**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-Q**

 
| ** ** | **(Mark One)**                                                                                                                                                                                         |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                             |
| **ý** | **Quarterly report pursuant  to Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                 |
| ** ** | ** **                                                                                                                                                                                             |
| ** ** | **For the quarterly period ended September 30,  2005**                                                                                                                                            |
| ** ** |
| **o**      | **Transition report pursuant  to Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                |
| ** ** | ** **                                                                                                                                                                                             |
| ** ** | **For the transition period from                 to               ** |
| ** ** |
| ** ** | **Commission file number   **0-26886                                                                                                                                                    |
|            |                                                                                                                                                                                                        |  |

 

**MEDICSIGHT, INC.**

**(Exact name of registrant asspecified in its charter)**

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

** **

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

**(Address of principal executiveoffices, including zip code)**

 

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

**(Registrant’s telephone number,including area code)**

 

** **

**(Former name, former address andformer fiscal year, if changed since last report)**

 

**Indicateby check whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days Yes  **ý             No  o

** **

**Indicateby check whether the registrant is an accelerated filer (as defined in Rule 12b—2of the Exchange Act):  Yes  **o             No  ý

 

**Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b—2of the Exchange Act):  Yes  **o             No  ý

 

**APPLICABLE ONLY TOCORPORATE ISSUERS**

 

**Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: As of November 10, 2005: 36,367,881 shares of Common Stock, parvalue $0.001 per share.**

 

 

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**NOTEREGARDING FORWARD LOOKING STATEMENTS**

 

This Quarterly Report on Form 10-Q, including “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inItem 2, contains forward-looking statements that involve risks anduncertainties, as well as assumptions that, if they never materialize or proveincorrect, could cause the results of Medicsight, Inc and its consolidatedsubsidiaries (the “Company”) to differ materially from those expressed or impliedby such forward-looking statements. All statements other than statements ofhistorical fact are statements that could be deemed forward-looking statements,including any projections of revenue, gross margin, expenses, earnings orlosses from operations, synergies or other financial items; any statements ofthe plans, strategies and objectives of management for future operations,including the execution of restructuring plans; any statement concerningdevelopments, performance or industry rankings relating to products orservices; any statements regarding future economic conditions or performance;any statements of expectation or belief; and any statements of assumptionsunderlying any of the foregoing. The risks, uncertainties and assumptionsreferred to above include the performance of contracts by suppliers, customersand partners; employee management issues; the difficulty of aligning expenselevels with revenue changes; and other risks that are described herein,including but not limited to the specific risks areas discussed in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inItem 2 of this report, and that are otherwise described from time to timein the Company’s Securities and Exchange Commission reports filed after thisreport. The Company assumes no obligation and does not intend to update theseforward-looking statements.

 

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

 

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**PART 1**

** **

**FINANCIALINFORMATION**

** **

## **Item 1.**                       Financial Statements

 

Medicsight, Inc. and its subsidiaries arecollectively referred to in this Report as the “Company”.  For purposes of the discussion containedherein, all financial information is reported on a consolidated basis. The financialstatements for the Company’s fiscal quarter ended September 30, 2005 areattached to this Report, commencing at page F-1.

 

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

 

**BACKGROUND**

 

Medicsight, Inc develops enterprise-widecomputer-aided detection (CAD) software that is used by the medical imagingmarket to aid in earlier detection of disease. Tested on one of the world’s largestdatabases of verified CT scan data, Medicsight’ssoftware solutions helpclinicians identify, measure, and analyze suspicious pathology, such ascolorectal polyps and lung lesions. The company’s CAD ApplicationProgramming Interface (“API”) products include ColonCAD API, the first CADtechnology available for CT colonography, and LungCAD API. Both products allowa concurrent-read that allows clinicians to review the original imagesimultaneously with the Medicsight CAD findings, which results in improvedworkflow and productivity. Medicsight continues to develop CAD software for avariety of disease states that can help in the early detection of disease andultimately improve patient outcomes

 

Originally incorporated as a Utah corporation in 1977.On December 19, 2000, Medicsight, Inc. entered into an Agreement andPlan of Merger with its wholly owned subsidiary HTTP Technology, Inc., aDelaware corporation, and thereby effected a re-incorporation of the Companyfrom Utah to Delaware. All references in this Quarterly Report to  “the Company”, “we” or “us” are to Medicsight, Inc.,the Delaware corporation and subsidiaries, if the referenced event occurred onor after December 19, 2000 or to HTTP Technology, Inc., the Utahcorporation and subsidiaries, if the referenced event occurred prior to December 19,2000. On January 27, 2004 the Company increased its authorized sharecapital from 25,000,000 shares to 40,000,000 shares.

 

During the nine months ended September 30, 2005the Company issued approximately 1,298,000 shares of restricted stock raising$4,676,000 (net of commissions paid to Asia IT investments Ltd (“Asia IT”), arelated party) as part of a private placement.

 

Between October 1, 2005 and November 10,2005 the Company issued approximately 2,003,000 shares of restricted stockraising $7,729,000 (net of commissions paid to Asia IT, a related party) aspart of a private placement. As part of this transaction Asia IT Nominees Ltd (“AsiaNominees”), a related party, acquired 1,050,000 shares for $4,200,000 and Mr. TimPaterson-Brown, Chief Executive Officer and Director of Medicsight, Inc.,acquired 250,000 shares for $1,000,000.

 

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

 

**BUSINESS STRATEGY**

 

Developers of enterprise computer aided detection (“CAD”)software technology for medical diagnostic applications applicable acrossdiffering business models. There are five principal operating subsidiaries:Medicsight PLC (“MS-PLC”), Medicsight USA, Inc (“MS-US”) (previously LifesyneUS), Medicsight International Limited (“MIL”), Medicsight On-Line, Inc (“MOL”),Lifesyne UK Limited (“Lifesyne UK”), and Medicsight Asset Management Limited (“MAM”).

 

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*MS-PLC.* The majority-ownedsubsidiary, MS-PLC, is currently developing CAD software that allows cliniciansto better interpret medical images acquired through a radiological device. Thisin turn helps them detect earlier some of the world’s most common causes ofpremature death. At September 30, 2005, the Company owned 70,677,300ordinary shares in MS-PLC, constituting 81.8% of the outstanding shares. 

 

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

 

*MIL.* MIL, a whollyowned subsidiary of MS-PLC, was established to co-ordinate operations outsidethe United States of America and Europe and is based in Geneva, Switzerland. Ithas established further offices in China and Japan.

 

*MOL.* MOL, amajority owned subsidiary, was recently incorporated in the State of Delaware,U.S.A. to research and develop a medical portal to allow medical professionalsto gain access and use MS-PLC’s and other third party software where therelevant hardware is less accessible – such as the developing world. It isanticipated that MOL will obtain licenses from MS-PLC and others at commercialrates.

 

*Lifesyne UK*.Lifesyne is a wholly owned non-core subsidiary of MS-PLC that was establishedin September 2002. Lifesyne operates a scanning center in Westminster,London in the United Kingdom. In addition to providing scanning services,Lifesyne focuses on the rapid acquisition of patient CT scan data necessary totrain and validate the Medicsight CAD software. On November 10, 2005Lifesyne was sold to an independent third party for approximately $450,000. On August 18,2005 MS-PLC entered into an option agreement with the purchaser to acquireLifesyne for a non-refundable deposit of approximately $90,000 as the purchaserneeded further time to arrange the financing for the acquisition. This depositconstituted part of the sale proceeds on completion of the acquisition. At thattime the net assets of Lifesyne totaled approximately $844,000 leading to animpairment loss of approximately $394,000.

 

Revenues and operatinglosses for Lifesyne follow:

 
| ** **       | ** ** | **$(000)**                   | ** ** |
|------------------|------------|------------------------------|------------|
| ** **       | ** ** | **Three months**             | ** ** | **Three months** | ** ** | **Nine months** | ** ** | **Nine months** | ** ** |
| ** **       | ** ** | **Ended**                    | ** ** | **Ended** | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **       | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
|             |       |                         |       |   |   |   |   |   |   |
| Revenues         |       | $                            | 113        |   | $ | 111 |   | $ | 395 |   | $ | 399 |   |
| Operating losses |       | $                            | 290        |   | $ | 519 |   | $ | 882 |   | $ | 1,175 |   |

 

*MAM*.  MAM is also a wholly owned subsidiary ofMS-PLC that was established in September 2002 for the purpose of acquiringfixed assets on behalf of the operating entities in the group. As Lifesyne’sstrategy changed MAM’s business was limited so all assets were transferred toMS-PLC or Lifesyne at market value on December 31, 2004. MAM has ceasedtrading now that all of its assets have been disposed of.

 

Medicsight is a medical imaging software company. TheCompany’s core technology is focused on the development of CAD software forclinicians to improve their ability to diagnose and treat diseases. For thelast four years the Company has been working on developing algorithms in thisarea through a team of over 30 scientists and software developers. 

 

Medicsight has focused so far on 3 therapeutic areas –three of the leading causes of premature death, coronary heart disease, lungcancer and colorectal cancer. Between them these diseases are responsible forover 8.5 million premature deaths globally. There’s increasing evidence in allthree areas that early detection leads to an improved life expectancy and thisfact has been a core focus of our product development. However, our technologyis scalable to many other disease areas. Plans are already underway to researchthis potential.

 

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The Company has to date primarily focused on multislice computed tomography (“CT”) scan analysis. In the world today there areover 120 million scans done a year. Over a third of these are conducted in theU.S and, of that number, around seven million scans are lung scans andapproximately one million are heart scans. These are nearly all diagnosticscans – that is, scans on patients with symptoms. When screening ofasymptomatic patients begins (scans of patients without specific symptoms),these figures are expected to increase dramatically. The Company’s technologyis equally applicable to magnetic resonance imaging (“MRI”) and Medicsight hasbegun research into brain diseases with a leading global institution.

 

## ***Mission Statement***

 

The Company aims to be a leading developer of CADsoftware in the medical imaging market. It will be successful in selling high-quality and innovative products tothis market by: 

 

•                                           Continued investment in the scientists thatare developing the software products.

•                                           Continued investment in creating a globalnetwork of third party distribution partners.

•                                          Continued investment in the development of anetwork of the worlds leading experts within each relevant disease area.

•                                          Continued investment in building the worldslargest verified CT scan databases.

 

*CorporateStrategy Objectives*

* *

•                                           Developing the broadest range of detection andanalysis products in CT and MRI technology

•                                           Working with third parties to develop thenecessary distribution channels

•                                           Developing a strategic presence in Asia

•                                           Making selective acquisitions/partnershipsthat broaden

•              Productrange/rate of product development

•              Geographicscope

•              The skills base

 

*Whatdifferentiates the Company*

 

We differentiate ourselves from the competition by deliveringto the market innovative and market leading products that are clinicallydeveloped and supported by the world’s leading scientists and physicians. Weare able to accomplish this by focusing on the following:

 

•                                          Commercial agreements with key distributionpartners that allow the efficient and cost effective delivery of our productsto the market

•                                           Relationships with the leading scientists andphysicians in the world

•                                           Access to the largest and highest quality ofpatient and scan databases

 

*How does this evidence itself?*

 

Over the nine months to September 30, 2005 wehave signed definitive agreements with TeraRecon, Inc, Viatronix, Inc and VitalImages, Inc to distribute out products. We believe that these partners will allow our company to sell ourproducts in an efficient and cost effective manner to a vast majority of theimaging market.

 

In each of our core product areas (heart, lung andcolon) we have attracted leading medical experts in radiology, including DrsHenschke and Yankelvitz from Cornell, the leading world opinions in lung cancerscreening. In addition Dr Pickhardt who conducted the ground breaking colonstudy published in New

 

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England Medical Journal in December 2003 hasagreed to participate. Doctors of this caliber are integral to our productstrategy and our data collection strategy.

 

The third area, after science and medical expertise,is data which is crucial to the training and testing of our products The moredata available the better opportunity of significantly improving productperformance and we have, we believe access to the world’s largest lung andcolon scan databases. However, it’s not just quantity of data that isimportant. Our databases include patient management histories and the observedoutcomes that can then be correlated with the original CT scan findings. Thusthese databases that include outcome data, will allow us to go beyond basicnodule or polyp detection to diagnostic and therapeutic prediction. As the databasesgrow and our access to them increases, it will enable the Company to continueto stay ahead of the field in the area of data acquisition and analysis andthus improve the reliability of image prediction which is at the core of theCompany’s software products. We believe that this is an important area ofdifferentiation from our competition.

 

# ***ProductPortfolio***

# *** ***

Our products currently target three therapeutic areas:colon, lung and heart.

 

The software products are called:

 

Medicsight ColonCAD

 

Medicsight LungCAD

 

Medicsight Heartscreen

 

Medicsight introduced a number of innovations to themarket in 2004:

 

•                                           Thefirst approved “joint read” detection products

•                                           Thefirst colon neoplasm detection product

•                                          Thefirst adjustable filter system to allow radiologists to adjust their diagnosticprediction settings to suite their requirements

 

Medicsight CAD tools enableradiologists to read CT scans of the colon and lung using a “concurrent-read”approach. Unlike “second-read” software, in which software is employed 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.  Medicsight believes that using CAD in a concurrent-readincreases colonic polyp and lung nodule detection efficiency by minimizing theimpact on existing radiology workflows while providing valuable additionalinformation to the radiologist.

 

There is increasing evidence in all three areas thatearly disease (cancer) detection leads to an improved life expectancy and thishas been a core focus of our product development. However, our technology isalso applicable to many other diseases and we are already starting to plan forthese developments.

 

In terms of clinical practice and therefore marketsegmentation, the products can be split between diagnostic treatment andscreening;

 

*Diagnostic; incidental “diseasedetection” and “disease tracking”*. These products have beendesigned to be used in symptomatic patients but to detect other diseasesincidental to those for which the investigation was originally requested.Subsequently, these incidentally identified lesions may be tracked so thattheir progress may be monitored by measurement. The primary applications inthis area are Lung nodule tracking and Heart calcium scoring. However, theCompany believes there will be a growing requirement for colorectal as aconsequence of the increased usage of CT colonography. 

 

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“*Screening”products*; *population screening ofasymptomatic patients*. There is much evidence to demonstrate thatthe early detection of colon, lung and heart diseases lead~~s~~ to animproved life expectancy.  CAD CT willprovide a cost effective solution to identify such diseases sufficiently earlyto alter the economics (costs per life year saved) of population screeningprograms.

 

In October 2004, MS-PLC received approval fromthe U.S. Food and Drug Administration (“FDA”) for its ColonCAD product, animage analysis software tool that is used with CT colonography (“virtualcolonoscopy”) to assist radiologists to search for and measure colorectalpolyps. Virtual colonoscopy uses a CT scanner to generate both two-dimensionaland three-dimensional views of inside of the colon in a non-invasive fashion.By contrast, traditional colonoscopy, in which a viewing instrument isphysically inserted into the bowel is an invasive procedure with a wellrecognized morbidity and complication rate. Colorectal cancers most often startwhen malignant cells form within pre-existing benign polyps that are part ofthe inner surface of the large bowel. Detection and removal of thesepreexisting polyps can prevent them from developing into invasive tumors. 

 

Medicsight ColonCAD works by using MS-PLC’s CARtechnology to deploy a series of filters against image data derived from CTcolonographies. These filters highlight spherical areas of the image as smallas 5 mm (the size of a small pea), which could be potential polyps. Theradiologist is also able to manually highlight any other irregularities forcloser inspection.  Once suspect polypsare found, the software can precisely identify their boundaries and features andshow them in 3D with a volume measurement, diameter, shape and location. Thisallows the radiologist to accurately review and track any growth in the polypswith a repeated CT scan.

 

In July 2004, MS-PLC received approval from theFDA and Conformité Europeène (“CE”) certification forits Lung CAD product; an image analysissoftware tool that assists radiologists to evaluate lesions or nodules foundduring CT scans of the lung. MS-PLC’s LungCAD is the first “joint-read”software available for CT lung scans.

 

LungCAD works by deploying a series of filters againstthe image data derived from CT scans. The software has a number of automaticand manual measurement tools to aid diagnosis, including 3D volume measurementand the ability to review follow up scans and tumor doubling times.

 

The Company’s heart product, Heartscreen received FDAapproval in November 2003. Heartscreen is a software application forannotating MSCT scans of the heart used by radiologists to identify coronaryartery calcium (“CAC”). The reason we consider that this software product issuperior to others in its category because of its extensive segmentationcapabilities, which enable the radiologist to accurately extract the CACboundary and therefore accurately measure it. This means that the radiologistcan accurately track CAC increase or regression.

 

# ***BusinessDevelopment***

# *** ***

In the last year, non–exclusive agreements have beensigned with, TeraRecon, Inc (for the distribution of both LungCAD andColonCAD), Viatronix, Inc (for both LungCAD and ColonCAD) and Vital Images, Inc(for Colon CAD). These agreements are the first of their kind for the Companyand represent a major step forward in the Company’s plans to commercialize itsadvanced imaging technology on a worldwide basis. The intent is to incorporateMS-PLC’s software into the companies’ existing product offerings. 

 

The agreement with TeraRecon(a leader of advanced image processing and 3D visualization solutions formedical applications) will allow current and new users of TeraRecon’s flagshipAquarius family of medical imaging products to add Medicsight’s ColonCAD APIand LungCAD API image analysis software tools. The combined TeraRecon /Medicsight imaging system is expected to reach the market in late 2005 or early2006 and will be debuted in November 2005 at the annual meeting of theRadiological Society of North America (“RSNA”) in Chicago, IL from November 24, 2005 to December 2,2005..

 

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The agreement with Viatronix(a leading innovator and developer of diagnostic 3D imaging software) will allow current and new users of Viatronix’sV3D-Colon and V3D-Explorer modules to add Medicsight ColonCAD API and LungCADAPI image analysis software tools. Users of the integrated software will beable to interactively view Medicsight’s ColonCAD polyp identification marks orLungCAD lung nodule identification marks while viewing a virtual fly-through ofthe colon or viewing 3D CT lung images using real-time volume rendering.

 

The combined Viatronix /Medicsight imaging system is expected to reach the market in the fourth quarterof 2005. The V3D-Colon system, along with V3D-Explorer integrated withMedicsight LungCAD API, will bedisplayed in its full commercial form at the annual meeting of the RSNA inChicago, IL in late November.

 

Vital Images has successfully integrated MS-PLC’sColon CAD software into its CT colon product InnerviewGITM. Its commerciallaunch is intended to be at the RSNA conference in Chicago at the end of November 2005.

 

In April 2005 the Company signed a Letter ofIntent with a major Japanese distributor to integrate MS-PLC’s Colon CARTMsoftware product into the workstations of its Japan distribution partner.

 

*Expanding distribution*

* *

Significant business development has already takenplace that has lead to an announcement regarding a ColonCAD distributionarrangement in Japan and plans to finalize agreements for distribution of ourLungCAD software product in Japan in the fourth quarter of 2005.

 

The Company sees Japan and China, in particular, asstrategically important and the Company believes that the significant businessdevelopment to date should lead to further announcements in these areas thisyear.

 

*Expanding product range and range oftechnologies*

 

Whilst there is a significant ongoing investment ininternal new product development programmes, the company is always seeking tobuild on its leading position. The market for advanced software applications isstill embryonic, its ultimate structure remains to be defined; we aim to be oneof the leaders and drivers of these changes and ultimately one of theconsolidators in the sector.

 

Medicsight has stated as part of its corporateobjectives that it will expand its operations via acquisition to fill gaps intechnology or product. Over the next year we aim to put this general principalinto practice. A number of interesting targets have been identified alreadythat will enhance our ability to offer innovative, integrated clinicalsolutions to our partners. We believe that, in this way we are in an excellentposition to develop differences between the competition and ourselves in thisway. 

 

*InternationalAdvisory Boards*

* *

As the Company’s strategy has evolved, particularly,after the decision to concentrate our efforts on software development andinternational product distribution, we have acted to align our medical advisorymechanisms to the new circumstances.  TheCompany has therefore set up three International Advisory Boards (“IAB”).  The IABs have recruited and will continue torecruit individuals with the relevant expertise to become members and encouragethe involvement of the radiologists undertaking beta testing of our products,providing data for software development and participating in our scientificprogram.

 

Some members of the original Medical Board haveaccepted appointments to the new IABs. New members will include persons withrelevant expertise from the United States, Germany, France, Italy, China andJapan.  The IABs are co-chaired by Dr. JohnCostello (MS-PLC’s medical director), who reports back to

 

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the MS-PLC Board; however, much of the scientificadvice and leadership will be provided through a co-chairman, chosen from theIAB members.

 

*Terms of Reference of theInternational Advisory Board*

* *

The IABs will meet twice a year and fulfill thefollowing roles:

 

•                  Advise on thedevelopment and application of Medicsight CT image analysis software in theterritories represented.

•                  Provide links tousers of CT image analysis systems in their respective territories.

•                  Assist ininvestor relations on an international basis.

•                  Advise on, andparticipate in, clinical development programs for the Company’s software.

•                  Act as advisorsin relation to regulatory submissions for the Company’s products.

•                  Advise onsources of library data (CT scans) to support training and development of theCompany’s software.

 

*Objectives of the International Advisory Board*

* *

The objectives of the IAB meetings may be varied fromtime-to-time, as agreed with MS-PLC, but will include the following:

 

•                  Ensure thatmembers have a full understanding of the Medicsight technology and aremotivated to participate in its development and application, both locally andinternationally.

•                  Ensure that theclinical development program is compatible with local clinical practice.

•                  Ensure that theclinical development program is compatible with local regulatory guidelines.

•                  Obtain insightinto local issues with respect to marketing of the Company’s products.

 

*Risk Factors*

* *

We cannot assure you that the Company will besuccessful in commercializing the MedicsightTM system, or if such a system iscommercialized, that its use will be profitable to the Company. We faceobstacles in commercializing our core technology and in generating operatingrevenues such as, but not limited to, successful development, testing of andgaining regulatory approval for the technology. 

 

The Company does not believe that there is currentlyany comparable system that is competitive with the MedicsightTM system. Thereare computer-aided diagnostic systems that operate in the field, but, in ourview, such other systems are overly dependent on human resources to carry outthe analysis, as none have the automated capability of the MedicsightTM system. 

 

The Company has had only a limited operating historyupon which an evaluation of its prospects can be made. The Company’s prospectsmust be considered keeping in mind the risks, expenses and difficultiesfrequently encountered in the establishment of a new business in anever-changing industry. There can be no assurance that the Company will be ableto achieve profitable operations.

 

The Company has identified a number of other specificrisk areas that may affect the Company’s operations and results in the future: 

 

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

 

*Market Risks.*  The market for the MedicsightTM system may beslower to develop or smaller than estimated or it may be more difficult tobuild the market than anticipated. The medical community may resist theMedicsightTM system or be slower to accept it than we expect. Revenues from theLifesyneTM scanning

 

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centers and the licensing of the MedicsightTM systemmay be delayed or costs may be higher than expected which may result in theCompany requiring additional funding. 

 

*Regulatory Risks.*  The MedicsightTM system is subject to regulatoryrequirements in both the United States and Europe. Approvals may not beobtained, may be delayed or incur additional cost to the MedicsightTM system.

 

*Competitive Risks.*There are anumber of groups and organizations, such as software companies in the medicalimaging field, scanner manufacturers, screening companies and other healthcareproviders that may develop a competitive offering to the MedicsightTMsystem.  In addition these competitorsmay have significantly greater resources than the Company. We cannot make anyassurance that they will not attempt to develop such offerings, that they willnot be successful in developing such offerings or that any offerings they dodevelop will not have a competitive edge over the MedicsightTMsystem.

 

*Financial Risk.*Theseconsolidated financial statements are presented on the basis that the Companywill continue as a going concern. The going concern concept contemplates therealization of assets and satisfaction of liabilities in the normal course ofbusiness over a reasonable length of time. The Company has incurred significantoperating losses since inception. As a result, the Company has generatednegative cash flows from operations, and has an accumulated deficit at September 30,2005 and there is uncertainty with respect to the availability and theutilization of its credit facility with Asia IT Capital Investments Limited (arelated party) – see Note 3. The Company is operating in a developing industrybased on new technology and its primary source of funds to date has beenthrough the issuance of securities and borrowed funds. The Company is currentlyseeking additional funding and is actively developing the technology in orderto bring it to market.

 

*CorporateStructure.*The Company’s corporate structure may make it moredifficult or costly to take certain actions. The Company conducts substantiallyall its business through MS-PLC, a U.K. public company which is 81.8% owned bythe Company, and through MS-PLC’s subsidiaries in the United Kingdom and theUnited States.  Although the Company and MS-PLC share directors andmanagement, they are required to comply with corporate governance andother laws and rules applicable to public companies in the UnitedKingdom and the United States.  Should the Company propose to take anyaction, such as a transfer or allocation of assets or liabilities between theCompany and MS-PLC, the Company would have to take into consideration thepotentially conflicting interests of the Company’s stockholders and theminority stockholders of MS-PLC.  This may deter the Company from takingsuch actions that might otherwise be in the best interest of the Company orcause the Company to incur additional costs in taking such actions. MS-PLCwould not be able to pay dividends or make other distributions of profitsor assets to the Company without making pro rata payments or distributions tothe minority stockholders of MS-PLC.  Although neither MS-PLC or theCompany has plans to pay dividends or make distributions to itsshareholders, the Company’s corporate structure may deter MS-PLC and theCompany from doing so in the future. 

 

*Foreign Exchange Risks.*Asthe Company’s 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 successfullychallenged or credit facilities being reduced or terminated by lenders.

 

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**RESULTS OF OPERATIONS**

 

*Revenues.* For the nine monthsended September 30, 2005 and September 30, 2004, and for the quartersended September 30, 2005 and September 30, 2004, the Company’s grossrevenues from continuing operations were $nil. 

 

The Company’s revenues were derived from the Company’sdiscontinued LifesyneTM scanning operations – see “*Discontinued Operations*” below.

 

*Selling, General and Administrative Expenses.*The Company’s selling, general and administrative expenses from continuingoperations for the nine months and quarter ended September 30, 2005, were$7,057,000 and $2,419,000 respectively as compared to $7,453,000 and $2,287,000for the nine months and quarter ended September 30, 2004 respectively. 

 

The significant elements of the Selling, General and Administrative Expensesfrom continuing operations areoutlined in the table below:

 
| ** **                                | ** ** | **($000’s)**           | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **Nine months**             | ** ** | **Quarter** | ** ** | **Nine months** | ** ** | **Quarter** | ** ** |
| ** **                                | ** ** | **ended**                   | ** ** | **Ended** | ** ** | **ended** | ** ** | **ended** | ** ** |
| ** **                                | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** |
|                                      |       |                        |       |   |   |   |   |   |   |
| Salaries and directors’ compensation |       | 2,912                       |       | 983 |   | 2,444 |   | 827 |   |
|                                      |       |                        |       |   |   |   |   |   |   |
| Payroll taxes and other staff costs       |       | 416                         |       | 128 |   | 470 |   | 88 |   |
|                                      |       |                        |       |   |   |   |   |   |   |
| Professional fees                         |       | 691                         |       | 262 |   | 725 |   | 186 |   |
|                                      |       |                        |       |   |   |   |   |   |   |
| Property rent                             |       | 500                         |       | 194 |   | 470 |   | 164 |   |
|                                      |       |                        |       |   |   |   |   |   |   |
| Property service charges                  |       | 247                         |       | 62 |   | 306 |   | 93 |   |

 

The increase in salaries and director’s compensationfor the nine months ended September 30, 2005 as compared to the ninemonths ended September 30, 2004 is due to the increase in staff as theCompany moves from its research and development stage to a more commerciallyorientated entity. The increase in professional fees for the quarter ended September 30,2005 is due to increased legal costs associated with our various patentapplications.

 

*Research and Development Cost.*TheCompany’s research and development cost for the nine months and quarter ended September 30,2005, was $1,721,000 and $558,000 respectively as compared to $2,221,000 and$701,000 for the nine months and quarter ended September 30, 2004respectively. The reduction was due to the MS-PLC reducing its use of outsideconsultants and the costs of data acquisition as MS-PLC gains access to the largest and highest quality ofpatient and scan databases. The Company’s research and development costsare comprised of staff and consultancy costs expensed on the MedicsightTMsystem.

 

11

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*Income Tax Benefit Realized.*The receipt of $883,000 relates to a taxcredit paid by the United Kingdom taxation authorities in the second quarter ofFiscal 2005 under its R&D tax relief scheme for small and mediumenterprises to MS-PLC. The tax credit can either be set-off against taxableprofits or, if not available, can be paid. If it is paid then this is set-offagainst the net operating loss carry forwards. The basis for the R&D reliefis too encourage the development of new technologies and is only applicable tothe research and development of a new technology and not a product.

 

The receipt represented thetax credit received for expenditures incurred between November 2001 and December 2003.The Company did not accrue for any potential tax credit for Fiscal 2004 as ithas determined that the completion date of the new technology occurred at theend of Fiscal 2003 and therefore no application for Fiscal 2004 will be made.

 

*Discontinued Activities.*Duringthe third quarter of 2005 a plan was initiated for the disposal of the Lifesynebusiness.  In accordance with Statementof Financial Accounting Standards No. 144 *Accountingfor Impairment or disposal of Long-Lived Assets* Lifesyne has beenaccounted for as discontinued operations. Accordingly, our financial statements have been restated to reflect theLifesyne Segment as a discontinued operation in our consolidated statements ofoperations and cash flows for all periods presented.  Statement of operations information presentedin the notes to consolidated financial statements has been restated to reflectcontinuing operations for all periods presented. Balance sheet informationpresented in the notes to consolidated financial statements has been restatedto reflect continuing operations for 2005 only. In addition, the September 30, 2005 consolidated balance sheetreflects the assets and liabilities of the discontinued operations as held forsale.

 

On November 10, 2005 Lifesyne was sold to anindependent third party for approximately $450,000. On August 18, 2005MS-PLC entered into an option agreement with the purchaser to acquire Lifesynefor a non-refundable deposit of approximately $90,000 as the purchaser neededfurther time to arrange the financing for the acquisition. This depositconstituted part of the sale proceeds on completion of the acquisition. At thattime the net assets of Lifesyne totaled approximately $844,000 leading to animpairment loss of approximately $394,000.

 
| **Assets and Liabilities** | ** ** | **$’000** | ** ** |
|----------------------------|------------|----------------|------------|
|                       |       |           |       |
| Property and  equipment    |       | 1,075          |       |
| Impairment loss            |       | (394           | )          |
|                       |       | 681            |       |
| Current assets             |       | 136            |       |
| Current  liabilities       |       | (367           | )          |
|                       |       | $              | 450        |   |
|                            |            |                |            |  |

 

Revenues and operatinglosses for Lifesyne follow:

 
| ** **       | ** ** | **$(000)**                   | ** ** |
|------------------|------------|------------------------------|------------|
| ** **       | ** ** | **Three months**             | ** ** | **Three months** | ** ** | **Nine months** | ** ** | **Nine months** | ** ** |
| ** **       | ** ** | **Ended**                    | ** ** | **Ended** | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **       | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
|             |       |                         |       |   |   |   |   |   |   |
| Revenues         |       | $                            | 113        |   | $ | 111 |   | $ | 395 |   | $ | 399 |   |
| Operating losses |       | $                            | 290        |   | $ | 519 |   | $ | 882 |   | $ | 1,175 |   |

 

12

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*Net Loss and Net Loss per Share.*  Net loss was $9,110,000 and $3,652,000respectively for the nine months and quarter ended September 30, 2005 ascompared to a net loss of $10,232,000 and $3,024,000 for the nine months andquarter ended September 30, 2004. Net loss per share for the nine months and quarter ended September 30,2005 was $0.27 and $0.11 respectively, based on weighted average sharesoutstanding of 33,687,045 and 34,123,713 respectively, as compared to a netloss per share for the nine months and quarter ended September 30, 2004was $0.34 and $0.10 respectively, based on weighted average shares outstandingof 30,157,023 and 31,104,194 respectively.

 

The decrease in net losses for the nine months to September 30,2005 as compared to the nine months to September 30, 2004 are due todecreases in selling, general and administrative expenses, research and developmentcosts and the receipt of the R&D tax credit under a United Kingdom taxationscheme.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

*Working Capital Information as at September 30:*  

 
| ** **                                      | ** ** | **($000’s)**       | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **September  30, 2005** | ** ** | **December 31,  2004** | ** ** |
|                                            |       |                    |       |   |   |
| Cash and Cash  Equivalents                      |       | 1,749                   |       | 5,276 |   |
|                                            |       |                    |       |   |   |
| Current Assets                                  |       | 3,157                   |       | 6,515 |   |
|                                            |       |                    |       |   |   |
| Current  Liabilities                            |       | (1,887                  | )          | (2,353 | ) |
|                                            |       |                    |       |   |   |
| Working Capital  Surplus                        |       | 1,270                   |       | 4,162 |   |
|                                            |       |                    |       |   |   |
| Ratio of Current  Assets to Current Liabilities |       | 1.67                    |       | 2.77 |   |

 

*Net Decrease in Cash and Cash Equivalents.*During the nine months ended September 30, 2005, the Company’s cash andcash equivalents decreased by $3,527,000. This decrease was primarily theresult of cash flows received from shares issued by the Company being exceededby the net cash used in operating activities. The Company used net cash of$7,592,000 in continuing operations and used net cash of $651,000 indiscontinued operations. The Company received net cash of $4,343,000 infinancing activities and received $199,000 from investing activities.

 

*Net Cash Used in Operations.* Theuse of cash in continuing operations of $7,592,000 in the nine months ended September 30, 2005, wasattributable to the Company’s relatively minimal revenues at the same time thatthe Company incurred significant operating and software research anddevelopment costs. The effect of these costs was reduced by the tax credit of$883,000 received by MS-PLC. These significant costs included professionalfees, salaries and director compensation, marketing, regulatory costs andproperty service charges and rent. The Company used cash in continuingoperations in the nine months ended September 30, 2004 of  $10,331,000.

 

*Net Cash provided by Investing Activities.*In the nine months ended September 30, 2005, the Company had a net cashinflow from investing activities of $199,000. On May 25, 2005 Medicsight’sindirect subsidiary

 

13

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MAM completed the sale of the CT Lightspeed 16 scannerlocated at the redundant test center at Ravenscourt Hospital in West London for$300,000, net of applicable sales tax, to GE Medical Systems. Additionally, theCompany purchased $101,000 in fixed assets in the same period. In the ninemonths ended September 30, 2004 the Company had a net cash outflow frominvesting activities of $121,000. The Company used the funds to purchaseadditional fixed assets.

 

*Net Cash Provided by Financing Activities.*In the nine months ended September 30, 2005, the Company had a net cashinflow from financing activities of $4,343,000. The funds received in the ninemonths ended September 30, 2005, consisted of $4,676,000 from the Company’sprivate offerings less $333,000 used to settle the lease outstanding on the CTLightspeed 16 scanner sold by MAM. For the nine months ended September 30,2004, the Company had a net cash inflow from financing activities of$19,728,000. The funds received consisted of $22,851,000 received from theprivate offering of the Company’s stock, which were partly used to reduce thebank overdraft ($196,000) and to repay the short term debt – related party by$2,880,000. 

 

*Stockholders’ Equity.* The Company’sstockholders’ equity at September 30, 2005 was $13,926,000, including anaccumulated deficit of $(187,608,000), as compared to $18,465,000 at December 31,2004, including an accumulated deficit of $(178,498,000). Additional paid-incapital was $201,327,000 and $196,652,000, at September 30, 2005 and December 31,2004 respectively. The increase in stockholders’ equity was a result of anincrease in additional paid-in capital of $4,676,000 resulting from theplacement of the Company’s stock offset by an increase in accumulated deficitof $9,110,000.

 

*Additional Capital.* The Companywill require additional capital during its fiscal years ending December 31,2005 and 2006 to implement its business strategies, including cash for paymentof increased operating expenses such as salaries for additional employees. Suchadditional capital may be raised through additional public or private equityofferings, as well as borrowings and other resources. Currently, the Companyhas two available lines of credit.

 

During the nine months ended September 30, 2005the Company issued approximately 1,298,000 shares of restricted stock raising$4,676,000 (net of commissions paid to Asia IT investments Ltd (“Asia IT”), arelated party) as part of a private placement.

 

Between October 1, 2005 and November 10,2005 the Company issued approximately 2,003,000 shares of restricted stockraising $7,729,000 (net of commissions paid to Asia IT, a related party) aspart of a private placement. As part of this transaction Asia IT Nominees Ltd (“AsiaNominees”), a related party, acquired 1,050,000 shares for $4,200,000 and Mr. TimPaterson-Brown, Chief Executive Officer and Director of Medicsight, Inc.,acquired 250,000 shares for $1,000,000.

 

On December 15, 2000, the Company entered into anunsecured credit facility with Asia IT that provides a $20,000,000 line ofcredit. Such line of credit originally expired on December 31, 2001, buthas been extended until June 30, 2008. Interest on advances under thecredit facility accrues at 2% above US LIBOR. The Company can draw down on thiscredit facility for its financing requirements, upon approval by the Company’sBoard of Directors and subject to approval by Asia IT (such approval not to beunreasonably withheld). The Company is restricted from borrowing funds,directly or indirectly, other than through the credit facility with Asia IT,without the consent of Asia IT. The availability of the credit facility reducesupon the Company’s sale of any of its investment assets. The amounts drawn andinterest charged under this facility are repayable on demand or at the maturityof the facility.

 

On November 20, 2001, Asia IT entered into a£10,000,000 ($18,000,000) credit facility with MS-PLC.  Such facility matures on June 30, 2008and is secured by a lien on all assets of MS-PLC.  Interest on outstanding amounts accrues at 2%above GBP LIBOR. The loan is convertible into ordinary shares in MS-PLC onannouncement of an Offer to Subscribe, Placing or other public offering of itsordinary shares, at the same price per share as the offering price. 

 

14

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At September 30, 2005, the Company had not drawndown any funds under the $20,000,000 facility with Asia IT, and MS-PLC had notdrawn down any funds under its £10,000,000 ($18,000,000) facility with Asia IT.

 

To the extent that additional capital is raisedthrough the sale of equity or equity-related securities of the Company or itssubsidiaries, the issuance of such securities could result in dilution to theCompany’s stockholders. No assurance can be given, however, that the Companywill have access to the capital markets in the future, or that financing willbe available on acceptable terms to satisfy the Company’s cash requirements toimplement its business strategies. If we are unable to access the capitalmarkets or obtain acceptable financing, our results of operations and financialconditions could be materially and adversely affected.  We may be required to raise substantialadditional funds through other means.  The products derived from our proprietary software, including theMedicsightTM system, are expected to account for substantially all of ourrevenues from operations in the foreseeable future.  Our technology has not yet been fullycommercialized and we have not begun to receive any significant revenues fromcommercial operations.  We cannot assureour stockholders that our technology and products will be commercializedsuccessfully, or that if so commercialized, that revenues will be sufficient tofund our operations.  If adequate fundsare not available to us, we may be required to curtail operations significantlyor to obtain funds through entering into arrangements with collaborativepartners or others that may require us to relinquish rights to certain of ourtechnologies or products that we would not otherwise relinquish.

 

*Critical Accounting Policies*

 

The Securities and Exchange Commission requested thatall registrants list their most critical accounting policies in the Management’sDiscussion and Analyses of Financial Condition and Results of Operations. TheSecurities and Exchange Commission indicated a “critical accounting policy” isone which is both important to the portrayal of the company’s financialcondition and results and requires management’s most difficult, subjective orcomplex judgments, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain. We believe that the followingaccounting policies fit the definition of critical accounting policies.

 

*Revenue Recognition.*Weexpect to earn our revenue primarily from software licenses and relatedservices. Our revenue is recognized in accordance with Statement ofPosition 97-2 (SOP 97-2), as amended by Statement ofPosition 98-9. Currently the Company’s revenues derive from its scanningservices operated by LifesyneTM. Scan revenue is recognized when theservice is delivered.

 

The recognition of revenues from software licenses andrelated services will require more difficult and complex judgments. The termsof the license contract, long-term (over 12 months), short-term, cancelable,non-cancelable or per scan for example will affect the recognition of revenuesfrom services such as up-front fees (for example installation, activation andup-front license fees), on-going license fees, upgrade fees, termination feesand maintenance fees. Where fees are received prior to any service beingdelivered the fees are deferred until the related service has been deliveredsuccessfully and the revenue can then be recognized. Again if there are feesthat relate to any “milestone” agreements these are deferred until the “milestone”has passed and then the revenue can be recognized.

 

The Company believes that the accounting estimatesrelated to the recognition of revenue and establishment of reserves foruncollectable amounts in the results of operations is a “critical accountingestimate” because: (1) it requires management to make assumptions aboutfuture collections, and (2) the impact of changes in actual performanceversus these estimates on the accounts receivable balance reported on ourconsolidated balance sheets and the results reported in our consolidatedstatements of operations could be material. Further the Company has no historyof uncollectable amounts and therefore must initially look to the estimates forthe industry or particular companies that the management feels operate in asimilar environment in addition to any current market indicators about generaleconomic conditions that might impact the collectability of accounts.

 

15

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

 

The Company decided that capitalizing such expenditurewas inappropriate because of the difficulty in assigning costs accurately tothe various software products and versions being developed as technical anddevelopment staff are moved from product to product and version to version on aregular basis. Therefore the Company has decided to expense all research anddevelopment costs. The Company’s research and development costs are comprisedof staff and consultancy costs expensed on the MedicsightTM system.

* *

*Impairment of Long-lived Assets andLong-lived Assets To Be Disposed of*. The Company evaluatesthe carrying value of long-lived assets for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. The Company’s assessment for impairment of an asset involvesestimating the undiscounted cash flows expected to result from use of the assetand its eventual disposition. An impairment loss recognized is measured as theamount by which the carrying amount of the asset exceeds the fair value of theasset.

 

Calculating the estimated fair value of the assetinvolves significant judgments and a variety of assumptions. Judgments that theCompany makes concerning the intangible acquired include assessing time andcost involved for development, time to market, risks of regulatory failure orobsolescence (due to market, environmental or technological advances forexample). For calculating fair value based on discounted cash flows, weforecast future operating results and future cash flows, which includeslong-term forecasts of revenue growth, gross margins and capital expenditures.

 

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

 

Under this standard, goodwill is tested for impairmenton an annual basis or wherever indicators of impairment arise.

 

*Recent Accounting Pronouncements*

* *

In May 2005, the Financial Accounting StandardsBoard (“FASB”) issued Statement 154, *“AccountingChanges and Error Corrections, a replacement of APB Opinion No. 20 andFASB Statement No. 3.” *The standard requiresretrospective application to prior periods’ financial statements of a voluntarychange in accounting principle unless it is deemed impracticable. The standardstates that a change in method of depreciation, amortization or depletion forlong-lived, non-financial assets be accounted for as a change in accountingestimate that is affected by a change in accounting principle.  Thestandard is effective for accounting changes and corrections of errors madeoccurring in fiscal years beginning after December 15, 2005.  Theadoption of Statement of Financial Accounting Standards (“SFAS”) No. 154is not expected to have a material impact on the Company’s financial positionor results of operations.

 

In December 2004, the FASB issued Statement 153,*”Exchanges of Non-monetary Assets, an amendment ofAPB Opinion No.29.”* The standard is based on the principle thatexchanges of non-monetary assets should be measured based on the fair value ofthe assets exchanged and eliminates the exception under

 

16

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APB Opinion No. 29 for an exchange of similarproductive assets and replaces it with an exception for exchanges ofnon-monetary assets that do not have commercial substance. The standard iseffective for non-monetary exchanges occurring in fiscal periods beginningafter June 15, 2005. The Company cannot determine the impact of SFAS 153at this time.

 

In December 2004, the FASB issued Statement 123(revised 2004),*”Share-Based Payment.”*The standard eliminates the disclosure-only election under the priorSFAS 123 and requires the recognition of compensation expense for stockoptions and other forms of equity compensation based on the fair value of theinstruments on the date of grant. The standard is effective for fiscal yearsbeginning after June 15, 2005.

 

## **Item 3.**                       Quantitative and QualitativeDisclosures About Market Risk

 

**Interest Rate Risk**

 

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

 
| **Debt Holder**                 | ** ** | **Facility** | ** ** | **Draw Down** | ** ** | **Interest rate** | ** ** | **At September 30** | ** ** |
|---------------------------------|------------|--------------|------------|---------------|------------|-------------------|------------|--------------------------|------------|
| ** **                      | ** ** | ** **   | ** ** | ** **    | ** ** | ** **        | ** ** | ** **               | ** ** |
| Asia IT Capital Investments Ltd |       | $            | 20,000,000 |          | $          | nil               |       | US Libor + 2             | %          | 6.44 | % |
|                            |       |         |       |          |       |              |       |                     |       |
| Asia IT Capital Investments Ltd |       | $            | 18,000,000 |          | $          | nil               |       | GBP Libor + 2            | %          | 6.54 | % |

 

A hypothetical 100 basis point increase in interestrates would increase interest cost by approximately $nil per annum assuming nofurther draw downs or repayments are made.

 

**Foreign Exchange Risk**

** **

The Company holds limited cash balances in BritishPounds so any adverse movements in the exchange rates are consideredimmaterial.

 

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

 

17

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

** **

*Evaluation of Disclosure Controls and Procedures*

 

As required by Rule 13a-15(b) under theExchange Act, our management carried out an evaluation of the effectiveness ofthe design and operation of the Company’s “disclosure controls and procedures” as of September 30, 2005. Thisevaluation was carried out under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer. As defined in Rules 13a-15(e) and 15d-15(e) under theExchange Act, disclosure controls and procedures are controls and otherprocedures of the Company that are designed to ensure that information requiredto be disclosed by the Company in the reports it files or submits under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed bythe Company in the reports it files or submits under the Exchange Act isaccumulated and communicated to the Company’s management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure.

 

Based upon that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of September 30, 2005.  It should be noted that the design of anysystem of controls is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions, regardlessof how remote.

 

*Changes in Internal Control over FinancialReporting*

 

As required by Rule 13a-15(d) under theExchange Act, our management, including our Chief Executive Officer and ChiefFinancial Officer, also conducted an evaluation of our internal control overfinancial reporting to determine whether any change occurred during the quarterended September 30, 2005, that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.Based on that evaluation during the quarter ended September 30, 2005 therehas been no change in our internal control over financial reporting that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

The Company is currently undergoing a comprehensiveeffort in preparation for compliance with Section 404 of theSarbanes-Oxley Act of 2002. This will involve the documentation, testing andreview of our internal controls under the direction of senior management.

 

18

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# **PART II**

# ** **

## **Item 1.**                       Legal Proceedings  

## ** **

### There are currently no pending legal proceedings.

###  

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

## ** **

### Between January 1, 2005 and September 30,2005 the Company issued approximately 1,298,000 shares of common stock at $4.00per share to a number of institutional investors and private individuals aspart of a private placement raising approximately $4,676,000 net of commissionspayable to Asia IT, a related party. The shares of common stock were issuedwithout registration in reliance upon the exemption provided by Section 4(2) ofthe Securities Act of 1933.

###  

Between October 1,2005 and November 10, 2005 the Company issued approximately 2,003,000shares of common stock at $4.00 per share to a number of institutionalinvestors and private individuals as part of a private placement raisingapproximately $7,729,000 (net of commissions) as part of a private placement.The shares of common stock were issued without registration in reliance uponthe exemption provided by Section 4(2) of the Securities Act of 1933.

 

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

## ** **

### None.

###  

## **Item 4.**                       Submission of Matters to a Voteof Security Holders

## ** **

### None.

###  

## **Item 5.**                       Other Information

## ** **

### None.

 

19

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## **Item 6.**                       Exhibits and Reports on Form 8-K

 
| (a)    | Exhibits                                                                                                                   |
|--------|----------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                       |
| 31.1   | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive  Officer - filed herewith). |
|   |                                                                                                                       |
| 31.2   | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial  Officer - filed herewith). |
|   |                                                                                                                       |
| 32.1   | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive  Officer - filed herewith). |
|   |                                                                                                                       |
| 32.2   | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial  Officer - filed herewith). |
|   |                                                                                                                       |
| (b)    | Reports on Form 8-K                                                                                                   |
|   |                                                                                                                       |
|   | None                                                                                                                       |

 

20

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**MEDICSIGHT,INC. AND SUBSIDIARIES**

** **

**INDEXTO CONDENSED CONSOLIDATED**

**FINANCIALSTATEMENTS**

**AS OFAND FOR THE THREE AND NINE MONTH PERIODS ENDED**

**SEPTEMBER 30,2005**

 
| Condensed  Consolidated Balance Sheets as of September 30, 2005 (Unaudited) and  December 31, 2004                                                                     | F-2         |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------|
|                                                                                                                                                                             |        |
| Condensed  Consolidated Statements of Operations for the Three Months Ended  September 30, 2005 (Unaudited) and the Three Months Ended  September 30, 2004 (Unaudited) | F-3         |
|                                                                                                                                                                             |        |
| Condensed  Consolidated Statements of Operations for the Nine months Ended  September 30, 2005 (Unaudited) and the Nine months Ended  September 30, 2004 (Unaudited)   | F-4         |
|                                                                                                                                                                             |        |
| Condensed  Consolidated Statement of Cash Flows for the Nine months Ended  September 30, 2005 (Unaudited) and the Nine months Ended  September 30, 2004 (Unaudited)    | F-5         |
|                                                                                                                                                                             |        |
| Notes to Condensed  Consolidated Financial Statements                                                                                                                            | F-6 to F-10 |

 

F-1

----

 

**MEDICSIGHT,INC. AND SUBSIDIARIES**

** **

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In$ thousands)**

 
| ** **                                                                                                                          | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                          | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| ASSETS                                                                                                                              |       |                         |       |                        |       |
| CURRENT ASSETS:                                                                                                                     |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                           |       | $                            | 1,749      |                        | $          | 5,276 |   |
| Accounts receivable                                                                                                                 |       | —                       |       | 26                          |       |
| Other receivables                                                                                                                   |       | 56                           |       | 28                          |       |
| Prepaid expenses                                                                                                                    |       | 462                          |       | 498                         |       |
| Sales tax receivable                                                                                                                |       | 73                           |       | 687                         |       |
| Assets held for disposal                                                                                                            |       | 817                          |       | —                      |       |
| Total current assets                                                                                                                |       | 3,157                        |       | 6,515                       |       |
|                                                                                                                                |       |                         |       |                        |       |
| PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation of  $1,516 and $2,202, respectively                                |       | 284                          |       | 2,066                       |       |
|                                                                                                                                |       |                         |       |                        |       |
| INVESTMENTS, at cost                                                                                                                |       | 359                          |       | 359                         |       |
|                                                                                                                                |       |                         |       |                        |       |
| SECURITY DEPOSITS                                                                                                                   |       | 827                          |       | 901                         |       |
|                                                                                                                                |       |                         |       |                        |       |
| EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED                                                                                   |       | 11,200                       |       | 11,200                      |       |
|                                                                                                                                |       |                         |       |                        |       |
| Total assets                                                                                                                        |       | $                            | 15,827     |                        | $          | 21,041 |   |
|                                                                                                                                |       |                         |       |                        |       |
| LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                          |       |                         |       |                        |       |
| CURRENT LIABILITIES:                                                                                                                |       |                         |       |                        |       |
| Current portion of obligations under capital leases                                                                                 |       | $                            | 14         |                        | $          | 107 |   |
| Accounts payable                                                                                                                    |       | 1,079                        |       | 1,193                       |       |
| Accrued expenses                                                                                                                    |       | 427                          |       | 1,053                       |       |
| Liabilities held for disposal                                                                                                       |       | 367                          |       | —                      |       |
| Total current liabilities                                                                                                           |       | 1,887                        |       | 2,353                       |       |
| CAPITAL LEASE, net of current portion                                                                                               |       | 14                           |       | 223                         |       |
| Total liabilities                                                                                                                   |       | $                            | 1,901      |                        | $          | 2,576 |   |
|                                                                                                                                |       |                         |       |                        |       |
| STOCKHOLDERS’ EQUITY:                                                                                                          |       |                         |       |                        |       |
| Common stock, $0.001 par value, 40,000,000 shares authorized, 34,365,381  and 33,067,125 shares issued and outstanding,respectively |       | 34                           |       | 33                          |       |
| Additional paid-in capital                                                                                                          |       | 201,327                      |       | 196,652                     |       |
| Cumulative foreign currency translation adjustment                                                                                  |       | 173                          |       | 278                         |       |
| Accumulated deficit                                                                                                                 |       | (187,608                     | )          | (178,498                    | )          |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                                     |       | 13,926                       |       | 18,465                      |       |
|                                                                                                                                |       |                         |       |                        |       |
| Total liabilities and stockholders’ equity                                                                                     |       | $                            | 15,827     |                        | $          | 21,041 |   |

 

The accompanying notesare an integral part of these condensed statements.

 

F-2

----

 

**MEDICSIGHT,INC. AND SUBSIDIARIES**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
| ** **                                                                 | ** ** | **Three Months**             | ** ** | **Three Months**             | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                 | ** ** | **Ended**                    | ** ** | **Ended**                    | ** ** |
| ** **                                                                 | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
| ** **                                                                 | ** ** | **(unaudited)**              | ** ** | **(unaudited)**              | ** ** |
|                                                                       |       |                         |       |                         |       |
| REVENUES                                                                   |       | $                            | —     |                         | $          | — |   |
|                                                                       |       |                         |       |                         |       |
| EXPENSES:                                                                  |       |                         |       |                         |       |
| Selling, general and administrative charges                                |       | 2,419                        |       | 2,287                        |       |
| Research and development cost                                              |       | 558                          |       | 701                          |       |
| Impairment of investment                                                   |       | —                       |       | 70                           |       |
|                                                                       |       |                         |       |                         |       |
|                                                                       |       | 2,977                        |       | 3,058                        |       |
|                                                                       |       |                         |       |                         |       |
| Operating loss                                                             |       | (2,977                       | )          | (3,058                       | )          |
|                                                                       |       |                         |       |                         |       |
| OTHER INCOME                                                               |       |                         |       |                         |       |
| Interest and other income                                                  |       | 9                            |       | 82                           |       |
|                                                                       |       |                         |       |                         |       |
| LOSS FROM OPERATIONS BEFORE MINORITY INTEREST AND DISCONTINUED  OPERATIONS |       | (2,968                       | )          | (2,976                       | )          |
|                                                                       |       |                         |       |                         |       |
| MINORITY INTEREST                                                          |       | —                       |       | 471                          |       |
|                                                                       |       |                         |       |                         |       |
| DISCONTINUED OPERATIONS:                                                   |       |                         |       |                         |       |
| Loss from impairment of assets held for sale                               |       | (394                         | )          | —                       |       |
| Loss from operations of Lifesyne                                           |       | (290                         | )          | (519                         | )          |
|                                                                       |       |                         |       |                         |       |
| NET LOSS                                                                   |       | $                            | (3,652     | )                            | $          | (3,024 | ) |
|                                                                       |       |                         |       |                         |       |
| LOSS PER SHARE:                                                            |       |                         |       |                         |       |
| Basic and diluted:                                                         |       |                         |       |                         |       |
| Loss from continuing operations                                            |       | $                            | (0.09      | )                            | $          | (0.08 | ) |
| Loss from discontinued operations                                          |       | $                            | (0.02      | )                            | $          | (0.02 | ) |
|                                                                       |       |                         |       |                         |       |
| Net loss                                                                   |       | $                            | (0.11      | )                            | $          | (0.10 | ) |
|                                                                       |       |                         |       |                         |       |
| Weighted average number of common shares outstanding                       |       | 34,123,713                   |       | 31,104,194                   |       |

 

**The accompanying notes are an integral part of these**condensedstatements.

 

F-3

----

 

**MEDICSIGHT,INC. AND SUBSIDIARIES**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
| ** **                                                                              | ** ** | **Nine months**              | ** ** | **Nine months**              | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                              | ** ** | **Ended**                    | ** ** | **Ended**                    | ** ** |
| ** **                                                                              | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
| ** **                                                                              | ** ** | **(unaudited)**              | ** ** | **(unaudited)**              | ** ** |
|                                                                                    |       |                         |       |                         |       |
| REVENUES                                                                                |       | $                            | —     |                         | $          | — |   |
|                                                                                    |       |                         |       |                         |       |
| EXPENSES:                                                                               |       |                         |       |                         |       |
| Selling, general and administrative charges                                             |       | 7,057                        |       | 7,453                        |       |
| Research and development cost                                                           |       | 1,721                        |       | 2,221                        |       |
| Impairment of investment                                                                |       | —                       |       | 70                           |       |
|                                                                                    |       |                         |       |                         |       |
|                                                                                    |       | 8,778                        |       | 9,744                        |       |
|                                                                                    |       |                         |       |                         |       |
| Operating loss                                                                          |       | (8,778                       | )          | (9,744                       | )          |
|                                                                                    |       |                         |       |                         |       |
| OTHER INCOME                                                                            |       |                         |       |                         |       |
| Interest and other income                                                               |       | 61                           |       | 82                           |       |
|                                                                                    |       |                         |       |                         |       |
| LOSS BEFORE INCOME TAX BENEFIT REALIZED, MINORITY INTEREST AND  DISCONTINUED OPERATIONS |       | (8,717                       | )          | (9,662                       | )          |
|                                                                                    |       |                         |       |                         |       |
| INCOME TAX BENEFIT REALIZED                                                             |       | 883                          |       | —                       |       |
|                                                                                    |       |                         |       |                         |       |
| LOSS BEFORE MINORITY INTEREST,  AND DISCONTINUED OPERATIONS                             |       | (7,834                       | )          | (9,662                       | )          |
|                                                                                    |       |                         |       |                         |       |
| MINORITY INTEREST                                                                       |       | —                       |       | 605                          |       |
|                                                                                    |       |                         |       |                         |       |
| DISCONTINUED OPERATIONS:                                                                |       |                         |       |                         |       |
| Loss from impairment of assets held for sale                                            |       | (394                         | )          | —                       |       |
| Loss from operations of Lifesyne                                                        |       | (882                         | )          | (1,175                       | )          |
|                                                                                    |       |                         |       |                         |       |
| Net loss                                                                                |       | $                            | (9,110     | )                            | $          | (10,232 | ) |
|                                                                                    |       |                         |       |                         |       |
| LOSS PER SHARE:                                                                         |       |                         |       |                         |       |
| BASIC AND DILUTED                                                                       |       |                         |       |                         |       |
| Loss from continuing operations                                                         |       | $                            | (0.23      | )                            | $          | (0.30 | ) |
| Loss from discontinued operations                                                       |       | $                            | (0.04      | )                            | $          | (0.04 | ) |
|                                                                                    |       |                         |       |                         |       |
| Net loss                                                                                |       | $                            | (0.27      | )                            | $          | (0.34 | ) |
|                                                                                    |       |                         |       |                         |       |
| Weighted average number of common shares outstanding                                    |       | 33,687,045                   |       | 30,157,023                   |       |

** **

**The accompanying notes are an integral part of these**condensedstatements.

 

F-4

----

 

**MEDICSIGHT,INC. AND SUBSIDIARIES**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW**

**(In $thousands)**

 
| ** **                                                                  | ** ** | **Nine months  Ended**       | ** ** | **Nine months  Ended**       | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                  | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
| ** **                                                                  | ** ** | **(unaudited)**              | ** ** | **(unaudited)**              | ** ** |
|                                                                        |       |                         |       |                         |       |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                       |       |                         |       |                         |       |
| Net loss                                                                    |       | $                            | (9,110     | )                            | $          | (10,232 | ) |
| Loss from discontinued operations                                           |       | (1,276                       | )          | (1,175                       | )          |
| Loss from continuing operations                                             |       | (7,834                       | )          | (9,057                       | )          |
|                                                                        |       |                         |       |                         |       |
| Adjustments to reconcile net loss to net cash used in operating  activities |       |                         |       |                         |       |
| Depreciation                                                                |       | 355                          |       | 570                          |       |
| Impairment of investment                                                    |       | —                       |       | 70                           |       |
| Minority interest in net loss of subsidiary                                 |       | —                       |       | (605                         | )          |
| Loss on disposal  of fixed assets                                           |       | 69                           |       | —                       |       |
| (Increase)/decrease  in assets                                              |       |                         |       |                         |       |
| Accounts receivable                                                         |       | 26                           |       | 1                            |       |
| Prepaid expenses and other current assets                                   |       | 8                            |       | 61                           |       |
| Sales tax receivable                                                        |       | 590                          |       | (117                         | )          |
| (Decrease) in  liabilities                                                  |       |                         |       |                         |       |
| Accounts payable                                                            |       | (156                         | )          | (1,185                       | )          |
| Accrued expenses                                                            |       | (650                         | )          | (69                          | )          |
|                                                                        |       |                         |       |                         |       |
| Net cash provided by/(used in) operating activities                         |       | (7,592                       | )          | (10,331                      | )          |
|                                                                        |       |                         |       |                         |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                       |       |                         |       |                         |       |
| Sale of fixed assets                                                        |       | 300                          |       | —                       |       |
| Purchase of fixed assets                                                    |       | (101                         | )          | (234                         | )          |
| Net cash used in investing activities                                       |       | 199                          |       | (234                         | )          |
|                                                                        |       |                         |       |                         |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                       |       |                         |       |                         |       |
| Principal payments under capital lease obligations                          |       | (333                         | )          | (47                          | )          |
| Decrease of bank overdraft                                                  |       | —                       |       | (196                         | )          |
| Proceeds from sale of common stock                                          |       | 4,676                        |       | 22,851                       |       |
| Decrease in short term debt – related party                            |       | —                       |       | (2,880                       | )          |
| Net cash provided by financing activities                                   |       | 4,343                        |       | 19,728                       |       |
|                                                                        |       |                         |       |                         |       |
| Effect of exchange rates on cash and cash equivalents                       |       | 174                          |       | (19                          | )          |
|                                                                        |       |                         |       |                         |       |
| Discontinued Operations                                                     |       | (651                         | )          | (1,175                       | )          |
|                                                                        |       |                         |       |                         |       |
| NET CHANGE IN CASH & CASH EQUIVALENTS                              |       | (3,527                       | )          | (7,969                       | )          |
|                                                                        |       |                         |       |                         |       |
| CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD                       |       | 5,276                        |       | 845                          |       |
|                                                                        |       |                         |       |                         |       |
| CASH & CASH EQUIVALENTS, END OF PERIOD                             |       | $                            | 1,749      |                         | $          | 8,814 |   |
|                                                                        |       |                         |       |                         |       |
| SUPPLEMENTAL  DISCLOSURES OF CASH PAID                                      |       |                         |       |                         |       |
| Interest                                                                    |       | 4                            |       | 38                           |       |
| Income tax benefit  realized                                                |       | (883                         | )          | —                       |       |

 

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

 

F-5

----

 

**MEDICSIGHT,INC. AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL**

**STATEMENTS**

 

*(1)*                               Formationand Business of the Company

* *

Medicsight, Inc. (formerly HTTP Technology, Inc.)and its subsidiaries are collectively referred to in this Report as the “Company”.  Our business objective is to conceive,develop and commercialize the MedicsightTM system (ourstate-of-the-art digital disease detection software system comprising ColonCAD, Lung CAD and Heartscreen) through our majority-owned subsidiary,Medicsight PLC (“MS-PLC”). 

 

We were originally incorporated as a Utah corporationin 1977. On December 19,2000, we entered into an Agreement and Plan of Merger with our wholly ownedsubsidiary HTTP Technology, Inc., a Delaware corporation, and therebyeffected a re-incorporation of the company from Utah to Delaware. Allreferences in this Annual Report to  “theCompany”, “we” or “us” refer to Medicsight, Inc., the Delaware corporationand subsidiaries, if the event occurred on or after December 19, 2000 orto HTTP Technology, Inc., the Utah corporation and subsidiaries, if theevent occurred prior to December 19, 2000. 

 

*(2)*                               Basisof Presentation and liquidity

* *

The accompanying unaudited condensed consolidatedfinancial statements of the Company have been prepared pursuant to the rules ofthe Securities and Exchange Commission (the “SEC”). Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles in the United Stateshave been condensed or omitted pursuant to such rules and regulations.These unaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for theFiscal years ended December 31, 2004. In the opinion of management, theaccompanying unaudited condensed consolidated financial statements reflect alladjustments, which are of a normal recurring nature, necessary for a fairpresentation of the results for the periods presented. All significantinter-company transactions have been eliminated in consolidation.

 

The results of operations for such periods are notnecessarily indicative of the results expected for the full fiscal year or forany future period.

 

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

 

These unaudited condensed consolidated financialstatements are presented on the basis that the Company will continue as a goingconcern. The going concern concept contemplates the realization of assets andsatisfaction of liabilities in the normal course of business over a reasonablelength of time. The Company has incurred significant operating losses sinceinception. As a result, the Company has generated negative cash flows fromoperations, and has an accumulated deficit at September 30, 2005 and thereis uncertainty with respect to the availability and the utilization of itscredit facility with Asia IT Capital Investments Limited (a related party) –see Note 3. 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 will continue to seekadditional funding when required and is actively developing the technology inorder to bring it to market. While the Company is optimistic and believesappropriate actions are being taken, there can be no assurance, however, thatmanagement’s efforts will be successful or that the products the Companydevelops and markets will be accepted by consumers.

 

F-6

----

 

*(3)*                               Linesof Credit

* *

On December 15, 2000, the Company entered into anunsecured credit facility with Asia IT, which provides a $20,000,000 line ofcredit. Such line of credit originally expired on December 31, 2001, buthas been extended until June 30, 2008. Interest on advances under thecredit facility accrues at 2% above US LIBOR. The Company can draw down on thiscredit facility for its financing requirements, upon approval by the Company’sBoard of Directors and subject to approval by Asia IT (such approval not to beunreasonably withheld). The Company is restricted from borrowing funds,directly or indirectly, other than through the credit facility with Asia IT,without the consent of Asia IT. The availability of the credit facility wouldbe reduced upon the Company’s sale of any of its investment assets. The amountsdrawn and interest charged under this facility are repayable on demand or atthe maturity of the facility. 

 

On November 20, 2001, MS-PLC entered into a£10,000,000 ($18,000,000) credit facility with Asia IT.  Such facility matures on June 30, 2008and is secured by a lien on all assets of MS-PLC.  Interest on outstanding amounts accrues at 2%above GBP LIBOR.  The loan is convertibleinto ordinary shares in MS-PLC on announcement of an Offer to Subscribe,Placing or other public offering of its ordinary shares, at the same price pershare as the offering price. 

 

At September 30, 2005, the Company had not drawndown any funds under the $20,000,000 facility with Asia IT, and MS-PLC had notdrawn down any funds under its £10,000,000 ($18,000,000) facility with Asia IT.

 

*(4)*                               DiscontinuedActivities

* *

During the third quarter of 2005 a plan was initiatedfor the disposal of the Lifesyne business. In accordance with Statement of Financial Accounting Standards No. 144*Accounting for Impairment or disposal ofLong-Lived Assets* Lifesyne has been accounted for as discontinuedoperations.  Accordingly, our financialstatements have been restated to reflect the Lifesyne Segment as a discontinuedoperation in our consolidated statements of operations and cash flows for allperiods presented.  Statement ofoperations information presented in the notes to consolidated financialstatements has been restated to reflect continuing operations for all periodspresented. Balance sheet information presented in the notes to consolidatedfinancial statements has been restated to reflect continuing operations for2005 only.  In addition, the September 30,2005 consolidated balance sheet reflects the assets and liabilities of thediscontinued operations as held for sale.

 

On November 10, 2005Lifesyne was sold to an independent third party for approximately $450,000. On August 18,2005 MS-PLC entered into an option agreement with the purchaser to acquireLifesyne for a non-refundable deposit of approximately $90,000 as the purchaserneeded further time to arrange the financing for the acquisition. This depositconstituted part of the sale proceeds on completion of the acquisition. At thattime the net assets of Lifesyne totaled approximately $844,000 leading to animpairment loss of approximately $394,000.

 

Revenues and operatinglosses for Lifesyne follow:

 
| ** **       | ** ** | **$(000)**                   | ** ** |
|------------------|------------|------------------------------|------------|
| ** **       | ** ** | **Three months**             | ** ** | **Three months** | ** ** | **Nine months** | ** ** | **Nine months** | ** ** |
| ** **       | ** ** | **Ended**                    | ** ** | **Ended** | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **       | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
|             |       |                         |       |   |   |   |   |   |   |
| Revenues         |       | $                            | 113        |   | $ | 111 |   | $ | 395 |   | $ | 399 |   |
| Operating losses |       | $                            | 290        |   | $ | 519 |   | $ | 882 |   | $ | 1,175 |   |

 

F-7

----

 

*(5)*                               Stockholders’Equity 

* *

During the nine months ended September 30, 2005the Company issued approximately 1,298,000 shares of restricted stock raising$4,676,000 (net of commissions paid to Asia IT investments Ltd (“Asia IT”), arelated party) as part of a private placement.

 

*(6)*                               Accountingfor Stock Based Compensation

* *

On March 20, 2003, the Board of Directors ofMS-PLC approved a stock option plan “A” for its employees and reserved4,000,000 shares of its common stock for issuance upon exercise of optionsgranted under this plan. On April 19, 2003, the Remuneration Committee ofMS-PLC also approved the stock option plan and implemented it on April 30,2003 granted options over 2,828,600 shares to employees of MS-PLC. At September 30,2005 there were 1,872,500 options outstanding and 100% of the options issuedwere exercisable under this plan.

 

On September 30, 2004 MS-PLC granted options over3,400,500 shares to its employees under the stock option plan “B”. Subsequentlyon August 15, 2005, the Board of Directors of MS-PLC approved the stockoption plan “B”. At September 30, 2005 there were 2,057,700 optionsoutstanding and 70% of the options issued were exercisable under this plan afterMS-PLC had passed certain vesting criteria.

 

On June 30, 2005 MS-PLC granted options over200,000 shares to its employees. Subsequently on August 15, 2005, theBoard of Directors of MS-PLC approved a stock option plan “C”. At September 30,2005 there were 200,000 options outstanding and none of the options issued wereexercisable. Options issued under this plan vest equally after employees havebeen employed for 12, 24 and 36 months.

 

The Company has elected to adopt the disclosure onlyprovisions of Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” as amended by SFAS No. 148, “Accounting forStock-Based Compensation - Transition and Disclosure - an amendment of FASBStatement No. 123”, and measures the cost for MS-PLC’s employee stockcompensation plan by using the accounting methods prescribed by APB Opinion No. 25,“Accounting for Stock Issued to Employees”, which allows that no compensationcost be recognized unless the exercise price of the options granted is lowerthan the fair market value of the Company’s stock at date of grant.Accordingly, no stock-based employee compensation cost is reflected in netloss, as all options granted had an exercise price equal to the market value ofthe underlying common stock on the date of grant. SFAS No. 123, as amendedby SFAS No. 148, requires disclosure of pro forma income and pro formaincome per share as if the fair value based method had been applied inmeasuring compensation expense.

 
| ** **                                           | ** ** | **Nine months**              | ** ** | **Nine months**              | ** ** | **Three months**             | ** ** | **Three months**             | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                           | ** ** | **Ended**                    | ** ** | **Ended**                    | ** ** | **Ended**                    | ** ** | **Ended**                    | ** ** |
| ** **                                           | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
| ** **                                           | ** ** | **(unaudited)**              | ** ** | **(unaudited)**              | ** ** | **(unaudited)**              | ** ** | **(unaudited)**              | ** ** |
| ** **                                           | ** ** | **$’000**               | ** ** | **$’000**               | ** ** | **$’000**               | ** ** | **$’000**               | ** ** |
|                                                 |       |                         |       |                         |       |                         |       |                         |       |
| Net loss as reported:                                |       | (9,110                       | )          | (10,232                      | )          | (3,652                       | )          | (3,024                       | )          |
|                                                 |       |                         |       |                         |       |                         |       |                         |       |
| Fair value method of stock based compensation        |       | (833                         | )          | (165                         | )          | (563                         | )          | (121                         | )          |
|                                                 |       |                         |       |                         |       |                         |       |                         |       |
| Proforma net loss                                    |       | (9,943                       | )          | (10,397                      | )          | (4,215                       | )          | (3,145                       | )          |
|                                                 |       |                         |       |                         |       |                         |       |                         |       |
| Reported earnings per common share Basic and diluted |       | (0.27                        | )          | (0.34                        | )          | (0.11                        | )          | (0.10                        | )          |
| Proforma earnings per common share Basic and diluted |       | (0.29                        | )          | (0.34                        | )          | (0.13                        | )          | (0.10                        | )          |

 

F-8

----

 

*(7)*                               Goodwilland Other Intangible Assets

* *

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

 

*(8)*                               SecurityDeposits

* *

As MS-PLC occupies approximately 95% of 46 BerkeleySquare it acquired the security deposit on the offices for cash fromInternational Cellulose Company Ltd in February 2003. The value of thesecurity deposit is £470,000 ($827,000) and is interest-bearing.

 

*(9)*                               LeaseCommitments

* *

The Company had entered into property leases for theWestminster and Ravenscourt centers through its Lifesyne subsidiary. Followingthe sale of Lifesyne the Company has no outstanding formal property leaseagreements.

 

The Company’s corporate offices at 46 Berkeley Squareare leased to International Cellulose Company Limited (ICCL), a companyregistered in England and Wales. STG Holdings PLC, a significant stockholder ofthe Company, acquired 100% of the issued share capital of ICCL in November 2001.There is no formal lease agreement between ICCL and the Company for its officesat 46 Berkeley Square but the Company is charged by ICCL on the basis of spaceoccupied. The approximate charge is $140,000 per quarter.

 

*(10)*                        Income TaxBenefit Realized

* *

The receipt of $883,000relates to a tax credit paid by the United Kingdom taxation authorities in thesecond quarter of Fiscal 2005 under its R&D tax relief scheme for small andmedium enterprises to MS-PLC. The tax credit can either be set-off againsttaxable profits or, if not available, can be paid. If it is paid then this isset-off against the net operating loss carry forwards. The basis for theR&D relief is too encourage the development of new technologies and is onlyapplicable to the research and development of a new technology and not aproduct.

 

The receipt represented thetax credit received for expenditures incurred between November 2001 and December 2003.The Company did not accrue for any potential tax credit for Fiscal 2004 as ithas determined that the completion date of the new technology occurred at theend of Fiscal 2003 and therefore no application for Fiscal 2004 will be made.

 

*(11)*                        ComprehensiveIncome

* *

As of September 30,2005 and the nine months and quarter then ended, comprehensive income iscomprised of a net loss from operations and the net effect of foreign currencytranslation adjustments. This comprised a net loss of $9,110,000 and $3,652,000and foreign currency translation adjustments of $105,000 and ($43,000),resulting in comprehensive loss of $9,215,000 and $3,609,000, respectively.

 

F-9

----

 

*(12)        RecentAccounting Pronouncements*

* *

In May 2005, the Financial Accounting StandardsBoard (“FASB”) issued Statement 154, *“AccountingChanges and Error Corrections, a replacement of APB Opinion No. 20 andFASB Statement No. 3.” *The standard requiresretrospective application to prior periods’ financial statements of a voluntarychange in accounting principle unless it is deemed impracticable. The standardstates that a change in method of depreciation, amortization or depletion forlong-lived, non-financial assets be accounted for as a change in accountingestimate that is affected by a change in accounting principle.  The standardis effective for accounting changes and corrections of errors made occurring infiscal years beginning after December 15, 2005.  The adoption ofStatement of Financial Accounting Standards (“SFAS”) No. 154 is notexpected to have a material impact on the Company’s financial position orresults of operations.

 

In December 2004, the FASB issued Statement 153,*”Exchanges of Non-monetary Assets, an amendment ofAPB Opinion No.29.”* The standard is based on the principle thatexchanges of non-monetary assets should be measured based on the fair value ofthe assets exchanged and eliminates the exception under APB Opinion No. 29for an exchange of similar productive assets and replaces it with an exceptionfor exchanges of non-monetary assets that do not have commercial substance. Thestandard is effective for non-monetary exchanges occurring in fiscal periodsbeginning after June 15, 2005. The Company cannot determine the impact ofSFAS 153 at this time.

 

In December 2004, the FASB issued Statement 123(revised 2004),*”Share-Based Payment.”*The standard eliminates the disclosure-only election under the priorSFAS 123 and requires the recognition of compensation expense for stockoptions and other forms of equity compensation based on the fair value of theinstruments on the date of grant. The standard is effective for fiscal yearsbeginning after June 15, 2005.

 

*(13)        SubsequentEvents*

* *

Between October 1, 2005 and November 10,2005 the Company issued approximately 2,003,000 shares of restricted stockraising $7,729,000 (net of commissions paid to Asia IT, a related party) aspart of a private placement. As part of this transaction Asia IT Nominees Ltd (“AsiaNominees”), a related party, acquired 1,050,000 shares for $4,200,000 and Mr. TimPaterson-Brown, Chief Executive Officer and Director of Medicsight, Inc.,acquired 250,000 shares for $1,000,000.

 

F-10

----

 

**SIGNATURE**

** **

In accordance with the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|                   | MEDICSIGHT, INC. |
|------------------------|------------------|
|                   |             |
|                   |             |
|                   | By:              | /s/ TIM PATERSON-BROWN |   |
|                   |             | Tim Paterson-Brown |
|                   |             | Chief Executive Officer |
|                   |             |
|                   |             |
|                   | By:              | /s/ PAUL A. GOTHARD |   |
|                   |             | Paul A. Gothard |
|                   |             | Chief Financial Officer |
|                   |             |
|                   |             |
| November 14, 2005 |             |

 

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