5,730 | ) |
|                                                  |       |                                              |       |   |   |
| Income taxes                                          |       | —                                            |       | 883 |   |
|                                                  |       |                                              |       |   |   |
| Net loss from  continuing activities                  |       | (7,031                                            | )          | (4,847 | ) |
|                                                  |       |                                              |       |   |   |
| DISCONTINUED  OPERATIONS:                             |       |                                              |       |   |   |
| Net loss from operations of Lifesyne                  |       | —                                            |       | (611 | ) |
|                                                  |       |                                              |       |   |   |
| Net loss                                              |       | $                                                 | (7,031     | ) | $ | (5,458 | ) |
|                                                  |       |                                              |       |   |   |
| PER SHARE DATA:                                       |       |                                              |       |   |   |
| Net loss from continuing activities                   |       | $                                                 | (0.19      | ) | $ | (0.14 | ) |
| Net loss from discontinued activities                 |       | $                                                 | —     |   | $ | (0.02 | ) |
|                                                  |       |                                              |       |   |   |
| Basic and diluted loss per share                      |       | $                                                 | (0.19      | ) | $ | (0.16 | ) |
|                                                  |       |                                              |       |   |   |
| Weighted average  number of common shares outstanding |       | 37,480,590                                        |       | 33,465,092 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financial statements

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**MEDICSIGHT,INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

**(unaudited)**
| ** **                                                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                                   | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                        |       |                                              |       |   |   |
| Net loss                                                                     |       | $                                                 | (7,031     | ) | $ | (5,458 | ) |
|                                                                         |       |                                              |       |   |   |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                              |       |   |   |
| Loss from discontinued activities                                            |       | —                                            |       | 611 |   |
| Share-based compensation                                                     |       | 183                                               |       | — |   |
| Depreciation                                                                 |       | 119                                               |       | 244 |   |
| Loss on disposal of fixed assets                                             |       | —                                            |       | 69 |   |
| Changes in  operating assets and liabilities                                 |       |                                              |       |   |   |
| Accounts receivable                                                          |       | —                                            |       | (1 | ) |
| Prepaid expenses and other current assets                                    |       | 44                                                |       | 29 |   |
| VAT receivable                                                               |       | (83                                               | )          | 474 |   |
| Accounts payable                                                             |       | 59                                                |       | 667 |   |
| Accounts payable – related parties                                      |       | (1,017                                            | )          | — |   |
| Accrued expenses                                                             |       | 446                                               |       | (691 | ) |
| Net cash used in  operating activities                                       |       | (7,280                                            | )          | (4,056 | ) |
|                                                                         |       |                                              |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                        |       |                                              |       |   |   |
| Cash held for common stock subscribed but unissued                           |       | 2,660                                             |       | — |   |
| Purchase of marketable securities                                            |       | (1,964                                            | )          | — |   |
| Sale of fixed assets                                                         |       | —                                            |       | 300 |   |
| Purchase of fixed assets                                                     |       | (61                                               | )          | (81 | ) |
| Net cash  provided by investing activities                                   |       | 635                                               |       | 219 |   |
|                                                                         |       |                                              |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                        |       |                                              |       |   |   |
| Principal payments under capital lease obligations                           |       | (9                                                | )          | (333 | ) |
| Proceeds from sale of common stock (net)                                     |       | 4,590                                             |       | 2,714 |   |
| Proceeds from common stock subscribed but unissued  (net)                    |       | (2,394                                            | )          | — |   |
| Net cash provided by financing activities                                    |       | 2,187                                             |       | 2,381 |   |
|                                                                         |       |                                              |       |   |   |
| CASH FLOWS OF  DISCONTINUED OPERATIONS                                       |       |                                              |       |   |   |
| Operating activities                                                         |       | —                                            |       | (557 | ) |
|                                                                              |            |                                                   |            |  |  |  |  |

 

7

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| ** **                                              | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
|                                                    |       |                                              |       |   |   |
| Effects of  exchange rates on cash and cash equivalents |       | (63                                               | )          | 88 |   |
|                                                    |       |                                              |       |   |   |
| NET CHANGE IN  CASH AND CASH EQUIVALENTS                |       | (4,521                                            | )          | (1,925 | ) |
|                                                    |       |                                              |       |   |   |
| CASH AND CASH  EQUIVALENTS – BEGINNING OF PERIOD   |       | 7,249                                             |       | 5,276 |   |
|                                                    |       |                                              |       |   |   |
| CASH AND CASH  EQUIVALENTS – END OF PERIOD         |       | $                                                 | 2,728      |   | $ | 3,351 |   |
|                                                    |       |                                              |       |   |   |
| SUPLEMENTAL  DISCLOSURES OF CASH RECEIVED               |       |                                              |       |   |   |
| Interest received                                       |       | 98                                                |       | 52 |   |
| Income tax  benefit realized                            |       | —                                            |       | 883 |   |
|                                                         |            |                                                   |            |  |  |  |  |

The accompanying notesare an integral part of these condensed consolidated financial statements

8

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**MEDICSIGHT,INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

**1.Summary of Significant Accounting Policies**

*Basisof Presentation and Liquidity*

Theaccompanying condensed consolidated financial statements of Medicsight, Inc.have been prepared following the requirements of the Securities and ExchangeCommission for interim reporting. As permitted under those rules, certainfootnotes or other financial information that are normally required by U.S.generally accepted accounting principles (GAAP) have been condensed or omitted.The condensed consolidated financial statements are unaudited and reflect alladjustments (consisting solely of normal recurring adjustments) which are, inthe opinion of management, necessary to present fairly the financial positionat, and the results of operations for, the interim periods presented.

Theresults of operations for the three and six month periods ended June 30,2006 are not necessarily indicative of the results to be expected for theentire year ending December 31, 2006 or of future operating results forany interim period. The financial information included herein should be read inconjunction with our Annual Report on Form 10-K for the year endedDecember 31, 2005, which includes our audited consolidated financialstatements and the notes thereto.

TheCompany has incurred significant operating losses since inception. As a result,the Company has generated negative cash flows from operations, and has anaccumulated deficit at June 30, 2006. The Company is operating in a developingindustry based on new technology and its primary source of funds to date hasbeen through the issuance of securities. The Company is currently seekingadditional funding and is actively developing the technology in order to bringit to market. While the Company is optimistic and believes appropriate actionsare being taken, there can be no assurance that management’s efforts will besuccessful or that the products the Company develops and markets will beaccepted by consumers.

*Principlesof Consolidation*

Thefinancial statements include the accounts of our company and our majority ownedsubsidiaries. Our main operating subsidiaries are Medicsight PLC andMedicexchange PLC, both based in London (UK). The functional currencies of oursubsidiaries are their local currencies. All intercompany transactions and balances have been eliminated.  All foreign currency translation gains andlosses arising on consolidation were recorded in stockholders’ equity as acomponent of comprehensive income (loss) in accordance with Statement ofFinancial Accounting Standards No. 52, *Foreign CurrencyTranslation.*

*Useof Estimates*

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the amounts reported in thefinancial statements and accompanying notes. Actual results could differ fromthose estimates.

*MarketableSecurities*

Weinvest some of our cash balances in short-term highly liquid available for salemarketable securities, which are carried in our balance sheet at fair value inaccordance with Statement of Financial Accounting Standards No. 115 *Accounting for Certain Investments in Debt and Equity Securities,*with unrealized gains and losses reported in stockholders’ equity as acomponent of other comprehensive income (loss) - unless we conclude thatunrealized losses represent an other-than-temporary impairment. In thatcircumstance, such losses would be reflected in the consolidated statements ofoperations. Realized gains and losses are included in interest income. Fairvalue is based

9

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upon quoted market pricesfor these or similar instruments.

AtJune 30, 2006 our available for sale marketable securities cost $1,964,000 andhad a fair value of $2,011,000.  Werecorded an unrealized gain of $47,000 in other comprehensive income instockholders’ equity.

*ComprehensiveIncome (Loss)*

Statementof Financial Accounting Standards No. 130,*Reporting Comprehensive Income*, established standards for thereporting and display of comprehensive income (loss) and its components.Comprehensive Income (Loss) consists all unrealized foreign exchangetranslation gains and losses, plus the changes in unrealized gains and losseson marketable securities. Comprehensive losses for the three and six monthsended June 30, 2006 and 2005 are as follows (in thousands):
|                                           | ** ** | **Three Months ended  June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                        | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                      |       |                                            |       |                                                |       |   |   |   |   |
| Net loss as  reported                     |       | $                                               | (4,001     | )                                                   | $          | (2,364 | ) | $ | (7,031 | ) | $ | (5,458 | ) |
| Unrealized  foreign exchange gain (loss)  |       | 146                                             |       | 156                                                 |       | (63 | ) | (148 | ) |
| Unrealized gain  on marketable securities |       | 47                                              |       | —                                              |       | 47 |   | — |   |
| Comprehensive loss                        |       | $                                               | (3,808     | )                                                   | $          | (2,208 | ) | $ | (7,047 | ) | $ | (5,606 | ) |

*Researchand Development Expenses and Accruals*

Researchand development expenses include personnel and facility related expenses,outside contract services including clinical advisors and other consultingservices. Research and development costs are expensed as incurred. In instanceswhere we enter into agreements with third parties, costs are expensed upon theearlier of when non-refundable amounts are due or as services are performed.Amounts due under such arrangements may be either fixed fee or fee for service,and may include upfront payments, monthly payments, and payments upon thecompletion of milestones or receipt of deliverables.

*NetLoss Per Share*

Inaccordance with Statement of Financial Accounting Standards No. 128,*Earnings Per Share*, basic and diluted netloss per share have been computed using the weighted average number of sharesof common stock outstanding during each period. Our calculation of diluted netloss per share excludes potentially dilutive shares, as these shares wereantidilutive for all periods presented. Our calculation of diluted net incomeper share may be affected in future periods by dilutive impact of ouroutstanding stock options.

*Investments*

Weaccount for investments in non-marketable securities under the cost methodwhere (a) we own less than a 20% interest; and (b) we do not have significantinfluence over the entity.  Wecontinually review each investment to assess for other-than-temporary decreasesin value.  At June 30, 2006 we held 6% inEurindia PLC, a company that invests in small Indian IT servicescompanies.  Following recent informationreceived from Eurindia’s management, we estimate the current value of ourinvestment to be about $860,000.

*Goodwill and OtherIntangible Assets*

Inaccordance with Statement of Financial Accounting Standard No. 142, *Goodwill and Other Intangible Assets,* goodwill is no longeramortized but is tested for impairment on an annual basis and wheneverindicators of impairment arise.

10

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*Lease Commitments and Security Deposit*

Ourmain corporate office is at 46 Berkeley Square, London W1J 5AT, United Kingdom.  The office is comprised of 9,642 squarefeet.  The lease holder is ICC PropertiesLimited (a related party).  The rentpayable is based on the amount of space we occupy. There is no formal leasebetween the Company and the lease holder. We have paid a security deposit of £470,000 ($854,000) which is interestbearing.

**2. Discontinued Activities**

Duringthe third quarter of 2005 a plan was initiated for the disposal of the Lifesynebusiness and Lifesyne was subsequently sold on November 10, 2005.  In accordance with Statement of FinancialAccounting Standards No. 144 *Accounting forImpairment or Disposal of Long-Lived Assets,* Lifesyne has beenaccounted for as discontinued operations. Accordingly, our financial statements for the three and six months endedJune 30, 2006 have been restated to reflect the Lifesyne Segment as adiscontinued operation in our consolidated statements of operations and cashflows.

Therevenues and operating losses for Lifesyne were:
|                  | ** ** | **Three Months ended  June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **       | ** ** | **2006**                                        | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|             |       |                                            |       |                                                |       |   |   |   |   |
| Revenue          |       | $                                               | —     |                                                | $          | 131 |   | $ | — |   | $ | 282 |   |
| Operating losses |       | $                                               | —     |                                                | $          | 365 |   | $ | — |   | $ | 611 |   |

**3. Stock-Based Compensation**

Wehave 3 Stock Option Plans in Medicsight PLC (one of our UK subsidiary companies).  The shares in this company are not publiclytraded.

a.                                       PlanA - On March 20, 2003 we approved a stock option plan “A” and reserved4,000,000 shares for issuance upon exercise of options granted under this plan.On April 19, 2003, the Remuneration Committee also approved the stock optionplan and implemented it on April 30, 2003 granted options over 2,828,600 sharesto employees. At June 30, 2006 there were 1,754,000 options outstanding and100% of the options issued were exercisable under this plan.

b.                                      PlanB - On September 30, 2004 we granted options for 3,400,500 shares under stockoption plan “B”. Subsequently on August 15, 2005, we approved the stock optionplan “B”. At June 30, 2006 there were 1,860,000 options outstanding.  70% of the options issued were exercisableunder this plan at June 30, 2006.  100%of the options issued become fully vested on December 31, 2006.

c.                                       PlanC - On June 30, 2005 we granted options for 230,000 shares to its employeesunder the stock option plan “C”. On August 15, 2005, we approved stock optionplan “C”. At June 30, 2006 there were 145,000 options outstanding and 43,333 ofthe options issued were exercisable. Options issued under this plan vest in equal one-thirds after employeeshave been employed for 12, 24 and 36 months.

Effective January 1, 2006, weadopted Statement of Financial Accounting Standards No. 123 (revised), *Share-Based Payment SFAS 123(R)*, utilizing the ModifiedProspective Application method.  Prior tothe adoption of

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SFAS 123(R), we accounted forstock option grants in accordance with Accounting Principle Board (“APB”)Opinion No. 25 *Accounting for Stock Issued to Employees*(the intrinsic value method) and, accordingly, recognized no compensationexpense for stock option grants if the intrinsic value of a grant was zero orless.

Under the Modified ProspectiveApplication method, SFAS 123(R) applies to new awards and to awards that wereoutstanding on January 1, 2006 that are subsequently modified, repurchased orcancelled.  Under the Modified ProspectiveApplication method, we recognised compensation costs in the first six months of2006 including:

a.                                       cost for all share-based payments granted priorto, but not yet vested as of, January 1, 2006 - based on the grant-date fairvalue estimated in accordance with the original provisions of SFAS 123; and

b.                                      compensation cost for all share-based paymentsgranted subsequent to January 1, 2006 - based on the grant-date fair valueestimated in accordance with the provisions of SFAS 123(R).

Prior periods have not beenrestated to reflect the impact of adopting this new accounting standard.

As a result of adopting SFAS123(R) the net loss for the six months ended June 30, 2006 was $183,000 higherthan if we had continued to account for stock-based compensation under APBOpinion No. 25 for our stock option grants.

The following tableillustrates the effect on operating results and per share information if we hadaccounted for stock-based compensation in accordance with SFAS 123(R) for thethree and six months ended June 30, 2005 (unaudited, in thousands except pershare amounts)
|                                                    | ** ** | **Three Months ended  June 30, 2005** | ** ** | **Six months ended  June 30, 2005** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
|                                               |       |                                                      |       |                                                    |       |
| Net loss as  reported                              |       | $                                                         | (2,364     | )                                                       | $          | (5,458 | ) |
| Fair value  method of stock based compensation     |       | (250                                                      | )          | (270                                                    | )          |
| Proforma net  loss                                 |       | (2,614                                                    | )          | (5,728                                                  | )          |
|                                               |       |                                                      |       |                                                    |       |
| Reported loss  per common share, basic and diluted |       | (0.07                                                     | )          | (0.16                                                   | )          |
| Proforma loss per  common share, basic and diluted |       | (0.08                                                     | )          | (0.17                                                   | )          |
|                                                    |            |                                                           |            |                                                         |            |  |  |

Weused the Black-Scholes option-pricing model to estimate the fair value of eachof the stock option awards under plans A, B and C with the followingweighted-average assumptions for the indicated periods:
|                                        | ** ** | **For all periods shown** | ** ** |
|----------------------------------------|------------|---------------------------|------------|
|                                   |       |                      |       |
| Dividend yield                         |       | 0.0%                      |       |
| Expected volatility                    |       | 65% to 81%                |       |
| Risk-free rate                         |       | 3.5% to 4.6%              |       |
| Expected life of options               |       | 1 to 2 years              |       |
| Weighted-average grant-date fair value |       | £1.00 ($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.

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The following table summarizes stock option activityfor the six months ended June 30, 2006 under all option plans:
|                                       | ** ** | **Number of  Options** | ** ** | **Weighted Average  Remaining  Contractual Term  (years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------|------------|
|                                  |       |                        |       |                                                                 |       |                                |       |
| Balance January  1, 2006              |       | 4,146,200                   |       |                                                                 |       |                                |       |
| Granted                               |       | 115,000                     |       |                                                                 |       |                                |       |
| Forfeited                             |       | (502,200                    | )          |                                                                 |       |                                |       |
| Exercised                             |       | —                      |       |                                                                 |       |                                |       |
| Outstanding June  30, 2006            |       | 3,759,000                   |       | 7.6                                                                  |       | $                                   | 9,849,000  |   |
|                                  |       |                        |       |                                                                 |       |                                |       |
| Options exercisable at  June 30, 2006 |       | 3,147,483                   |       | 7.4                                                                  |       | $                                   | 8,246,000  |   |

The weighted average exercise price for all options is£1.00 ($1.80).

The weightedaverage grant-date fair value of options granted during the six months endedJune 30, 2006 and 2005 were $0.49 and $nil respectively.

The activity withrespect to the non-vested options under our stock option plans was:

|                                | ** ** | **Number of  Options** | ** ** | **Weighted Average  Grant Date Fair  Value** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-------------------------------------------------------------|------------|
|                           |       |                        |       |                                                        |       |
| Non-vested at  January 1, 2006 |       | 783,350                     |       | $                                                           | 0.56       |   |
| Granted                        |       | 115,000                     |       | $                                                           | 0.49       |   |
| Vested                         |       | (43,333                     | )          |                                                        |       |
| Terminated/Cancelled           |       | (143,500                    | )          | $                                                           | 0.52       |   |
| Non-vested at  June 30, 2006   |       | 711,517                     |       |                                                        |       |

At June 30, 2006, therewas $282,000 of total unrecognized compensation cost related to non-vestedstock option awards which is expected to be recognized over a weighted-averageperiod of 1 year.  The total fair valueof options vested during the six months ended June 30, 2006 was $183,000.

**4.Stockholders’ Equity**

Inthe six months ended June 30, 2006 we raised $5,100,000 (gross beforecommissions) by issuing 1,275,000 restricted shares of our common stock.  We paid commission of $510,000 to Asia ITCapital Investments Limited (a related party) raising a net amount of$4,590,000.

InJune 2006 we received cash of $1,340,000 (gross before commissions), in advanceof issuing stock certificates relating to subscriptions for 335,000 restrictedshares of our common stock.  We incurredcommission costs of $134,000 to Asia IT Capital Investments Limited (a relatedparty), raising a net amount of $1,206,000.

PostJune 30, 2006 we raised additional share capital of $3,340,000 (gross beforecommissions) by issuing 835,000 restricted shares of our common stock.  We incurred commission costs of $334,000 toAsia IT Capital Investments Limited (a related party), raising a net amount of$3,006,000.

Theseprivate placements were underwritten by Asia IT Capital Investments Limited (arelated party).

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**5.Credit Facilities**

AsiaIT Capital Investments Limited (a related party) has provided us with twocredit facilities:

a.               Medicsight Inc —has a credit facility for up to $20 million (expiring in December 2007).  Any draw downs against this facility wouldaccrue interest at 2% above US LIBOR.  Weare restricted from borrowing funds directly or indirectly other than throughthis facility without the consent of Asia IT Capital Investments Limited;

b.              Medicsight PLC (oneof our UK subsidiary companies) — has a credit facility for up to £10 million($18 million), (expiring in December 2007), that is secured by a lien on all ofthe assets of this company.  Any drawdowns against this facility would accrue interest at 2% above Sterling LIBOR.

The company has not drawn down any funds under eitherof these two facilities.

**6.Related Party Transactions**

Abrother of Tim Paterson-Brown (our Chief Executive Officer) is a directorof Asia IT Capital Investments Limited.

Inthe six months ended June 30, 2006 we incurred $644,000 in private placementfees with Asia IT Capital Investments Limited. At June 30, 2006 $134,000 of these fees were unpaid.

AsiaIT Capital Investments Limited has provided us with two credit facilities (seeNote 5).  We have not drawn down anyfunds under either of these two facilities.

Adirector (Stephen Forsyth) and a former director (Glyn Thomas) are alsodirectors of ICC Properties Limited.  Inthe six months ended June 30, 2006, we paid $240,000 in property rent to ICCProperties Limited.  There were noamounts unpaid at June 30, 2006.

**7.Subsequent Events**

Post June 30, 2006we:

a.               raised additionalshare capital of $3,340,000 (gross before commissions), by issuing 835,000restricted shares of our common stock. We incurred commission of $334,000 to Asia IT Capital InvestmentsLimited (a related party), raising a net amount of $3,006,000.

b.              executed a privateplacement with Asia IT Capital Investments Limited (a related party) wherebythey will invest £5 million ($9 million) via a private placement of 5,000,000shares of Medicexchange PLC (one of our UK subsidiary companies).  We expect this financing round to closebefore August 31, 2006.

**8. RecentAccounting Pronouncements**

InJune, 2006 the FASB issued FASB Interpretation No. 48 Accounting forUncertainty in Income Taxes, an interpretation of FASB Statement No. 109,Accounting for Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in a company’s financial statements in accordance with FASBStatement No. 109.  FIN 48 stipulates arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN 48 also provides guidance on derecognition, classification,and interest and penalties. The provisions of FIN 48 are to be effective forour fiscal year beginning after December 31, 2006. We have not yet determinedthe impact that uncertain tax positions will have on our financial position orresults of operations.

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**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

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

·                  Toconceive, develop and commercialize innovative medical imaging applicationsderived from our core technology known as Medicsight CAD. (“Medicsight PLC”)

·                  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. (“Medicexchange PLC”)

**Medicexchange PLC**

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.

*Product Benefits*

Medicexchangewill provide vendors the opportunity to sell a variety of applications directlyto radiologists in an efficient and low-cost manner (including web-baseddownloads). Medicexchange will offer traditional pricing plans in addition toflexible “per use” pricing. This decreases the financial purchasing risk andsetup times for radiologists by giving them an attractive pricing model via an onlinechannel.

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 and Orthopedic. Other areas such asNeurology will be added later.

*Market Opportunity*

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

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

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*What differentiates the Company?*

Bycreating strong relationships with our 3rd party partner vendors Medicexchange intends todevelop the 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 Medicexchange could materially change the way in whichnew medical products reach the market. Other websites in the area, in our view,have not been able to take full advantage of the expressed desire in themedical community for portals, such as the Medicexchange, because their productofferings are limited compared to those of Medicexchange.

*Recent and Future Events*

Todate Medicexchange PLC has signed two world wide Affiliates & Contentagreements.  One of these being withAuntMinnie.com (the leading online source for radiology professionals worldwidewith over 130,000 registered users). Under these agreements we get access to affiliate content and users forwhich the affiliate receives sponsorship fees as well as a commission on eachcompleted sale we make to an affiliate-user.

MedicexchangePLC has signed an online distribution agreement with Medicsight PLC and hasother similar distribution agreements in the pipeline.

InAugust this year we expect Medicexchange PLC to close equity funding of about£5 million ($9 million), via Asia IT Capital Investments Limited (a relatedparty), that will be used to accelerate commercial operations.  We expect to launch the medicexchange.comportal later this year.

**Medicsight PLC CAD**

MedicsightPLC’s CAD 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, Medicsight PLC has focused on two of the leading causes of prematuredeath, lung cancer and colorectal cancer. Between them, these diseases areresponsible for over 8.5 million premature deaths globally. There is increasingevidence that early detection leads to an improved life expectancy. Developingtechnology that enables early detection of lung and colorectal cancers has beena core focus of our product development. However, Medicsight PLC’s technologyis scalable to many other disease areas. We have plans to further extend ourtechnologies to new areas of abdominal imaging such as liver during 2006.

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

*Product Benefits*

MedicsightPLC’s CAD 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 ofinterest.  We believe that using CAD in a concurrent-read capacityincreases colonic polyp and lung nodule detection efficiency by minimizing theimpact on

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existing radiologyworkflows while providing valuable additional information to the radiologist.

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

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

“*Screening” products*; *population screening of asymptomatic patients*.CAD CT 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*

MedicsightPLC has signed non—exclusive agreements with TeraRecon, Inc (for thedistribution of both LungCAD and ColonCAD), Viatronix, Inc (for thedistribution of both LungCAD and ColonCAD) and Vital Images, Inc (for thedistribution of Colon CAD). These agreements are part of the the Company’splans to commercialize its advanced imaging technology on a worldwide basis.Medicsight PLC’s CAD software is integrated into the partner companies’existing product offerings.

TeraRecon has successfully integrated ourColonCAD 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 ourColonCAD 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 our Colon CAD software into its CTColonography application which is part of the VitreaTM software package. This was also shown at theNovember 2005 RSNA conference in Chicago.

Inaddition to these signed partnerships, Medicsight PLC is in discussion with anumber of other major imaging companies and is looking to have furtherannouncements in the near future.

InJapan, we expect to finalize agreements for distribution of our LungCAD andColonCAD in the coming months.

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

*Regulatory Process*

Inorder to release new products into a specific market, Medicsight 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 13485:2003 certificationconfirming the Medicsight PLC’s compliance with international qualitystandards. All of our products are designed, built, distributed and supportedto this level of quality control.

Wecan 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)application is submitted when the product is substantially equivalent to anexisting legally marketed device. A PMA is required for higher risk productsand is the more stringent route

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which requiresscientific evidence to demonstrate that the product is safe and effective forits 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.

Wehave a significant amount of experience in preparing, submitting and gainingregulatory approvals for its products. In the US, Medicsight PLC has existingFDA 510(k) approvals for its LungCAR and ColonCAR products and has approvalspending for the recent ColonCAD and LungCAD releases.

InEurope, Medicsight PLC has CE approval for all released products and isregularly audited by an external notified body.

MedicsightPLC is seeking approvals for its ColonCAD and LungCAD products in Japan andChina. As each new product is prepared for release, Medicsight PLC’s internalregulatory team prepares the regulatory documentation for each market in orderto allow that product to be marketed and sold.

BecauseMedicsight 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.

We expect to receiveFDA approval for our CAD products later this year with approvals for Japan andChina following early in fiscal 2007.

**CriticalAccounting Policies and the Use of Estimates**

OnJanuary 1, 2006 we adopted Statement of Financial Standards No. 123 (revised), *Share-Based Payment* SFAS 123(R), utilizing the ModifiedProspective Application method.

Webelieve there have been no other significant changes in our critical accountingpolicies during the six months ended June 30, 2006 as compared to our previousdisclosures in Management’s Discussion and Analysis of Financial Condition andResults of Operations included in our Annual Report on Form 10-K for the fiscalyear ended December 31, 2005.

Theaccompanying discussion and analysis of our financial condition and results ofoperations are based upon our condensed consolidated financial statements andthe related disclosures, which have been prepared in accordance with U.S.generally accepted accounting principles (GAAP). The preparation of thesecondensed consolidated financial statements requires us to make estimates,assumptions and judgments that affect the reported amounts in our condensedconsolidated financial statements and accompanying notes. These estimates formthe basis for making judgments about the carrying values of assets andliabilities. We base our estimates and judgments on historical experience andon various other assumptions that we believe to be reasonable under thecircumstances. Actual results could differ materially from these estimates.

Webelieve the following policies to be the most critical to an understanding ofour financial condition and results of operations because they require us tomake estimates, assumptions and judgments about matters that are inherentlyuncertain.

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*Stock Based Compensation*

Wehave issued employee stock options from Medicsight PLC (one of our UKsubsidiary companies).  We use theBlack-Scholes option pricing model to estimate the fair value of employee stockoptions. Calculating the fair value of these stock options requiresconsiderable judgment, including estimating stock price volatility, the amountof options that are expected to be forfeited and the expected life of theoptions awards.

Thevalue of a stock option is derived from its potential for appreciation. Themore volatile the stock, the more valuable the option becomes due to thegreater possibility of significant changes in stock price.  The expected option term also has asignificant effect on the value of the option. The longer the term, the moretime the option holder has to allow the stock price to increase without a cashinvestment and thus, the more valuable the option. When establishing anestimate of the expected term, we consider the vesting period for the award andour estimate of employee’s likely stock option exercises, the expectedvolatility, and a comparison to relevant peer group data.

Theshares underlying our currently awarded stock options are not publicly tradedshares. We review our valuation assumptions at each grant date and, as a result,we are likely to change our valuation assumptions used to value stock basedawards granted in future periods. Actual results, and future changes inestimates, may differ substantially from our current estimates. As a result, iffactors change and we use different assumptions, our stock-based compensationexpense could be materially different in the future.

**Resultsof Operations**

*Revenues.*

Forthe six months and for the quarters ended June 30, 2006 and June 30, 2005 ourrevenues from continuing operations were $nil. The only revenues for the sixmonths ended June 30, 2005 were derived from the discontinued LifesyneTMscanning operations.

*Selling, General and Administrative Expenses*

Ourselling, general and administrative expenses from continuing operations were(in thousands):
|                                               | ** ** | **Three Months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                          |       |                                            |       |                                          |       |   |   |   |   |
| Selling, general and  administrative expenses |       | $                                               | 3,521      |                                          | $          | 2,396 |   | $ | 5,989 |   | $ | 4,619 |   |
|                                               |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

Our selling, general andadministrative expenses have increased as we expand our internationalcommercial operations. The significant elements being (in thousands):

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|                                                                      | ** ** | **Three Months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Salaries and  director’s compensation (including payroll taxes) |       | $                                               | 1,168      |                                          | $          | 1,063 |   | $ | 2,183 |   | $ | 2,113 |   |
| Contractors and  Consultants                                         |       | 128                                             |       | 150                                           |       | 145 |   | 245 |   |
| Professional  fees                                                   |       | 297                                             |       | 87                                            |       | 521 |   | 222 |   |
| Property rent  and rates                                             |       | 378                                             |       | 235                                           |       | 552 |   | 485 |   |
| Travel                                                               |       | 189                                             |       | 150                                           |       | 337 |   | 236 |   |
| Software licenses                                                    |       | 156                                             |       | 15                                            |       | 317 |   | 22 |   |
| Public relations                                                     |       | 539                                             |       | 240                                           |       | 883 |   | 513 |   |
|                                                                      |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

We are in the process ofreviewing our London office property with the possibility of moving to anotherLondon location.  If we do move we wouldexpect our future property rent expense to decrease.

*Research and Development (in thousands).*
|                                    | ** ** | **Three Months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                               |       |                                            |       |                                          |       |   |   |   |   |
| Research and  development expenses |       | $                                               | 513        |                                          | $          | 524 |   | $ | 1,140 |   | $ | 1,163 |   |
|                                    |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

**Liquidityand Capital Resources**

*Working Capital Information as June 30, 2006 (inthousands):*
|                                                                                                         | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                                                                              | ** ** | **(unaudited)**             | ** ** | ** **                      | ** ** |
| ** **                                                                                              | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| Cash and Cash  Equivalents                                                                              |       | 2,728                       |       | 7,249                           |       |
|                                                                                                    |       |                        |       |                            |       |
| Current Assets                                                                                          |       | 6,690                       |       | 11,867                          |       |
| Current Liabilities                                                                                     |       | (2,231                      | )          | (2,746                          | )          |
| Working Capital  Surplus                                                                                |       | 4,459                       |       | 9,121                           |       |
|                                                                                                    |       |                        |       |                            |       |
| Ratio of Current  Assets to Current Liabilities                                                         |       | 3.00                        |       | 4.32                            |       |
|                                                                                                    |       |                        |       |                            |       |
| Cash, cash  equivalents, cash held for common stock subscribed but unissued, and  marketable securities |       | 6,079                       |       | 11,249                          |       |

As of June 30, 2006 wehad $2,728,000 in cash and cash equivalents (compared to $7,249,000 at December31, 2005) and $6,079,000 in cash, cash equivalents, marketable securities andcash for common stock subscribed but

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unissued, compared to $11,249,000 at December 31,2005.

Net cash used inoperating activities was $7,280,000 for the six months ended June 30, 2006($4,056,000 for the six month period ended June 30, 2005).  This resulted primarily from:

a.               our net loss of$7,031,000 ($5,458,000 for the six month period ended June 30, 2005);

b.              adjusted fordepreciation and stock-based compensation expenses (non cash items) of $302,000($244,000 for the six month period ended June 30, 2005);

c.               an overall netreduction in current assets (excluding cash items) and current liabilities of$551,000 in the six months ended June 30, 2006 (compared to a net increase of$478,000 in the six month period ended June 30, 2005) – primarily due to thepayment of commissions to Asia IT Capital Investments Limited (a related party)in the six months ended June 30, 2006;

d.              $nil impact of theoperating losses of the Lifesyne (discontinued) business activities in the sixmonths ended June 30, 2006 versus a $611,000 loss from Lifesyne activities inthe six months ended June 30, 2006.

Netcash used in investing activities of $635,000 in the six months ended June 30,2006 ($219,000 for the six months ended June 30, 2005) consisted primarily of:

a.                                       a$2,660,000 decrease in cash held for common stock subscribed but unissued - atDecember 31, 2005 we had $4,000,000 of funds received in advance of issuingstock certificates, at June 30, 2006 this amount (relating to a subsequentround of fund raising) was $1,340,000;

b.                                      acash outflow of $1,964,000 for the purchase of available for sale marketablesecurities in the six months ended June 30, 2006;

c.                                       inthe six months ended June 30, 2006 we had $nil cash inflow from the sale offixed assets (versus $300,000 of cash inflows for the six months ended June 30,2005);

d.                                      inthe six months ended June 30, 2006 we used $61,000 in capital expenditure($81,000 for the six months ended June 30, 2005).

Net cash flows fromfinancing activities were $2,187,000 for the six months ended June 30, 2006(compared to $2,381,000 for the six months ended June 30, 2005), consistingmainly of:

a.                                       $2,196,000net proceeds from the sale of our common stock – being $4,590,000 of total newmoney received in the six months ended June 30, 2006 - less the $2,394,000 netmovement of monies received for common stock subscribed but unissued.  For the six months ended June 30, 2005 wereceived $2,714,000 net new money from the sale of our common stock.

b.                                      Areduction in our principal payments under our capital lease obligations – inthe six months ended June 30, 2006 we paid $9,000 compared to $333,000 paid inthe six months ended June 30, 2005.

Inthe six months ended June 30, 2006 we had $nil cash flows from the discontinuedLifesyne activities. In the six months ended June 30, 2005 we had cash outflowsof $557,000 from Lifesyne operating activities.

*Additional capital funding requirements*

Todate we have financed our operations through private placements of equitysecurities. At June 30, 2006 we have issued 37,667,883 of our 40,000,000authorized share capital.

Inthe quarter ending September 30, 2006 we expect to close about $5,000,000 ofnew equity investment by

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private placementof our common stock via Asia IT Capital Investments Limited (a related party),which includes the $1,340,000 cash received from stock subscriptions not yetissued in our June 30, 2006 balance sheet - that is we expect to receive newequity finance monies of about $3,660,000. As at August 10, 2006 we had received $4,680,000 (including the$1,340,000 received in June 2006).

Inaddition to this amount we have agreed to a private placement (with Asia ITCapital Investments Limited, a related party) of £5 million ($9 million) of newequity funding into Medicexchange PLC (one of our subsidiary companies). Weexpect this financing to be completed by August 31, 2006.

Inaddition to the above, we still have the two lines of credit facilities(together totaling $38 million) available from Asia IT Capital InvestmentsLimited (a related party).  We do notexpect to have to use any part of these credit lines.

*Risksand Uncertainties Related to Our Future Capital Requirements*

Tothe extent that additional capital is raised through the sale of equity orequity-related securities of the Company or its subsidiaries, the issuance ofsuch securities could result in dilution to the Company’s stockholders.

Noassurance can be given, however, that we will have access to the capitalmarkets in the future, or that financing will be available on acceptable termsto satisfy the Company’s cash requirements to implement its businessstrategies.

Ifwe are unable to access the capital markets or obtain acceptable financing, ourresults of operations and financial conditions could be materially andadversely affected.  We may be requiredto raise substantial additional funds through other means.

Theproducts derived from our proprietary software, including the MedicsightTMsystem, are expected to account for substantially all of our revenues fromoperations in the foreseeable future.

Ourtechnology has not yet been fully commercialized and we have not begun toreceive any significant revenues from commercial operations.  We cannot assure our stockholders that ourtechnology and products will be commercialized successfully, or that if socommercialized, that revenues will be sufficient to fund our operations.

Ifadequate funds are not available to us, we may be required to curtailoperations significantly or to obtain funds through entering into arrangementswith collaborative partners or others that may require us to relinquish rightsto certain of our technologies or products that we would not otherwiserelinquish.

*OtherInformation*

None.

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**Item 3.****          ****Quantitative andQualitative Disclosures About Market Risk**

*Interest Rate Risk*

Ourexposure to market risk associated with changes in interest rates relates toour debt obligations.  The Company hasthe following debt facilities, which are all repayable on demand:
| **Debt Holder**                                         | ** ** | **Facility**                    | ** ** | **Draw Down** | ** ** | **Interest rate** | ** ** | **At**June 30, 2006 | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|---------------|------------|-------------------|------------|---------------------|------------|
| Asia IT Capital  Investments Limited  (a related party) |       | $20 million                     |       | $nil          |       | US Libor + 2%     |       | 7.69%               |       |
| Asia IT Capital  Investments Limited  (a related party) |       | £10 million  ($18 million) |       | $nil          |       | GBP Libor + 2%    |       | 7.01%               |       |

We have never drawn downagainst either of these facilities.  Ahypothetical 100 basis point increase in interest rates would increase interestcost by approximately $nil per annum assuming no further draw downs or repaymentsare made.

*Foreign Exchange Risk*

Wehold limited cash balances in British Pounds - any adverse movements in theexchange rates are considered immaterial.

Ouroperating currency is UK sterling (£), our financial statements are reported inUS Dollars.  Our assets, liabilities andresults of operations are affected by movements in the $: £ exchange rate.

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

*Evaluation of Disclosure Controls and Procedures*

Asrequired by Rule 13a-15(b) under the Exchange Act, our management carried outan evaluation of the effectiveness of the design and operation of the Company’s“disclosure controls and procedures” as of June 30, 2006. This evaluation wascarried out under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer. As definedin Rules 13a-15(e) and 15d-15(e) under the Exchange Act, disclosure controlsand procedures are controls and other procedures of the Company that aredesigned to ensure that information required to be disclosed by the Company inthe reports it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms. Disclosure controls and proceduresinclude, without limitation, controls and procedures designed to ensure thatinformation required to be disclosed by the Company in the reports it files orsubmits under the Exchange Act is accumulated and communicated to the Company’smanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.

Basedupon that evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of June30, 2006.  It should be noted that thedesign of any system of controls is based in part upon certain assumptionsabout the likelihood of future events, and there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions, regardless of how remote.

*Changes in Internal Control over FinancialReporting*

Asrequired by Rule 13a-15(d) under the Exchange Act, our management, includingour Chief Executive Officer and Chief Financial Officer, also conducted anevaluation of our internal control over financial reporting to

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determine whetherany change occurred during the quarter ended June 30, 2006, that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting. Based on that evaluation during the quarter endedJune 30, 2006 there has been no change in our internal control over financialreporting that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

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.

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**PART II. OTHER INFORMATION**

## **Item 1.****                      ****Legal Proceedings**

### There are currently nopending legal proceedings.

## **Item 1A.****             ****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 othersystems in the field that have the automated capability of our products.

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

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

*Technical Risks*

TheMedicsight CAD system may not deliver the levels of accuracy and reliabilityneeded, or the development of such accuracy and reliability may be delayed.

*Market Risks*

Themarket for the Medicsight CAD products and MedicExchange may be slower todevelop or smaller than estimated or it may be more difficult to build themarket than anticipated. The medical community may resist the Medicsight CADand Medicexchange products or be slower to accept them than we expect. Revenuesfrom Medicsight CAD and MedicExchange may be delayed or costs may be higherthan expected which may result in the Company requiring additional funding.

*Regulatory Risks*

TheMedicsight CAD system is subject to regulatory requirements in the UnitedStates Europe, Japan, China and our other targeted markets. Necessaryregulatory approvals may not be obtained or may be delayed.  We may incur substantial additional cost inobtaining regulatory approvals for our products in our targeted markets.

*Competitive Risks*

Thereare a number of groups and organizations, such as software companies in themedical imaging field, scanner manufacturers, screening companies and otherhealthcare providers that may develop a competitive offering to the MedicsightCAD 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.

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*Financial Risk*

TheCompany has incurred significant operating losses since inception and hasgenerated no revenues from continuing operations. As a result, the Company hasgenerated negative cash flows from operations and has an accumulated deficit atJune 30, 2006. The Company is operating in a developing industry based on newtechnology and its primary source of funds to date has been through theissuance of securities and borrowed funds. The Company is currently seekingadditional funding and is actively developing the technology in order to bringit to market.

Whilethe Company is optimistic and believes appropriate actions are being taken,there can be no assurance that management’s efforts will be successful or thatthe products the Company develops and markets will be accepted by consumers.

*Corporate Structure*

TheCompany’s corporate structure may make it more difficult or costly to takecertain actions. The Company conducts substantially all its business throughMedicsight PLC, a UK public company which is 81.8% owned by the Company, andthrough Medicsight PLC’s subsidiaries in the United Kingdom and the UnitedStates and also through Medicexchange PLC, which is 90% owned by the Company.Although the Company and its subsidiaries share directors and management, theyare required to comply with corporate governance and other laws andrules applicable to public companies in the United Kingdom and the UnitedStates.  Should the Company propose to take any action, such as a transferor allocation of assets or liabilities between the Company and any of itssubsidiary entities, the Company would have to take into consideration thepotentially conflicting interests of the Company’s stockholders and theminority stockholders of the subsidiary companies.  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. Medicsight PLC would not be able to pay dividends or make otherdistributions of profits or assets to the Company without making pro ratapayments or distributions to its minority stockholders.  Althoughneither Medicsight PLC nor the Company has plans to pay dividends or makedistributions to its shareholders, the Company’s corporate structure maydeter us from doing so in the future. This risk will also apply toMedicexchange as it begins its operations this year as the Company owns 90% ofthe equity of this company.

*Foreign Exchange Risks*

Asthe Company’s main operating currency is UK sterling (£) and its financialstatements are reported in US Dollars, the Company’s assets and liabilities andits results of operations are affected by movements in the $: £ exchange rate.

*Other Risks*

TheCompany’s ability to deliver its software could be hindered by risks such asthe loss of key personnel or the patents and trademarks being successfully challengedor credit facilities being reduced or terminated by lenders.

## **Item 2.****                      ****Unregistered Sales of EquitySecurities and Use of Proceeds**

### In the six months ended June30, 2006 we issued 1,275,000 restricted shares of our common stock at $4.00 pershare to a number of institutional investors and private individuals as aprivate placement, raising $5,100,000 (gross before commissions).

### The shares of common stockwere issued without registration in reliance upon the exemption provided bySection 4(2) of the Securities Act of 1933.

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### **Item 3.****           Defaults Upon Senior Securities**

### None.

## **Item 4.****                      ****Submission of Matters to aVote of Security Holders**

### None.

## **Item 5.****                      ****Other Information**

### None.

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**Exhibitsand Reports on Form 8-K**
| Exhibits | ** ** | ** **                                                                                                           |
|----------|------------|----------------------------------------------------------------------------------------------------------------------|
|     |       |                                                                                                                 |
| 31.1     |       | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (Chief Executive Officer - filed herewith). |
| 31.2     |       | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (Chief Financial Officer - filed herewith). |
| 32.1     |       | Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (Chief Executive Officer - filed herewith). |
| 32.2     |       | Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (Chief Financial Officer - filed herewith). |

 

(b)                                 Reportson Form 8-K

None

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SIGNATURE

In accordance with therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                 | MEDICSIGHT, INC. |
|-----------------|------------------|
|            |             |
|            |             |
|            | By:              | /s/ TIM PATERSON-BROWN |
|            |             | Tim Paterson-Brown |
|            |             | Chief Executive Officer |
|            |             |   |
|            |             |   |
|            | By:              | /s/ ALLAN ROWLEY |
|            |             | Allan Rowley |
|            |             | Chief Financial Officer |
|            |             |   |
|            |             |   |
| August 10, 2006 |             |   |

 

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