**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

**(Mark One)**

 

**ý**         Quarterly report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934

 

**Forthe quarterly period ended March 31, 2005**

 

**o**         Transition report pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934

 

**Forthe transition period from              to               **

 

**Commission file** number 0-26886

 

**MEDICSIGHT, INC.**

**(Exactname of registrant as specified in its charter)**

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

 

**Indicate by check whether theregistrant: (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days Yes    **ý         No     o      

** **

**Indicate by check whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct):  Yes   **o          No   ý    

 

**APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCYPROCEEDINGS DURING THE PRECEDING FIVE YEARS**

** **

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

 

**APPLICABLE ONLY TO CORPORATE ISSUERS**

 

**Indicate the number of shares outstanding of each of theissuer’s classes of common stock, as of the latest practicable date:  As of May 9, 2005: 33,571,125 shares ofCommon Stock, par value $0.001 per share.**

 

 

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**NOTE REGARDING 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 orimplied by such forward-looking statements. All statements other thanstatements of historical fact are statements that could be deemedforward-looking statements, including any projections of revenue, gross margin,expenses, earnings or losses from operations, synergies or other financial items;any statements of the plans, strategies and objectives of management for futureoperations, including the execution of restructuring plans; any statementconcerning developments, performance or industry rankings relating to productsor services; any statements regarding future economic conditions orperformance; any statements of expectation or belief; and any statements ofassumptions underlying any of the foregoing. The risks, uncertainties andassumptions referred to above include the performance of contracts bysuppliers, customers and partners; employee management issues; the difficultyof aligning expense levels with revenue changes; and other risks that aredescribed herein, including but not limited to the specific risks areasdiscussed in “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in Item 2 of this report, and that are otherwisedescribed from time to time in the Company’s Securities and Exchange Commissionreports filed after this report. The Company assumes no obligation and does notintend to update these forward-looking statements.

 

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

 

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**PART 1**

 

**FINANCIAL INFORMATION**

 

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

 

Medicsight, Inc. and its subsidiaries are collectivelyreferred to in this Report as the “Company”. For purposes of the discussion contained herein, all financialinformation is reported on a consolidated basis. The financial statements forthe Company’s fiscal quarter ended March 31, 2005 are attached to this Report,commencing at page F-1.

 

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

 

**BACKGROUND**

 

We are a software development business, focused on themedical imaging market. Our core technology is about developing automaticdetection and analytical tools for clinicians to improve their ability todiagnose and treat diseases.

 

We were originally incorporated as a Utah corporationin 1977. On December 19, 2000, we entered into an Agreement and Plan of Mergerwith our wholly owned subsidiary HTTP Technology, Inc., a Delaware corporation,and thereby effected a re-incorporation of the Company from Utah to Delaware.All references in this Quarterly Report to “the Company”, “we” or “us” are to Medicsight, Inc., the Delawarecorporation and subsidiaries, if the referenced event occurred on or afterDecember 19, 2000 or to HTTP Technology, Inc., the Utah corporation andsubsidiaries, if the referenced event occurred prior to December 19, 2000. OnJanuary 27, 2004 the Company increased its authorized share capital from25,000,000 shares to 40,000,000 shares.

 

During the three months ended March 31, 2005 theCompany issued approximately 504,000 shares of restricted stock raising$1,813,000 (net of commissions paid to Asia IT, a related party) as part of aprivate placement.

 

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**

 

We are developers of software technology for medicaldiagnostic applications such as Computer Aided Detection  (“CAD”) and Computer Assisted Reader (“CAR”)software products in differing business models. We have five principaloperating subsidiaries: Medicsight PLC (“MS-PLC”), Medicsight Asset ManagementLimited (“MAM”), Lifesyne UK Limited (“Lifesyne UK”), Medicsight USA, Inc (“MS-US”)(previously Lifesyne US) and Medicsight International Limited (“MIL”).

 

*MS-PLC.*  Our majority-owned subsidiary, MS-PLC, iscurrently developing automatic detection and analytical tools for clinicians toimprove their ability to diagnose and treat diseases. At March 31, 2005, theCompany owned 70,677,300 ordinary shares in MS-PLC, constituting 81.8% of theoutstanding shares.

 

*Lifesyne UK*.  Lifesyne is a wholly owned subsidiary ofMS-PLC that was established in September 2002 for the purpose of providing abranded operating entity for the United Kingdom and Ireland markets. Lifesyneoperates scanning centers in the United Kingdom. As the Company has decided tofocus on the delivery of software, no further development of the Lifesynestrategy is envisaged beyond the Company’s current scanning requirements. Weare now focusing Lifesyne on the rapid acquisition of patient scan datanecessary to enable our expert software to refine its characterizationcapabilities.

 

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*MS-US.***MS-US (previously Lifesyne US) is also awholly owned subsidiary of MS-PLC, was established toco-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.

 

*MAM*.  MAM is also a wholly owned subsidiary ofMS-PLC that was established in September 2002 for the purpose of acquiring fixedassets on behalf of the operating entities in the group. As Lifesyne’s strategychanged MAM’s business was limited so all assets were transferred to MS-PLC orLifesyne at market value on December 31, 2004. We are currently in the processof selling the assets not deployed by MS-PLC or Lifesyne. MAM will ceaseoperations in the next few months once all assets are disposed of.

 

Medicsight is a medical imaging software company. TheCompany’s core technology is focused on developing automatic detection and analyticaltools for clinicians to improve their ability to diagnose and treat diseases.For the last four years the Company has been working on developing algorithmsin this area through a team of over 30 scientists and software developers.

 

Medicsight has focused so far on 3 therapeutic areas -three leading causes of premature death, lung cancer, coronary heart diseaseand colorectal cancer. Between them these diseases are responsible for over 8.5million premature deaths globally. There’s increasing evidence in all threeareas that early detection leads to an improved life expectancy and this facthas been a core focus of our product development. However, our technology isapplicable to many other diseases and we are already starting to plan for suchpotential expansion in the application of our products.

 

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.

 

*MissionStatement*

 

The Company aims be a leading global supplier ofmedical imaging analysis software, through

 

•                                          Focusing on developing our core technology

•                                          Creating a global network of leading medicalpartners

•                                          Developing industry best data collectionprogrammes and validation studies

•                                          Staying ahead of the competition bycontinuously developing our databases, technology and products

 

*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

•                                          Product range/rate of product development

•                                          Geographic scope

•                                          The skills base

 

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*What differentiates the Company*

 

We are 100% focused in our field and in delivering ourvision, which is to take CAD software beyond detection to diagnosis and patientmanagement. This is a clearly differentiating position from the competitionwho, we believe, are more focused on detection only. To make this claim, theCompany needs to be able to combine:

 

•                                          World leading science

•                                          World leading medical expertise

•                                          The largest patient and scan databases

 

*How does this evidence itself?*

 

As far as science is concerned, we have had over 30PhDs and software engineers working on developing the core algorithms for thelast four years. We believe we have developed more sophisticated tools thanothers currently available in the market place. The key to reliable detectionand to accurate measurement is accurate boundary identification of the suspectlesion. If your software does not distinguish the lesion from the wall tissue,it is self evident that you will not be able to reliably detect or accuratelymeasure; this is where we have focused much of our scientific development.

 

In each of the therapeutic areas, heart, lung andcolon, we are working in, we have attracted many ofthe world’s leading radiologists, including Drs Henschke and Yankelvitz fromCornell, the leading world opinions in lung cancer screening and also DrsPickhardt and Nugent who conducted the ground breaking colon study published inNew England Medical Journal in December 2003. Doctors of this caliber areintegral to our product strategy and our data collection strategy.

 

The third area, after science and medical expertise,is data; data is crucial to the training and testing of our products; the moredata you have the better your product performance and we have, we believeaccess to the world’s largest lung and colon scan databases; however, it’s notjust quantity of data that counts, our databases include the proven outcomes(cancers) and patient management histories so analyzing these will allow us togo beyond basic nodule or polyp detection. As the databases grow and our accessto them increases, it will enable the Company to continue to stay ahead of thefield in the area of data acquisition and thus improve the development of theCompany’s software products – a clearly sustainable point of differentiation.

 

*ProductPortfolio*

 

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

 

Medicsight introduced a number of innovations to themarket in 2004:

 

•                                          The firstapproved joint read detection products

•                                          The firstcolon detection product

•                                          The firstadjustable filter system to allow radiologists to adjust their settings tosuite their requirements

 

Medicsight was the firstcompany to use the term, Computer Assisted ReaderTM or CARTM, a term gaining muchindustry usage now. CAR signifies “joint-read” software that assistsradiologists in detecting and evaluating lesions or nodules found during CTscans of the lung or colon. Unlikecurrent “second-read” software, in which software is employed afterradiologists have completed their reviews, joint-read software enables theradiologist to review “unfiltered” images side-by-side and simultaneously withsoftware-enhanced regions of interest. For a radiologist reviewing up to 600images from a single CT scan, the joint-read capability saves time and aids inthe evaluation of nodules.

 

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There is increasing evidence in all three areas thatearly detection may lead to improved life expectancy and this has been a corefocus of our product development. However, our technology is applicable to manyother diseases and we are already starting to plan for this.

 

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

 

*Diagnostic;incidental detection and” disease tracking” products*.These are products designed for symptomatic patients to detect diseaseincidentally (for example when a patient is being scanned for anothersymptom/disease), and then subsequently track disease progress and monitortreatment effectiveness. The primary applications in this area are Lung noduletracking and Heart calcium scoring though the Company believes there will be agrowing requirement for polyp tracking in the colon as CT colonography becomesmore established

 

“*Screening”products*; *for populationscreening of asymptomatic patients*. There is much evidence todemonstrate that the early detection of colon, lung and heart disease leads toan improved life expectancy.  CAD CT willprovide a cost effective solution in identifying these diseases early enough tosignificantly alter the economics of population screening programs in theseareas.

 

In October 2004, MS-PLC received clearance from theU.S. Food and Drug Administration (“FDA”) for its Colon CARTMproduct, an image analysis software tool that is used with CT colonography (“virtualcolonoscopy”) to assist radiologists in searching for and measuring potentialcolorectal polyps. Virtual colonoscopy uses a CT scanner to generate bothtwo-dimensional and three-dimensional views of inside of the colon so isnon-invasive, as opposed to the traditional colonoscopy, in which a viewinginstrument is physically inserted into the bowel. Colon cancers most oftenstart when malignant cells form within polyps attached to the inner surface ofthe large bowel. Detection and removal of these polyps can prevent them frombecoming cancerous.

 

Medicsight Colon CARTM works by usingMS-PLC’s CAR technology to deploy a series of filters against image dataderived from CT colonographies. These filters highlight spherical areas of theimage as small as 5 mm or the size of a small pea, which could be potentialpolyps. The radiologist is also able to manually highlight any irregularitiesfor closer inspection.  Once suspectpolyps are found, the software can precisely identify the boundaries andfeatures and show them in 3D with a volume measurement, diameter, shape andlocation. This allows the radiologist to accurately review and track any growthin the polyps.

 

In July 2004, MS-PLC received clearance from the FDAand Conformité Europeène (“CE”) certification for its Lung CARTMproduct; an image analysis softwaretool that assists radiologists in evaluating lesions or nodules found during CTscans of the lung. MS-PLC’s Lung CARTM is the first “joint-read”software available for CT lung scans.

 

Lung CARTM works by deploying a series offilters against the image data derived from CT scans. The software has a numberof automatic and manual measurement tools to aid diagnosis, including 3D volumemeasurement and the ability to review follow up scans and doubling times.

 

The Company’s heart product, MedicHeart received FDAapproval in November 2003. MedicHeart is a software application for annotatingMSCT scans of the heart used by radiologists to identify coronary arterycalcium (“CAC”). The reason we consider that this software product is superiorto other products in its category is due to its extensive segmentation capabilities,which enable the radiologist to accurately extract the CAC boundary andtherefore accurately measure it. This means that the radiologist can accuratelytrack CAC growth or regression.

 

*BusinessDevelopment*

 

In November 2004 MS-PLC announced that it had signedletters of intent with Agfa-Gevaert N.V. and Viatronix and a commercialagreement with Vital Images for global distribution of MS-PLC’s medical imagingsoftware products. These agreements are the first of their kind for Medicsightand represent a 

 

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majorstep forward in the Company’s plans to commercialize its advanced imagingtechnology on a worldwide basis. The intent is to incorporate MS-PLC’s softwareinto the three companies’ existing product offerings. MS-PLC’s software wasdemonstrated at the exhibitor booths of Agfa, Vital Images, and Viatronixduring the annual meeting of the Radiological Society of North America (RSNA)that was held at the end of November 2004 in Chicago, Illinois.

 

Vital Images will be integrating MS-PLC’s Colon CARTMsoftware into its CT colon product InnerviewGITM.  The letter of intent signed by Viatronix andMS-PLC includes MS-PLC’s Lung CARTM and Colon CARTM software. The letter ofintent with Agfa is for all three products.

 

In April 2005 the Company signed a Letter of Intentwith a major Japanese distributor to integrate MS-PLC’s Colon CARTM softwareproduct into the workstations of its Japan distribution partner.

 

On the marketing side the Company achieved success in2004, with a significant number of articles in the medical press concerning theCompany and its products culminating in being voted “Best Industry Newcomer” byAuntMinnie (www.auntminnie.com) at the Radiological Society of North America2004 conference. These articles can be viewed on our website:www.medicsight.com.

 

*Expanding distribution*

 

Medicsight aims to build on the progress made in 2004by announcing new distribution partnerships in 2005; these will both expand thegeographic scope and depth of our market penetration. The Company’s aim is foran additional three to five partners to be signed up during 2005, not just inthe US but also in the key Asia markets.

 

Significant business development has already takenplace that has lead to an announcement regarding a Colon CARTM distribution dealin Japan and plans to finalize agreements for distribution of its Lung CARTMsoftware 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 still to be defined; we aim to be oneof the leaders and drivers of change and ultimately one of the consolidators inthe sector.

 

Medicsight has stated as part of its corporateobjectives that it will expand its operations via acquisition to fill in gapsin technology or product. During 2005 we aim to put this into practice; a numberof interesting targets have been identified already that will enhance ourabilities to offer innovative, integrated clinical solutions to our partners.We believe we are in an excellent position to develop differences between thecompetition and ourselves in this way. MS-PLC is also reviewing other potentialdistribution channels including a web-based browser.

 

*InternationalAdvisory Board*

 

As the Company’s strategy has evolved, in particular,following 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.

 

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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, andJapan.  The IABs are co-chaired by Dr.John Costello (MS-PLC’s medical director), who reports back to the MS-PLCBoard; however, much of the scientific advice and leadership will be providedthrough a co-chairman, chosen from the IAB members.

 

*Terms of Reference of the InternationalAdvisory Board*

 

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

 

•                  Advise on the development and application of Medicsight CTimage analysis software in the territories represented.

•                  Providelinks to users of CT image analysis systems in their respective territories.

•                  Assistin investor relations on an international basis.

•                  Adviseon, and participate in, clinical development programs for the Company’ssoftware.

•                  Actas advisors in relation to regulatory submissions for the Company’s products.

•                  Adviseon sources of library data (CT scans) to support training and development ofthe Company’s software.

 

*Objectivesof the International Advisory Board*

 

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

 

•                  Ensure that members have a fullunderstanding of the Medicsight technology and are motivated to participate inits development and application, both locally and internationally.

•                  Ensurethat the clinical development program is compatible with local clinicalpractice.

•                  Ensurethat the clinical development program is compatible with local regulatoryguidelines.

•                  Obtaininsight into 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 is commercialized, that its use will be profitable to theCompany. We face obstacles in commercializing our core technology and in generatingoperating revenues such as, but not limited to, successful development, testingof and gaining 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.

 

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

 

*Regulatory Risks.*  The MedicsightTM system is subject 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 a number of groups and organizations, such assoftware companies in the medical imaging field, scanner manufacturers,screening companies and other healthcare providers that may develop acompetitive offering to the MedicsightTM system.  In addition these competitors may havesignificantly greater resources than the Company. We cannot make any assurancethat they will not attempt to develop such offerings, that they will not besuccessful in developing such offerings or that any offerings they do developwill not have a competitive edge over the MedicsightTM system.

 

*FinancialRisk.***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 March31, 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.

 

*ForeignExchange 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.

 

*OtherRisks.***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.

 

**RESULTS OF OPERATIONS**

 

*Revenues.*For the quarters ended March 31, 2005 and March 31, 2004, the Company’s grossrevenues from operations were $151,000 and $152,000, respectively. The Company’srevenues are derived from the Company’s LifesyneTM scanning operations.

 

*Selling, General and Administrative Expenses.*The Company’s selling, general and administrative expenses for the quarterended March 31, 2005, were $2,620,000 as compared to $3,151,000 for the quarterended March 31, 2004.

 

The primary components of the decreased selling, general andadministrative expenses for quarter ended March 31, 2005 were decreases inprofessional fees, regulatory costs, software license fees and travel costs.This was offset slightly by increases in staff and public relation costs as theCompany initiated its various marketing strategies.

 

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Professional fees, including consulting services, were$339,000 for the quarter ended March 31, 2005 as compared to $437,000 for thequarter ended March 31, 2004. In the quarter ended March 31, 2005 salaries anddirectors’ compensation was $1,486,000, service charges and rates for propertyleasing were $124,000, and rent was $268,000. In the quarter ended March 31,2004, salaries and directors’ compensation was $1,363,000, service charges andrates for property leasing was $78,000, and rent was $271,000.

 

*Research and Development Cost.***The Company’s research and development cost for the quarterended March 31, 2005, was $639,000 as compared to $669,000 for the quarterended March 31, 2004 respectively. The Company’s research and development costsare comprised of staff and consultancy costs expensed on the MedicsightTMsystem.

 

*Net Loss and Net Loss per Share.*  Net loss was $3,094,000 for the quarter endedMarch 31, 2005 compared to a net loss of $3,534,000 for the quarter ended March31, 2004.  Net loss per share for thequarter ended March 31, 2005 was $0.09, based on weighted average sharesoutstanding of 33,302,325, compared to a net loss per share of $0.13 for thequarter ended March 31, 2004, based on weighted average shares outstanding of26,461,309.

 

The decrease in net losses for the quarter to March31, 2005 as compared to the quarter to March 31, 2004 are due to decreases inselling, general and administrative expenses and research and developmentcosts.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

*Working Capital Information as at March 31:*

 
| ** **                                      | ** ** | **($000’s)**   | ** ** |
|-------------------------------------------------|------------|---------------------|------------|
| ** **                                      | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|                                            |       |                |       |   |   |
| Cash and Cash Equivalents                       |       | 4,569               |       | 5,276 |   |
|                                            |       |                |       |   |   |
| Current Assets                                  |       | 5,448               |       | 6,515 |   |
|                                            |       |                |       |   |   |
| Current Liabilities                             |       | (2,906              | )          | (2,353 | ) |
|                                            |       |                |       |   |   |
| Working Capital Surplus                         |       | 2,542               |       | 4,162 |   |
|                                            |       |                |       |   |   |
| Ratio of Current Assets to Current  Liabilities |       | 1.87                |       | 2.77 |   |

 

*Net Increase in Cash and CashEquivalents.* During the quarter ended March 31, 2005,the Company’s cash and cash equivalents decreased by $707,000. This decreasewas primarily the result of cash flows received from shares issued by theCompany being exceeded by the net cash used in operating and investingactivities. The Company used net cash of $2,314,000 in operations. The Companyreceived net cash of $1,781,000 in financing activities and used $20,000 ininvesting activities.

 

*Net Cash Used in Operations.* Theuse of cash in operations of $2,314,000 in the quarter ended March 31, 2005, was attributableto the Company’s relatively minimal revenues at the same time that the Companyincurred significant operating and software research and development costs.These significant costs 

 

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includedprofessional fees, salaries and director compensation, marketing, regulatorycosts and property service charges and rent. The Company used cash inoperations in the quarter ended March 31, 2004 of  $4,165,000.

 

*Net Cash Used in Investing Activities.*In the quarter ended March 31, 2005, the Company had a net cash outflow frominvesting activities of $20,000. The Company used these funds to purchaseadditional fixed assets. In the quarter ended March 31, 2004 the Company had anet cash outflow from investing activities of $45,000. The Company used thefunds to purchase additional fixed assets.

 

*Net Cash Provided by Financing Activities.*In the quarter ended March 31, 2005, the Company had a net cash inflow fromfinancing activities of $1,781,000. The funds received in the quarter endedMarch 31, 2005, consisted of $1,813,000 from the Company’s private offerings.For the quarter ended March 31, 2004, the Company had a net cash inflow fromfinancing activities of $13,190,000. The funds received consisted of$13,907,000 received from the private offering of the Company’s stock, whichwere partly used to reduce the bank overdraft ($196,000) and to repay the shortterm debt – related party by $503,000.

 

*Stockholders’ Equity.*The Company’s stockholders’ equity at March 31, 2005 was $16,881,000, includingan accumulated deficit of $(181,592,000), as compared to $18,465,000 atDecember 31, 2004, including an accumulated deficit of $(178,498,000).Additional paid-in capital was $198,465,000 and $196,652,000, at March 31, 2005and December 31, 2004 respectively. The increase in stockholders’ equitywas a result of an increase in additional paid-in capital of $1,813,000resulting from the placement of the Company’s stock offset by an increase inaccumulated deficit of $3,094,000.

 

*Additional Capital.*The Company will require additional capital during its fiscal years endingDecember 31, 2005 and 2006 to implement its business strategies, includingcash for payment of increased operating expenses such as salaries foradditional employees. Such additional capital may be raised through additionalpublic or private equity offerings, as well as borrowings and other resources.Currently, the Company has two available lines of credit.

 

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, but hasbeen extended until December 31, 2006. Interest on advances under the creditfacility accrues at 2% above US LIBOR. The Company can draw down on this creditfacility for its financing requirements, upon approval by the Company’s Boardof 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 December 31, 2006and 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.

 

At March 31, 2005, the Company had not drawn down anyfunds under the $20,000,000 facility with Asia IT, and MS-PLC had not drawndown any funds under its £10,000,000 ($18,000,000) facility with Asia IT.

 

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 

 

11

----

 

substantiallyall of our revenues 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 three to five most “critical accounting policies” inthe Management’s Discussion and Analyses of Financial Condition and Results ofOperations. The Securities and Exchange Commission indicated a “criticalaccounting policy” is one which is both important to the portrayal of thecompany’s financial condition and results and requires management’s mostdifficult, subjective or complex judgments, often as a result of the need tomake estimates about the effect of matters that are inherently uncertain. Webelieve that the following accounting policies fit the definition of criticalaccounting policies.

 

*RevenueRecognition.***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.

 

*Researchand Development.***Costs incurredin connection with the development of software products that are intended forsale are accounted for in accordance with Statement of Financial AccountingStandards No. 86, “Accounting for the Costs of Computer Software to be Sold,Leased, or Otherwise Marketed”. Costs incurred prior to technologicalfeasibility being established for the product are expensed as incurred.Technological feasibility is established upon completion of a detail programdesign or, in its absence, completion of a working model. Thereafter, allsoftware production costs are capitalized and subsequently reported at thelower of unamortized cost or net realizable value. Capitalized costs areamortized based on current and future revenue for each product with an annualminimum equal to the straight-line amortization over the remaining estimatedeconomic life of the product. Amortization commences when the product isavailable for general release to customers.

 

12

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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 productand version to version on a regular basis. Therefore the Company has decided toexpense all research and development costs. The Company’s research anddevelopment costs are comprised of staff and consultancy costs expensed on theMedicsightTM system.

 

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

 

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 includes long-term forecasts of revenue growth, grossmargins 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, anyimpairment loss identified upon adoption of this standard is recognized as acumulative 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 December 2004, the Financial Accounting StandardsBoard (“FASB”) issued Statement No. 123 (revised 2004), Share-Based Payment(Statement 123(R)), which replaces Statement No. 123, “Accounting forStock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting forStock Issued to Employees.” Statement 123 (R) requires all companies to measurecompensation cost for all share-based payments (including employee stockoptions) at fair value and recognize the cost in the financial statements. Thepro forma disclosures previously permitted under Statement 123 will no longerbe an alternative to financial statement recognition. This statement applies toall awards granted after the date of adoption and to awards modified,repurchased, or cancelled after that date. The cumulative effect of initiallyapplying Statement 123(R), if any, will be recognized as of the date ofadoption.

 

In April 2005, the SEC delayed the effective date ofSFAS 123(R) to fiscal years beginning after June 15, 2005. As a result SFAS123(R) will be effective for the Company beginning in the first quarter of2006. The Company has not completed its evaluation of the impact that adoptingSFAS 123(R) will have on its financial statements.

 

13

----

 

*Contractual Obligations*

 

The Company has the following contractual obligations:

 
| ** **                                 | ** ** | ** ** | ** ** | **Payments Due By Period** | ** ** |
|--------------------------------------------|------------|------------|------------|----------------------------|------------|
| **Contractual Obligations  ($000’s)** | ** ** | **Total**  | ** ** | **Less than 1 year**       | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5 years** | ** ** |
|                                       |       |       |       |                       |       |   |   |   |   |   |   |
| Capital Lease Obligations                  |       | $          | 298        |                       | $          | 277 |   | $ | 21 |   | $ | — |   | $ | — |   |
| Operating Lease Obligations                |       | 1,627      |       | 507                        |       | 1,013 |   | 107 |   | — |   |
| Total                                      |       | $          | 1,925      |                       | $          | 784 |   | $ | 1,034 |   | $ | 107 |   | $ | — |   |

 

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

 

**Interest Rate Risk**

 

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

 
| **Debt Holder**                 | ** ** | **Facility** | ** ** | **Draw Down** | ** ** | **Interest rate** | ** ** | **At****March 31** | ** ** |
|---------------------------------|------------|--------------|------------|---------------|------------|-------------------|------------|--------------------|------------|
|                            |       |         |       |          |       |              |       |               |       |
| Asia IT Capital Investments Ltd |       | $            | 20,000,000 |          | $          | nil               |       | US Libor +  2%     |       | 5.84 | % |
|                            |       |         |       |          |       |              |       |               |       |
| Asia IT Capital Investments Ltd |       | $            | 18,000,000 |          | $          | nil               |       | GBP Libor +  2%    |       | 7.12 | % |

 

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.

 

14

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

 

*Evaluation of Disclosure Controls andProcedures*

 

As required by Rule 13a-15(b) under the Exchange Act,our management carried out an evaluation of the effectiveness of the design andoperation of the Company’s “disclosure controls and procedures” as of March 31, 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 the Exchange Act,disclosure controls and procedures are controls and other procedures of theCompany that are designed to ensure that information required to be disclosedby the Company in the reports it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms. Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by the Company inthe reports it files or submits under the Exchange Act is accumulated andcommunicated to the Company’s management, including our Chief Executive Officerand Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.

 

Based upon that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of March 31, 2005. It should be noted that the design of any system of controls is based inpart upon certain assumptions about the likelihood of future events, and therecan be no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions, regardless of how remote.

 

*Changes in Internal Control over FinancialReporting*

 

As required by Rule 13a-15(d) under the Exchange Act,our management, including our Chief Executive Officer and Chief FinancialOfficer, also conducted an evaluation of our internal control over financialreporting to determine whether any change occurred during the quarter endedMarch 31, 2005, that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting. Based on thatevaluation during the quarter ended March 31, 2005 there has been no change inour internal control over financial reporting that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

15

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**PART II**

 

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

 

There arecurrently no pending legal proceedings.

 

**Item 2.****           Unregistered Sales ofEquity Securities and Use of Proceeds**

 

### Between January 1, 2005 and March 31, 2005 the Companyissued 504,000 shares of common stock at $4.00 per share to a number ofinstitutional investors and private individuals as part of a private placementraising approximately $1,813,000 net of commissions payable to Asia IT, arelated party. The shares of common stock were issued without registration inreliance upon the exemption provided by Section 4(2) of the Securities Act of1933.

 

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

 

### None.

 

**Item 4.****           Submission of Mattersto a Vote of Security Holders**

 

### None.

###  

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

 

### None.

 

16

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**Item 6.****           Exhibits and Reports onForm 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                                                                                                                  |

 

17

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**MEDICSIGHT, INC. AND SUBSIDIARIES**

 

**INDEX TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2005**

 
| Condensed  Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and December 31,  2004                                                                | F-2         |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------|
|                                                                                                                                                          |        |
| Condensed  Consolidated Statements of Operations for the Three Months Ended March 31,  2005 (Unaudited) and the Three Months Ended March 31, 2004 (Unaudited) | F-3         |
|                                                                                                                                                          |        |
| Condensed  Consolidated Statement of Cash Flows for the Three months Ended March 31,  2005 (Unaudited) and the Three months Ended March 31, 2004 (Unaudited)  | F-4         |
|                                                                                                                                                          |        |
| Notes  to Condensed Consolidated Financial Statements                                                                                                         | F-5  to F-8 |

 

F-1

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

** **

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In $ thousands)**

 
| ** **                                                                                                                            | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                            | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| ASSETS                                                                                                                                |       |               |       |                  |       |
| CURRENT ASSETS:                                                                                                                       |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                             |       | $                  | 4,569      |                  | $          | 5,276 |   |
| Accounts receivable                                                                                                                   |       | 25                 |       | 26                    |       |
| Other receivables                                                                                                                     |       | 82                 |       | 28                    |       |
| Prepaid expenses                                                                                                                      |       | 642                |       | 498                   |       |
| Sales tax receivable                                                                                                                  |       | 130                |       | 687                   |       |
| Total current assets                                                                                                                  |       | 5,448              |       | 6,515                 |       |
|                                                                                                                                  |       |               |       |                  |       |
| PROPERTY AND EQUIPMENT, at  cost, net of accumulated depreciation of $3,354 and $3,227, respectively                                  |       | 1,917              |       | 2,066                 |       |
|                                                                                                                                  |       |               |       |                  |       |
| INVESTMENTS, at cost                                                                                                                  |       | 359                |       | 359                   |       |
|                                                                                                                                  |       |               |       |                  |       |
| SECURITY DEPOSITS                                                                                                                     |       | 884                |       | 901                   |       |
|                                                                                                                                  |       |               |       |                  |       |
| EXCESS OF PURCHASE PRICE OVER  NET ASSETS ACQUIRED                                                                                    |       | 11,200             |       | 11,200                |       |
|                                                                                                                                  |       |               |       |                  |       |
| Total assets                                                                                                                          |       | $                  | 19,808     |                  | $          | 21,041 |   |
|                                                                                                                                  |       |               |       |                  |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                             |       |               |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                  |       |               |       |                  |       |
| Accounts payable                                                                                                                      |       | $                  | 1,891      |                  | $          | 1,193 |   |
| Accrued expenses                                                                                                                      |       | 738                |       | 1,053                 |       |
| Current portion of obligations  under capital leases                                                                                  |       | 277                |       | 107                   |       |
| Total current liabilities                                                                                                             |       | 2,906              |       | 2,353                 |       |
| CAPITAL LEASE                                                                                                                         |       | 21                 |       | 223                   |       |
| Total liabilities                                                                                                                     |       | $                  | 2,927      |                  | $          | 2,576 |   |
|                                                                                                                                  |       |               |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                                            |       |               |       |                  |       |
| Common stock, $0.001 par value,  40,000,000 shares authorized, 33,571,125 and 33,067,125 shares issued and  outstanding, respectively |       | 34                 |       | 33                    |       |
| Additional paid-in capital                                                                                                            |       | 198,465            |       | 196,652               |       |
| Cumulative foreign currency  translation adjustment                                                                                   |       | (26                | )          | 278                   |       |
| Accumulated deficit                                                                                                                   |       | (181,592           | )          | (178,498              | )          |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                                       |       | 16,881             |       | 18,465                |       |
|                                                                                                                                  |       |               |       |                  |       |
| Total liabilities and  stockholders’ equity                                                                                      |       | $                  | 19,808     |                  | $          | 21,041 |   |

 

The accompanying notes are an integral partof these condensed statements.

 

F-2

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

** **

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

 
| ** **                                            | ** ** | **Three Months  Ended  March 31, 2005** | ** ** | **Three Months  Ended  March 31, 2004** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                            | ** ** | **(unaudited)**                         | ** ** | **(unaudited)**                         | ** ** |
| ** **                                            | ** ** | ** **                              | ** ** | ** **                              | ** ** |
| REVENUES                                              |       | $                                       | 151        |                                    | $          | 152 |   |
|                                                  |       |                                    |       |                                    |       |
| EXPENSES:                                             |       |                                    |       |                                    |       |
| Selling, general and  administrative charges          |       | 2,620                                   |       | 3,151                                   |       |
| Research and development cost                         |       | 639                                     |       | 669                                     |       |
|                                                  |       |                                    |       |                                    |       |
|                                                  |       | 3,259                                   |       | 3,820                                   |       |
|                                                  |       |                                    |       |                                    |       |
| Operating loss                                        |       | (3,108                                  | )          | (3,668                                  | )          |
|                                                  |       |                                    |       |                                    |       |
| OTHER INCOME                                          |       |                                    |       |                                    |       |
| Interest and other income                             |       | 14                                      |       | —                                  |       |
|                                                  |       |                                    |       |                                    |       |
| Net Loss before minority  interest                    |       | (3,094                                  | )          | (3,668                                  | )          |
|                                                  |       |                                    |       |                                    |       |
| MINORITY INTEREST                                     |       | —                                  |       | 134                                     |       |
|                                                  |       |                                    |       |                                    |       |
| Net loss                                              |       | $                                       | (3,094     | )                                       | $          | (3,534 | ) |
|                                                  |       |                                    |       |                                    |       |
| PER SHARE DATA:                                       |       |                                    |       |                                    |       |
| Basic and diluted loss per  share                     |       | $                                       | (0.09      | )                                       | $          | (0.13 | ) |
|                                                  |       |                                    |       |                                    |       |
| Weighted average number of  common shares outstanding |       | 33,302,325                              |       | 26,461,309                              |       |

 

The accompanying notes are an integral part of these condensedstatements.

 

F-3

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

** **

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

 
| ** **                                                                  | ** ** | **Three months  Ended  March 31, 2005** | ** ** | **Three months  Ended  March 31, 2004** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                  | ** ** | **(unaudited)**                         | ** ** | **(unaudited)**                         | ** ** |
| ** **                                                                  | ** ** | ** **                              | ** ** | ** **                              | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                      |       |                                    |       |                                    |       |
| Net loss                                                                    |       | $                                       | (3,094     | )                                       | $          | (3,534 | ) |
| Adjustments to reconcile net  loss to net cash used in operating activities |       |                                    |       |                                    |       |
| Depreciation                                                                |       | 127                                     |       | 191                                     |       |
| Minority interest in net loss  of subsidiary                                |       | —                                  |       | (134                                    | )          |
| (Increase)/decrease in assets                                               |       |                                    |       |                                    |       |
| Accounts receivable                                                         |       | 1                                       |       | (4                                      | )          |
| Prepaid expenses and other  current assets                                  |       | (144                                    | )          | (56                                     | )          |
| Sales tax receivable                                                        |       | 503                                     |       | 132                                     |       |
| Increase/(decrease) in liabilities                                          |       |                                    |       |                                    |       |
| Accounts payable                                                            |       | 650                                     |       | (521                                    | )          |
| Accrued expenses                                                            |       | 100                                     |       | (246                                    | )          |
| Accrued professional expenses                                               |       | (457                                    | )          | 7                                       |       |
| Net cash used in operating  activities                                      |       | (2,314                                  | )          | (4,165                                  | )          |
|                                                                        |       |                                    |       |                                    |       |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                      |       |                                    |       |                                    |       |
| Purchase of fixed assets                                                    |       | (20                                     | )          | (45                                     | )          |
| Net cash used in investing  activities                                      |       | (20                                     | )          | (45                                     | )          |
|                                                                        |       |                                    |       |                                    |       |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                      |       |                                    |       |                                    |       |
| Principal payments under  capital lease obligations                         |       | (32                                     | )          | (18                                     | )          |
| Decrease of bank overdraft                                                  |       | —                                  |       | (196                                    | )          |
| Proceeds from sale of common  stock                                         |       | 1,813                                   |       | 13,907                                  |       |
| (Decrease)/increase in short  term debt - related party                     |       | —                                  |       | (503                                    | )          |
| Net cash provided by financing  activities                                  |       | 1,781                                   |       | 13,190                                  |       |
|                                                                        |       |                                    |       |                                    |       |
| Effects of exchange rates on  cash and cash equivalent                      |       | (154                                    | )          | (9                                      | )          |
|                                                                        |       |                                    |       |                                    |       |
| NET CHANGE IN CASH & CASH  EQUIVALENTS                                  |       | (707                                    | )          | 8,971                                   |       |
|                                                                        |       |                                    |       |                                    |       |
| CASH & CASH EQUIVALENTS,  BEGINNING OF PERIOD                           |       | 5,276                                   |       | 845                                     |       |
|                                                                        |       |                                    |       |                                    |       |
| CASH & CASH EQUIVALENTS,  END OF PERIOD                                 |       | $                                       | 4,569      |                                    | $          | 9,816 |   |
|                                                                        |       |                                    |       |                                    |       |
| SUPPLEMENTAL DISCLOSURES OF CASH PAID                                       |       |                                    |       |                                    |       |
| Interest                                                                    |       | 2                                       |       | 24                                      |       |
| Income taxes                                                                |       | —                                  |       | —                                  |       |
|                                                                        |       |                                    |       |                                    |       |
| NON CASH FINANCING ACTIVITIES                                               |       |                                    |       |                                    |       |
| Capital lease obligations for equipment                                     |       | —                                  |       | —                                  |       |

 

**The accompanying notes are an integralpart of these**condensed statements.

 

F-4

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

*(1)*                               Formation and Businessof the Company

 

Medicsight, Inc. (formerly HTTP Technology, Inc.) andits 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 comprisingMedicColonTM, MedicHeartTM, and MedicLungTM)through our majority-owned subsidiary, Medicsight PLC (“MS-PLC”).

 

We were originally incorporated as a Utah corporationin 1977. OnDecember 19, 2000, we entered into an Agreement and Plan of Merger with ourwholly owned subsidiary HTTP Technology, Inc., a Delaware corporation, andthereby effected 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 corporation andsubsidiaries, if the event occurred on or after December 19, 2000 or to HTTPTechnology, Inc., the Utah corporation and subsidiaries, if the event occurredprior to December 19, 2000.

 

*(2)*                               Basis of Presentationand liquidity

* *

The accompanying unaudited consolidated financialstatements of the Company have been prepared pursuant to the rules of theSecurities 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. Theseunaudited consolidated financial statements should be read in conjunction withthe audited consolidated financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the Fiscal years ended December 31,2004. In the opinion of management, the accompanying unaudited consolidatedfinancial statements reflect all adjustments, which are of a normal recurringnature, necessary for a fair presentation of the results for the periodspresented. All significant inter-company transactions have been eliminated inconsolidation.

 

The results of operations presented for the quarterended March 31, 2005, are not necessarily indicative of the results to beexpected for any other interim period or any future fiscal year.

 

These consolidated financial statements are presentedon the basis that the Company will continue as a going concern. The goingconcern concept contemplates the realization of assets and satisfaction ofliabilities in the normal course of business over a reasonable length of time.The Company has incurred significant operating losses since inception. As aresult, the Company has generated negative cash flows from operations, and hasan accumulated deficit at March 31, 2005 and there is uncertainty with respectto the availability and the utilization of its credit facility with Asia ITCapital Investments Limited (a related party) – see Note 3. The Company isoperating in a developing industry based on new technology and its primarysource of funds to date has been through the issuance of securities andborrowed funds. The Company is currently seeking additional funding and isactively developing the technology in order to bring it to market. While theCompany is optimistic and believes appropriate actions are being taken, therecan be no assurance, however, that management’s efforts will be successful orthat the products the Company develops and markets will be accepted byconsumers. The condensed consolidated financial statements do not include anyadjustments that might result from the outcome of this going concernuncertainty.

 

F-5

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*(3)*                               Lines of 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, but hasbeen extended until December 31, 2006. Interest on advances under the creditfacility accrues at 2% above US LIBOR. The Company can draw down on this creditfacility for its financing requirements, upon approval by the Company’s Boardof 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 December 31, 2006and 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 per shareas the offering price.

 

At March 31, 2005, the Company had not drawn down anyfunds under the $20,000,000 facility with Asia IT, and MS-PLC had not drawndown any funds under its £10,000,000 ($18,000,000) facility with Asia IT.

 

*(4)*                               Stockholders’Equity

 

During the three months ended March 31, 2005 theCompany issued approximately 504,000 shares of restricted stock raising$1,813,000 (net of commissions paid to Asia IT, a related party) as part of aprivate placement.

 

*(5)*                               Accounting for StockBased Compensation

* *

On March 20, 2003, the Board of Directors of MS-PLCapproved a stock option plan for its employees and reserved 4,000,000 shares ofits common stock for issuance upon exercise of options granted under this plan.On April 19, 2003, the Remuneration Committee of MS-PLC also approved the stockoption plan and implemented it on April 30, 2003 by issuing options over2,828,600 shares to employees of MS-PLC. At March 31, 2005, 50% of the optionsissued were exercisable under the plan.

 

The Company has elected to adopt the disclosure only provisionsof Statement of Financial Accounting Standards No. 123, “Accounting forStock-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 nocompensation cost be recognized unless the exercise price of the optionsgranted is lower than the fair market value of the Company’s stock at date ofgrant. Accordingly, no stock-based employee compensation cost is reflected innet loss, as all options granted had an exercise price equal to the marketvalue of the underlying common stock on the date of grant. SFAS No. 123,as amended by SFAS No. 148, requires disclosure of pro forma income andpro forma income per share as if the fair value based method had been appliedin measuring compensation expense.

 

F-6

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| ** **                                     | ** ** | **Three months  Ended  March 31, 2005** | ** ** | **Three months  Ended  March 31, 2004** | ** ** |
|------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                     | ** ** | **(unaudited)  $’000**             | ** ** | **(unaudited)  $’000**             | ** ** |
| Net loss as reported:                          |       | (3,094                                  | )          | (3,534                                  | )          |
|                                           |       |                                    |       |                                    |       |
| Fair value method of stock  based compensation |       | (20                                     | )          | (22                                     | )          |
|                                           |       |                                    |       |                                    |       |
| Proforma net loss                              |       | (3,114                                  | )          | (3,556                                  | )          |
|                                           |       |                                    |       |                                    |       |
| Reported earnings per common  share            |       |                                    |       |                                    |       |
| Basic and diluted                              |       | (0.09                                   | )          | (0.13                                   | )          |
| Proforma earnings per common  share            |       |                                    |       |                                    |       |
| Basic and diluted                              |       | (0.09                                   | )          | (0.13                                   | )          |

 

The fair values of options granted were determinedunder the intrinsic value method for expense determined under the fair valuebased method, net of related tax effects.

 

*(6)*                               Goodwill and OtherIntangible 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.

 

Prior to January 1, 2002, goodwill was amortized on astraight-line basis over 5 years.

 

*(7)*                               Security Deposits

* *

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 the securitydeposit is £470,000 ($884,000) and is interest-bearing.

 

*(8)*                               Lease Commitments

* *

The Company has entered into property leases for theWestminster and Ravenscourt centers. Future minimum obligations under theselease arrangements are as follows:

 

| **For the 12 months ending   March 31,** | ** ** | **Property  Leases** | ** ** |
|------------------------------------------|------------|----------------------|------------|
| ** **                               | ** ** | **($’000)**     | ** ** |
| 2006                                     |       | 507                  |       |
| 2007                                     |       | 506                  |       |
| 2008                                     |       | 507                  |       |
| 2009                                     |       | 22                   |       |
| 2010 and thereafter                      |       | 85                   |       |

 

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 November2001. There is no formal lease agreement between ICCL and the Company for itsoffices at 46 Berkeley Square but the Company is charged by ICCL on the basisof space occupied. The approximate charge is $140,000 per quarter.

 

F-7

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*(9)*                               Comprehensive Income

 

As at March 31, 2005 and the quarter then ended,comprehensive income is comprised of a net loss from operations and the neteffect of foreign currency translation adjustments. This comprised a net lossof $3,094,000 and $3,534,000 and foreign currency translation adjustments of$304,000 and ($168,000), resulting in comprehensive loss of  $3,398,000 and $3,366,000,respectively.

 

*(10)**                        RecentAccounting Pronouncements*

 

In December 2004, the Financial Accounting StandardsBoard (“FASB”) issued Statement No. 123 (revised 2004), Share-Based Payment(Statement 123(R)), which replaces Statement No. 123, “Accounting forStock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting forStock Issued to Employees.” Statement 123 (R) requires all companies to measurecompensation cost for all share-based payments (including employee stockoptions) at fair value and recognize the cost in the financial statements. Thepro forma disclosures previously permitted under Statement 123 will no longerbe an alternative to financial statement recognition. This statement applies toall awards granted after the date of adoption and to awards modified,repurchased, or cancelled after that date. The cumulative effect of initiallyapplying Statement 123(R), if any, will be recognized as of the date ofadoption.

 

In April 2005,the SEC delayed the effective date of  SFAS 123(R) to fiscal years beginningafter June 15, 2005. As a result SFAS 123(R) will be effective for the Companybeginning in the first quarter of 2006. The Company has not completed itsevaluation of the impact that adopting SFAS 123(R) will have on its financialstatements.

 

F-8

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SIGNATURE

 

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

 

 
|         | MEDICSIGHT,  INC.       |
|--------------|-------------------------|
|         |                    |
|         |                    |
|         | By:                     | /s/ Tim  Paterson-Brown |   |
|         | Tim Paterson-Brown      |
|         | Chief Executive Officer |
|         |                    |
|         |                    |
|         | By:                     | /s/ Paul  Gothard |   |
|         | Paul Gothard            |
|         | Chief Financial Officer |
|         |                    |
|         |                    |
| May 11, 2005 |                    |

 

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