**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| ** **                                                                                                                                                         | **(Mark  One)**                                                                                    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                         | ** **                                                                                         |
| **ý**                                                                                                                                                         | **Quarterly report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**  |
| ** **                                                                                                                                                         | ** **                                                                                         |
| **For the quarterly period ended  June 30, 2004**                                                                                                             |
|                                                                                                                                                               |                                                                                               |
| **o**                                                                                                                                                              | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
| ** **                                                                                                                                                         | ** **                                                                                         |
| **For the transition period from             to            .** |
|                                                                                                                                                               |                                                                                               |
| **Commission file  number   ****0-26886**                                                                                                           |

 

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

 

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

 

**APPLICABLE ONLY TO ISSUERS INVOLVEDIN BANKRUPTCYPROCEEDINGS DURING THE PRECEDING FIVE YEARS**

 

Indicateby check mark whether the registrant filed all documents and reports requiredto be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of1934 subsequent to the distribution of securities under a plan confirmed bycourt. Yes      o          No       o

 

**APPLICABLE ONLY TO CORPORATE ISSUERS**

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date:  As ofAugust 6, 2004: 33,037,298 shares of Common Stock, par value $0.001 pershare.

 

 

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**NOTE REGARDING AMENDMENT ANDRESTATEMENT**

 

During Fiscal 2003, theCompany identified certain errors in its previously issued quarterly financialstatements relating to the impairment of an intangible assets and the Companyalso revised its treatment of software development costs in the third quarterof Fiscal 2003.

 

As a result, the Companyhas restated its previously issued financial statements for the six months andquarter ended June 30, 2003.  Asummary of the significant effects of the restatements is set forth below.

 

**MEDICSIGHT,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
| ** **                                           | ** ** | **Three months ended  June 30, 2003** | ** ** | **Three months ended  June 30, 2003** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **(as previously reported)  $000’s**  | ** ** | **(as restated)  $000’s**             | ** ** |
|                                                 |       |                                       |       |                                       |       |
| REVENUES                                             |       | 44                                         |       | 44                                         |       |
|                                                 |       |                                       |       |                                       |       |
| EXPENSES:                                            |       |                                       |       |                                       |       |
| Selling, general and administrative charges          |       | 3,592                                      |       | 2,657                                      |       |
| Research and development cost                        |       | —                                     |       | 515                                        |       |
| Impairment of vendor guarantee                       |       | (697                                       | )          | —                                     |       |
|                                                 |       | 2,895                                      |       | 3,172                                      |       |
|                                                 |       |                                       |       |                                       |       |
| Net loss before minority loss                        |       | (2,851                                     | )          | (3,128                                     | )          |
|                                                 |       |                                       |       |                                       |       |
| MINORITY INTEREST                                    |       | 405                                        |       | 405                                        |       |
|                                                 |       |                                       |       |                                       |       |
| Net loss                                             |       | (2,446                                     | )          | (2,723                                     | )          |
| PER SHARE DATA:                                      |       |                                       |       |                                       |       |
| Basic and diluted loss per share                     |       | $                                          | (0.12      | )                                          | $          | (0.13 | ) |
| Weighted average number of common shares outstanding |       | 21,155,189                                 |       | 21,155,189                                 |       |
|                                                      |            |                                            |            |                                            |            |  |  |

 

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| ** **                                           | ** ** | **Six months ended  June 30, 2003**  | ** ** | **Six months ended  June 30, 2003** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                           | ** ** | **(as previously reported)  $000’s** | ** ** | **(as restated)  $000’s**           | ** ** |
|                                                 |       |                                      |       |                                     |       |
| REVENUES                                             |       | $                                         | 54         |                                     | $          | 54 |   |
|                                                 |       |                                      |       |                                     |       |
| EXPENSES:                                            |       |                                      |       |                                     |       |
| Selling, general and administrative charges          |       | 6,569                                     |       | 4,587                                    |       |
| Research and development cost                        |       | —                                    |       | 984                                      |       |
| Impairment of vendor guarantee                       |       | (697                                      | )          | —                                   |       |
|                                                 |       | 5,872                                     |       | 5,571                                    |       |
|                                                 |       |                                      |       |                                     |       |
| Net loss before minority loss                        |       | (5,818                                    | )          | (5,517                                   | )          |
|                                                 |       |                                      |       |                                     |       |
| MINORITY INTEREST                                    |       | 694                                       |       | 694                                      |       |
|                                                 |       |                                      |       |                                     |       |
| Net loss                                             |       | $                                         | (5,124     | )                                        | $          | (4,823 | ) |
| PER SHARE DATA:                                      |       |                                      |       |                                     |       |
| Basic and diluted loss per share                     |       | $                                         | (0.24      | )                                        | $          | (0.23 | ) |
| Weighted average number of common shares outstanding |       | 21,155,032                                |       | 21,155,032                               |       |

 

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**MEDICSIGHT,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOW**

 
| ** **                                                                  | ** ** | **Six months ended  June 30, 2003**  | ** **   | **Six months ended  June 30, 2003** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------|--------------|------------------------------------------|------------|
| ** **                                                                  | ** ** | **(as previously reported)  $000’s** | ** **   | **(as restated)  $000’s**           | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                       |       |                                      |         |                                     |       |
|                                                                        |       |                                      |         |                                     |       |
| Net loss                                                                    |       | $                                         | (5,124       | )                                        | $          | (4,823 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities |       |                                      |         |                                     |       |
| Depreciation                                                                |       | 164                                       |         | 164                                      |       |
| Amortization of intangibles                                                 |       | 2,247                                     |         | —                                   |       |
| Impairment of vendor guarantee                                              |       | (697                                      | )            | —                                   |       |
| Minority interest in net earnings of subsidiary                             |       | (694                                      | )            | (694                                     | )          |
| (Increase)/decrease in assets                                               |       |                                      |         |                                     |       |
| Accounts receivable                                                         |       | (12                                       | )            | (12                                      | )          |
| Prepayments                                                                 |       | (382                                      | )            | (382                                     | )          |
| VAT receivable                                                              |       | (230                                      | )            | (230                                     | )          |
| Security deposits                                                           |       | (743                                      | )            | (743                                     | )          |
| Increase/(decrease) in assets                                               |       |                                      |         |                                     |       |
| Accounts payable                                                            |       | 970                                       |         | 970                                      |       |
| Accrued expenses                                                            |       | (81                                       | )            | (81                                      | )          |
| Accrued professional expenses                                               |       | 6                                         |         | 6                                        |       |
| Net cash used in operating activities                                       |       | (4,576                                    | )            | (5,825                                   | )          |
|                                                                        |       |                                      |         |                                     |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                       |       |                                      |         |                                     |       |
|                                                                        |       |                                      |         |                                     |       |
| Purchase of fixed assets                                                    |       | (526                                      | )            | (526                                     | )          |
| Software development costs                                                  |       | (1,249                                    | )            | —                                   |       |
| Net cash used in investing activities                                       |       | (1,775                                    | )            | (526                                     | )          |
|                                                                        |       |                                      |         |                                     |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                       |       |                                      |         |                                     |       |
|                                                                        |       |                                      |         |                                     |       |
| Principal payments under capital lease obligations                          |       | (34                                       | )            | (34                                      | )          |
| Increase in bank overdraft                                                  |       | 88                                        |         | 88                                       |       |
| Proceeds sale of common stock                                               |       | 919                                       |         | 919                                      |       |
| Increase in short term debt - related party                                 |       | 1,401                                     |         | 1,401                                    |       |
| Funds received under vendor guarantee                                       |       | 2,259                                     |         | 2,259                                    |       |
| Net cash provided by financing activities                                   |       | 4,633                                     |         | 4,633                                    |       |
|                                                                        |       |                                      |         |                                     |       |
| Effects of exchange rates on cash and cash equivalents                      |       | (60                                       | )            | (60                                      | )          |
|                                                                        |       |                                      |         |                                     |       |
| NET CHANGE IN CASH & CASH EQUIVALENTS                                   |       | $                                         | (1,778       | )                                        | $          | (1,778 | ) |
|                                                                        |       |                                      |         |                                     |       |
| CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD                            |       | 1,778                                     |         | 1,778                                    |       |
|                                                                        |       |                                      |         |                                     |       |
| CASH & CASH EQUIVALENTS, END OF PERIOD                                  |       | $                                         |  — |                                     | $          |  — |   |

 

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**June 30,2003**

 

***Research and Development*.**

 

During the first sixmonths of Fiscal 2003, in accordance with Statement of Financial AccountingStandards (FAS) 86, *Accounting for the Costsof Computer Software to be Sold, Leased, or Otherwise Marketed*, theCompany capitalized certain computer software development costs. Technicalfeasibility was established on completion of working models for MedicHeart,MedicLung and MedicColon software products in January 2003. Subsequently,the Company capitalized costs of $1,249,000 in the six months endedJune 30, 2003 under FAS 86. These costs capitalized comprised staff,consultants, regulatory and clinical trial costs specific to the threeproducts.

 

Subsequently the Companydecided that this accounting treatment was inappropriate because of thedifficulty in assigning costs accurately to the various software products andversions being developed as technical and development staff are moved fromproduct to product and version to version on a regular basis. The Company hasdecided to expend all research and development costs in Fiscal 2003. TheCompany’s research and development costs for the six months and quarter endedJune 30, 2003 of $984,000 and $515,000 respectively are comprised of staffand consultancy costs expensed on the MedicsightTM system. The regulatory andclinical trial charges for the six months and quarter ended June 30, 2003of $265,000 and $189,000 respectively are expensed in “Selling, general and administrative charges”.

 

***Depreciation and Amortization Expense.***

 

During Fiscal 2000, theCompany acquired an intangible asset from the former parent of Insightsconsisting of technology valued at $22,470,000. Under SFAS No.142, this isconsidered an intangible asset with a definite life of 5 years. Therefore thevalue of the asset was amortized on a straight-line basis over this period*.*

 

The Company evaluates thecarrying value of long-lived assets for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable. The Company’s assessment for impairment of an asset involvesestimating the undiscounted cash flows expected to result from use of the assetand its eventual disposition. An impairment loss recognized is measured as theamount by which the carrying amount of the asset exceeds the fair value of theasset.  During the third quarter of 2003the Company reviewed the carrying value of the core technology acquired fromInsights and decided that the core technology should be fully impaired.  This was based on the view that there were nofurther software applications apart from the medical imaging applicationscurrently being developed that could be derived from the core technology. TheCompany further decided that the impairment should be recorded as atDecember 31, 2002. In the six months and quarter ended June 30, 2003the Company had an amortization charges of $2,247,000 and $1,124,000respectively expensed in “Selling, general and administrative charges” relatingto the fully impaired technology which is no longer applicable.

 

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***Impairment of vendor guarantee.***

 

The Vendor Guaranteearose from the acquisition of Core Ventures Limited (“Core”) and relates to anoral agreement between the Company and Dr Nill, that the proceeds of the saleof Dr Nill’s 1,195,000 shares in the Company would be remitted to the Companyunder the terms of the Vendor Guarantee. These shares were sold in 2003 and theCompany received $3,689,000 net of commissions. At December 31, 2001 andDecember 31, 2002, the fair value attributed to the Vendor Guarantee wasbased on the weighted average share price. The Company reviewed the fair valueat December 31, 2002 and concluded that it would be more appropriate andbetter understood if the fair value at December 31, 2002 reflected thefunds actually received in 2003. Therefore in the six months and quarter endedJune 30, 2003 the reduction in impairment charge of $697,000 is restatedas nil.

 

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**NOTE REGARDING FORWARD LOOKINGSTATEMENTS**

 

This Quarterly Report onForm 10-Q, including “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in Item 2, contains forward-lookingstatements that involve risks and uncertainties, as well as assumptions that,if they never materialize or prove incorrect, could cause the results ofMedicsight, Inc and its consolidated subsidiaries (the “Company”) to differmaterially from those expressed or implied by such forward-looking statements.All statements other than statements of historical fact are statements thatcould be deemed forward-looking statements, including any projections ofrevenue, gross margin, expenses, earnings or losses from operations, synergiesor other financial items; any statements of the plans, strategies andobjectives of management for future operations, including the execution ofrestructuring plans; any statement concerning developments, performance orindustry rankings relating to products or services; any statements regardingfuture economic conditions or performance; any statements of expectation orbelief; and any statements of assumptions underlying any of the foregoing. Therisks, uncertainties and assumptions referred to above include the performanceof contracts by suppliers, customers and partners; employee management issues;the difficulty of aligning expense levels with revenue changes; and other risksthat are described herein, including but not limited to the specific risksareas discussed in “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” in Item 2 of this report, and that areotherwise described from time to time in the Company’s Securities and ExchangeCommission reports filed after this report. The Company assumes no obligationand does not intend 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.**                     FinancialStatements

 

Medicsight,Inc. and its subsidiaries are collectively referred to in this Report as the“Company”.  For purposes of thediscussion contained herein, all financial information is reported on aconsolidated basis. The financial statements for the Company’s fiscal quarterended June 30, 2004 are attached to this Report, commencing at page F-1.

## ** **

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

 

**BACKGROUND**

 

We area software development business, focused on the medical imaging market. Ourcore technology is about developing automatic detection and analytical toolsfor clinicians to improve their ability to diagnose and treat diseases.

 

Wewere originally incorporated as a Utah corporation in 1977. OnDecember 19, 2000, we entered into an Agreement and Plan of Merger withour wholly 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 toHTTP Technology, Inc., the Utah corporation and subsidiaries, if the eventoccurred prior to December 19, 2000. On July 31, 2003 the Company reduced its authorized share capitalfrom 100,000,000 shares to 25,000,000 shares. On January 27, 2004 theCompany increased its authorized share capital from 25,000,000 shares to 40,000,000shares.

 

Duringthe six months ended June 30, 2004 the Company issued approximately7,873,000 restricted shares of stock raising $20.93m as part of a privateplacement.

 

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

 

**BUSINESSSTRATEGY**

 

We aredevelopers of software technology for medical diagnostic applications such asComputer Aided Detection  (“CAD”) andComputer Assisted Reader (“CAR”) software products in differing businessmodels. We have four principal operating subsidiaries: Medicsight PLC(“MS-PLC”), Medicsight Asset Management Limited (“MAM”), Lifesyne UK Limited(“Lifesyne UK”) and Medicsight US, Inc (“MS-US”) (previously Lifesyne US).

 

*MS-PLC*. Our majority-owned subsidiary, MS-PLC, is currently developing automaticdetection and analytical tools for clinicians to improve their ability todiagnose and treat diseases. At June 30, 2004, the Company owned70,677,300 ordinary shares in MS-PLC, constituting 81.8% of the outstandingshares.

 

*Lifesyne*. Lifesyne is a wholly owned subsidiary of MS-PLC that was established inSeptember 2002 for the purpose of providing a branded operating entity forthe United Kingdom and Ireland markets. Lifesyne is the entity that operatesthe scanning centers located in the United Kingdom. As the Company has decidedto focus on the delivery of the software no further development of the Lifesynestrategy is envisaged beyond the Company’s current scanning requirements.

 

*MAM*. MAM is also a wholly owned subsidiary of MS-PLC that was established inSeptember 2002 for the purpose of acquiring fixed assets on behalf of theoperating entities in the group. MAM will negotiate and

 

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acquireequipment and fund leasehold improvements and development, which in turn willbe leased to the relevant operating entity.

 

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

 

It isnow widely accepted that the most effective way to achieve early detection ofthe principal deadly diseases is through radiological scanning. The MedicsightTMsystem analyzes digital data from the new generation of multi-slice computedtomography (“MSCT”) scanners and then provides information to enable theclinician to identify and characterize possible areas of abnormality. Webelieve that in the future the MedicsightTM system will be capable of reliablydetecting isolated pulmonary nodules in the lung, calcification of the coronaryarteries, polyps in the colon and other abnormalities indicative of disease.The potential advantage of the MedicsightTM system is that it increasesprecision and reliability while also providing scalability that will becost-effective. The system uses its technology to provide tools to radiologistsfor the identification of possible abnormalities. The clinician will then applyhis/her experience to determine the next steps in medical diagnosis andtreatment. We believe that the MedicsightTM system will:

 

•                  enable accurate and reliable scananalysis;

•                  provide a service that will besignificantly cheaper than at present as it reduces the burden on radiologistswho in current practice account for a significant proportion of the scan cost;and

•                  allow significant patient volume tobe achieved because the analysis is semi automated and scanning volumes are notthen constrained by the finite number of radiologists.

 

Thestep change in technology that increases the potential of the MedicsightTMsystem is the 16 detector CT scanner. This allows sub-millimetercross-sectional slices to be captured with increased speed and reducedradiological dose when compared with traditional single slice machines. Thiscan provide over 600 images of the chest instead of 30-60 for single slicescanners. The amount of detail now available, while enabling early detection ofsmaller nodules and areas of calcification, increases the time required foranalysis by radiologists. Therefore the automation of scan analysis isessential. Our technology is equally applicable to MRI and we have begunresearch into brain diseases with a leading global institution.

 

MS-PLCopened LifesyneTM’s flagship center in Westminster, London in 2003. Due to theCompany concentrating on the development of the software products it hasconcluded that its development of the LifesyneTM Scanning Center concept cannotbe rolled out further. It represents one potential model, which will beavailable for licensees who see a commercial opportunity to package the concepttogether with our MedicsightTM software.  We are now prioritizing LifesyneTM on therapid acquisition of patient scan data necessary to enable our expert softwareto hone its characterization skills.  Inthis role, we have reappraised our capacity requirements and have decided tofocus product development activity on the flagship center in Westminster, whichwill act more as a research institution. This means the center at Ravenscourt is currently surplus to our corerequirements and we are seeking a partner to operate the center as a commercialCT scanning business.

 

*Refining our business strategy*

 

Ouraim is to become a leading developer of CAD software in medical imaging. Thekey to reliable detection and to accurate measurement is accurate boundaryidentification of the region of interest. If your software does not distinguishthe lesion from the wall tissue, it is self evident that you will not be ableto reliably detect or measure abnormalities; this is where we have focused muchof our development.

 

Asdata is crucial to the development, training and testing of our products; themore data we have the better the product development and therefore the finalproduct. We are looking at obtaining access to the world’s largest lung andcolon scan databases in addition to our own. However, it’s not just quantity ofdata that counts, our databases include the proven outcomes (cancers) andpatient management histories so analyzing these will allow us to go beyondbasic nodule or polyp detection.

 

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TheCompany’s strategy is based upon the following priorities:

 

•                  Focusing our resources on developingindustry leading pattern recognition software in the medical imaging market.

•                  Targeting commercially valuableapplications where the accurate identification and measurement of abnormalitieswill lead to improved diagnosis and treatment of life threatening diseases.

•                  Developing an international networkof medical specialists, to support product development, data acquisition andcommercial delivery.

 

*Medicsight Product Portfolio*

 

Ourproducts currently target 3 therapeutic areas, Colon, Lung and Heart. As wellas developing the CAD software we are looking at developing and marketing CARapplications in the colon and lung arenas.

 

CAR is a “joint-read” software product that is beingdeveloped for reviewing CT lung and colon scans.  These products are image analysissoftware tools that assist radiologists in evaluating lesions or nodules foundduring CT scans of the lung or colon.  Unlike current “second-read” software, inwhich software is employed after radiologists have completed their reviews,joint-read software enables the radiologist to review “unfiltered” imagesside-by-side and simultaneously with software-enhanced regions of interest. Fora radiologist reviewing up to 600 images from a single CT scan, the joint-readcapability saves time and aids in the evaluation of nodules.

 

There’sincreasing evidence in all three areas that early detection may lead toimproved life expectancy and this has been a core focus of our productdevelopment. However, our technology is applicable to many other diseases andwe are already starting to plan for this.

 

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

 

*Diagnostic or “Disease tracking” products*;these are products designed for symptomatic patients to track disease progressand monitor treatment effectiveness. The primary applications in this area areLung nodule tracking and Heart calcium scoring though the company believesthere will be a growing requirement for polyp tracking in the colon as CTcolonography becomes more established

 

“*Screening” products*; for populationscreening of asymptomatic patients. There is much evidence to demonstrate thatthe early detection of colon, lung and heart disease leads to improved lifeexpectancy.  Computer aided detection(“CAD”) CT will provide a cost effective solution in identifying these diseasesearly enough to significantly alter the economics of population screeningprograms in these areas.

 

*Business Development*

 

MS-PLChas received clearance from the United States Food and Drug Administration andEuropean CE certification for its Lung CAR software product, an image analysis software tool that assistsradiologists in evaluating lesions or nodules found during CT scans of the lung.MS-PLC’s Lung CAR is the first “joint-read” software available for CT lungscans.

 

LungCAR works by deploying a series of filters against the image data derived fromCT scans. The software has a number of automatic and manual measurement toolsto aid diagnosis, including 3D volume measurement and the ability to reviewfollow up scans and doubling times.

 

Operationally,we aim to keep expanding our databases to keep enhancing our current productareas and increasingly refine our diagnostic and treatment capabilities.

 

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Commercially,we aim to sign up one or more distribution partners. We commenced buildingrelationships with third party distributors at the end of 2003 and already wehave established strong levels of interest amongst both picture archivers(“PACS”) software companies and CT hardware manufacturers. We will not go downthe route of a direct sales force as we wish to work with the major players inthe medical market who share our vision of an integrated range of “intelligent”software products. MS-PLC is also reviewing other potential distributionchannels including the internet.

 

We areactively talking to a number of these companies at the moment. As we finalizedevelopment of a number of products over the coming months and complete theirvalidation studies, we aim to be in closing discussions towards the end of theyear.

 

Finally,we may look at partnerships and/or acquisitions that help expand our productoffering, our technical capability or our distribution potential.

 

*InternationalAdvisory Board*

 

TheCompany established a Medical Board to guide the early development of theCompany’s software for the pre-symptomatic detection of lung cancer, bowelcancer and coronary heart disease.  TheMedical Board advised on and monitored product development, clinical targetsand scanning operations and formed an important link with medical scientistsand clinicians. Chaired by Dr. John Costello, the Medical Board comprised:

 

•                  Sir Christopher Paine

•                  Dr. John Karani

•                  Dr. Mary Roddie

•                  Dr. Jamshid Dehmeshki

•                  Mr. Paul Samuel

 

TheMedical Board reported to MS-PLC’s Board through Dr Costello. Three specialistadvisory boards supported the Medical Board with responsibility for the lung,colon and heart products.

 

As theCompany’s strategy evolved, in particular, following the decision toconcentrate our efforts on software development and international productdistribution, we have acted to align our medical advisory mechanisms to the newcircumstances.  The Company has thereforeset up three International Advisory Boards (“IAB”).  The IABs will recruit individuals with therelevant expertise to become members and encourage the involvement of theradiologists undertaking beta testing of our products, providing data forsoftware development and participating in our scientific program.

 

Somemembers of the original Medical Board have accepted appointments to the newIABs. New members will include persons with relevant expertise from the UnitedStates, Germany, France, Italy, and Japan. The IABs are co-chaired by Dr. Costello, 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 International Advisory Board*

 

TheIABs will meet twice a year and fulfill the following roles:

 

•                  Advise on the development andapplication of Medicsight CT image analysis software in the territoriesrepresented.

•                  Provide links to users of CT imageanalysis systems in their respective territories.

•                  Assist in investor relations on aninternational basis.

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

•                  Act as advisors in relation toregulatory submissions for the Company’s products.

 

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•                  Advise on sources of library data (CTscans) to support training and development of the Company’s software.

 

*Objectivesof the International Advisory Board*

 

Theobjectives of the meetings may be varied from time-to-time, as agreed withMS-PLC, but will include the following:

 

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

•                  Ensure that the clinical developmentprogram is compatible with local clinical practice.

•                  Ensure that the clinical developmentprogram is compatible with local regulatory guidelines.

•                  Obtain insight into local issues withrespect to marketing of the Company’s products.

 

Wecannot assure you that the Company will be successful in commercializing theMedicsightTM system, or if such system is commercialized, that its use will beprofitable to the Company. We face obstacles in commercializing our coretechnology and in generating operating revenues such as, but not limited to,successful development, testing of and gaining regulatory approval for thetechnology.

 

TheCompany does not believe that there is currently any comparable system that iscompetitive with the MedicsightTM system. There are computer-aided diagnosticsystems that work in the field, but, in our view, such existing systems areoverly dependent on human resources to carry out the analysis, as none have thecapability of the MedicsightTM system.

 

TheCompany has had only a limited operating history upon which an evaluation ofits prospects can be made. The Company’s prospects must be considered keepingin mind the risks, expenses and difficulties frequently encountered in theestablishment of a new business in an ever-changing industry. There can be noassurance that the Company will be able to achieve profitable operations.

 

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

 

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

 

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

 

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

 

*Competitive Risks*. There are a number ofgroups and organizations, such as software companies in the medical imagingfield, scanner manufacturers, screening companies and other healthcareproviders, that have an interest in developing a competitive offering to theMedicsightTM system.  In addition thesecompetitors may have significantly greater resources than the Company. Wecannot make any assurance that they will not attempt to develop such offerings,that they will not be successful in developing such offerings or that anyofferings they do develop will not have a competitive edge versus theMedicsightTM system.

 

*Other Risks*. The Company’s ability todeliver the software could be hindered by such risks as the loss of keypersonnel, the patents being successfully challenged or credit facilitiesreduced or called in.

 

12

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**RESULTSOF OPERATIONS**

 

*Revenues*. For the six months endedJune 30, 2004 and the six months ended June 30, 2003 (as restated),the Company’s gross revenues from operations were $288,000 and $54,000,respectively. For the quarter ended June 30, 2004 and the quarter endedJune 30, 2003 (as restated), the Company’s gross revenues from operationswere $136,000 and $44,000, respectively. The Company’s revenue in the sixmonths ended June 30, 2004 and 2003 were derived from the Company’sLifesyneTM scanning operations.

 

*Selling, General and Administrative Expenses.* The Company’s selling, general andadministrative expenses for the six months and quarter ended June 30,2004, were $6,110,000 and $2,959,000 respectively as compared to $4,587,000 and$2,657,000 respectively for the six months and quarter ended June 30, 2003(as restated).  Professional fees,including consulting services, were $802,000 and $365,000 for the six monthsand quarter ended June 30, 2004 as compared to $568,000 and $188,000respectively for the six months and quarter ended June 30, 2003 (asrestated). Also included in the six months and quarter ended June 30, 2004were salaries and directors’ compensation of $2,757,000 and $1,394,000respectively, service charges and rates for property leasing of $271,000 and$193,000 respectively, and rent of $538,000 and $267,000 respectively.  The primary components of the increasedselling, general and administrative expenses for the six months quarter endedJune 30, 2004 were increases in staff costs, professional fees, marketingand clinical trials as the Company initiated its various marketing strategies.

 

*Research and Development cost*. TheCompany’s research and development cost for the six months and quarter endedJune 30, 2004, was $1,520.000 and $851,000 respectively as compared to$984,000 and $515,000 for the six months and quarter ended June 30, 2003(as restated) respectively. The Company’s research and development costs arecomprised of staff and consultancy costs expensed on the MedicsightTM system.

 

*Net Loss and Net Loss per Share.*  Net loss was $6,737,000 and $3,203,000 forthe six months and quarter ended June 30, 2004 compared to a net loss of$4,823,000 and $2,723,000 for the six months and quarter ended June 30,2003 (as restated).  Net loss per sharefor the six months and quarter ended June 30, 2004 was $0.23 and $0.10respectively, based on weighted average shares outstanding of 28,862,025 and31,388,185 respectively, compared to a net loss per share of $0.23 and $0.13for the six months and quarter ended June 30, 2003 (as restated), based onweighted average shares outstanding of 21,155,032 and 21,155,189 respectively.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

*Working Capital.*  At June 30, 2004, the Company had$12,609,000 in current assets. Cash and cash equivalents amounted to$11,234,000. Current liabilities were $3,030,000 at June 30, 2004.  At December 31, 2003, the Company had$2,144,000 in current assets and cash and cash equivalents amounted to$845,000.  Current liabilities were$6,540,000 at December 31, 2003. Working capital surplus/(deficit) atJune 30, 2004 was  $9,579,000, ascompared to $(4,396,000) at December 31, 2003.  The ratio of current assets to currentliabilities was 4.16 to 1.0 at June 30, 2004 as compared to 0.33 to 1.0 atDecember 31, 2003. The increase is primarily due to the increase in cashand cash equivalents resulting from funds received in the Company’s privateoffering.

 

*Net Increase in Cash and Cash Equivalents.*  During the six months ended June 30,2004, the Company’s cash and cash equivalents increased by $10,389,000. Thisincrease was primarily the result of cash flows received from shares issued bythe Company in excess of the net cash used in operating and investingactivities and repayments of debt. The Company used net cash of $7,744,000 inoperations. The Company received net cash of $18,218,000 in financingactivities and used $121,000 in investing activities.

 

13

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*Net Cash Used in Operations.*  The use of cash in operations of  $7,744,000 in the six months endedJune 30, 2004, was attributable to the Company’s relatively minimalrevenues at the same time that the Company incurred significant operating andsoftware research and development costs. These significant costs includedprofessional fees, salaries and director compensation, marketing, clinicaltrials and service charges associated with rental property and rent. TheCompany used cash in operations in the six months ended June 30, 2003 (asrestated) of  $5,825,000.

 

*Net Cash Used in Investing Activities.*  In the six months ended June 30, 2004,the Company had a net cash outflow from investing activities of $121,000. TheCompany used these funds to purchase additional fixed assets. In the six monthsended June 30, 2003 (as restated) the Company had a net cash outflow frominvesting activities of $526,000. The Company used the funds to purchaseadditional fixed assets.

 

*Net Cash Provided by Financing Activities.*  In the six months ended June 30, 2004,the Company had a net cash inflow from financing activities of $18,218,000. Thefunds received in the six months ended June 30, 2004, comprised of$20,931,000 from the Company’s private offerings of which $2,470,000 was usedto repay our debt facilities with Asia IT and the bank overdraft of $196,000was also repaid. For the six months ended June 30, 2003 (as restated), theCompany had a net cash inflow from financing activities of $4,633,000. Thefunds received comprised of $919,000 received from the private offering ofMedicsight stock, $1,401,000 received under our debt facilities with Asia ITand $2,259,000 received under the vendor guarantee.

 

*Stockholders’ Equity.* The Company’sstockholders’ equity at June 30, 2004 was $24,661,000, including anaccumulated deficit of $(170,205,000), as compared to $10,489,000 atDecember 31, 2003, including an accumulated deficit of $(163,468,000).Additional paid-in capital was $194,733,000 and $173,810,000, at June 30,2004 and December 31, 2003 respectively. The increase in stockholders’equity was a result of an increase in additional paid-in capital of $20,923,000resulting from the placement of the Company’s stock offset by an increase inaccumulated deficit of $6,737,000.

 

*Additional Capital.*  The Company may require additional capitalduring its fiscal year ending December 31, 2004 to implement its businessstrategies, including cash for (i) payment of increased operating expensessuch as salaries for additional employees; and (ii) further implementationof those business strategies. Such additional capital may be raised throughadditional public or private financing, as well as borrowings and otherresources. Currently, the Company has two available lines of credit.

 

OnDecember 15, 2000, the Company entered into an unsecured credit facilitywith Asia IT which provides a $20,000,000 line of credit. Such line of creditoriginally expired on December 31, 2001, but has been extended untilJune 30, 2005. Interest on advances under the credit facility accrues at2% above US LIBOR. The Company can draw down on this credit facility for itsfinancing requirements, upon approval by the Company’s Board of Directors andsubject to approval by Asia IT (such approval not to be unreasonably withheld).The Company is restricted from borrowing funds, directly or indirectly, otherthan through the credit facility with Asia IT, without the consent of Asia IT.The availability of the credit facility reduces upon the Company’s sale of anyof its investment assets. The amounts drawn and interest charged under thisfacility are repayable on demand or at the maturity of the facility.

 

OnNovember 20, 2001, Asia IT entered into a £10,000,000 ($16,000,000) creditfacility with MS-PLC.  Such facilitymatures in November 2005 and is secured by a lien on all assets ofMedicsight.  Interest on outstandingamounts accrues at 2% above GBP LIBOR. Pursuant to such credit facility, MS-PLC had covenanted to undertake apublic offering of its ordinary shares in an amount not less than £25,000,000not later than March 2002.  MS-PLCdid not complete such an offering but the facility nevertheless remains inplace. The loan is convertible into ordinary shares in MS-PLC on announcementof an Offer to Subscribe, Placing or other public offering of its ordinaryshares, at the same price per share as the offering price. Due to the privateoffering being undertaken by MS-PLC, the loan is currently convertible.

 

AtJune 30, 2004, the Company had drawn down $410,000 under the $20,000,000 facility with Asia IT, and MS-PLC haddrawn down $nil under its £10,000,000 ($16,000,000) facility with Asia IT.

 

14

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To theextent that additional capital is raised through the sale of equity orequity-related securities of the Company or its subsidiaries, the issuance ofsuch securities could result in dilution to the Company’s stockholders. Noassurance can be given, however, that the Company will have access to thecapital markets in the future, or that financing will be available onacceptable terms to satisfy the Company’s cash requirements to implement itsbusiness strategies. If we are unable to access the capital markets or obtainacceptable financing, our results of operations and financial conditions couldbe materially and adversely affected.  Wemay be required to raise substantial additional funds through other means.   The products derived from our proprietarysoftware, including the MedicsightTM system, are expected to account forsubstantially all of our revenues from operations in the foreseeablefuture.  Our technology has not yet beenfully commercialized and we have not begun to receive any significant revenuesfrom commercial operations.  We cannotassure our 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.* TheSecurities and Exchange Commission requested that all registrants list theirthree to five most “critical accounting policies” in the Management’sDiscussion and Analyses of Financial Condition and Results of Operations. TheSecurities and Exchange Commission indicated a “critical accounting policy” isone which is both important to the portrayal of the company’s financialcondition and results and requires management’s most difficult, subjective orcomplex judgments, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain. We believe that the followingaccounting policies fit the definition of critical accounting policies.

 

*Revenue Recognition.* We expect to earn ourrevenue primarily from software licenses and related services. Our revenue is recognizedin accordance with Statement of Position 97-2 (SOP 97-2), as amendedby Statement of Position 98-9. Currently the Company’s revenues derivefrom its scanning services operated by LifesyneTM. Scan revenue isrecognized when the service is delivered.

 

Therecognition of revenues from software licenses and related services willrequire more difficult and complex judgments. The terms of the licensecontract, long-term (over 12 months), short-term, cancelable, non-cancelable orper scan for example will affect the recognition of revenues from services suchas up-front fees as installation, activation and up-front license fees,on-going license fees, termination fees and maintenance fees. Where fees arereceived prior to any service being delivered the fees are deferred until therelated service has been delivered successfully and the revenue can then berecognized. Again if there are fees that relate to any “milestone” agreementsthese are deferred until the “milestone” has passed and then the revenue can berecognized.

 

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

 

*Research and 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 the lowerof unamortized cost or net realizable value. Capitalized costs are amortizedbased on current and future revenue for each product with an annual minimumequal to the straight-line amortization

 

15

----

 

over theremaining estimated economic life of the product. Amortization commences whenthe product is available for general release to customers.

 

TheCompany decided that capitalizing such expenditure was inappropriate because ofthe difficulty in assigning costs accurately to the various software productsand versions being developed as technical and development staff are moved fromproduct to product and version to version on a regular basis. Therefore theCompany has decided to expense all research and development costs. TheCompany’s research and development costs are comprised of staff and consultancycosts expensed on the MedicsightTM system.

 

*Impairment of Long-lived Assets and Long-lived Assets To BeDisposed of.* The Company evaluates the carrying value oflong-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. TheCompany’s assessment for impairment of an asset involves estimating theundiscounted cash flows expected to result from use of the asset and itseventual disposition. An impairment loss recognized is measured as the amountby which the carrying amount of the asset exceeds the fair value of the asset.

 

Calculatingthe estimated fair value of the asset involves significant judgments and avariety of assumptions. Judgments that the Company makes concerning theintangible acquired include assessing time and cost involved for development,time to market, risks of regulatory failure or obsolescence (due to market,environmental or technological advances for example). For calculating fairvalue based on discounted cash flows, we forecast future operating results andfuture cash flows, which includes long-term forecasts of revenue growth, grossmargins and capital expenditures.

 

*Impairment of Excess of Purchase Price Over Net AssetsAcquired.* The Company adopted SFAS No. 142 on January 1,2002.  Under this standard, goodwill willno longer be amortized over its estimated useful life, but will be tested forimpairment on 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.

 

Inconnection with the adoption of SFAS No. 142, we performed our initialimpairment analysis of goodwill and indefinite-lived intangible assets as ofJanuary 1, 2002. The implementation involved the determination of the fairvalue of each reporting unit, where a reporting unit is defined as an operatingsegment or one level below.

 

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

 

*Recent Accounting Pronouncements.*  In January 2003, the FASB issuedInterpretation No. 46, “Consolidation of Variable Interest Entities” (FIN No.46), which addresses consolidation by business enterprises of variable interestentities (“VIEs”).   FIN No.46 isapplicable immediately for VIEs created after January 31, 2003 and areeffective for reporting periods ending after December 15, 2003, for VIEscreated prior to February 1, 2003. In December 2003, the FASBpublished a revision to FIN 46 (“FIN 46R”) to clarify some of the provisions ofthe interpretation and to defer the effective date of implementation forcertain entities. Under the guidance of FIN 46R, public companies that haveinterests in VIE’s that are commonly referred to as special purpose entitiesare required to applythe provisions of FIN 46R for periods ending afterDecember 15, 2003. A public company that does not have any interests inspecial purpose entities but does have a variable interest in a VIE createdbefore February 1, 2003, must apply the provisions of FIN 46R by the endof the first interim or annual reporting period ending after March 14,2004. The adoption of FIN No. 46 did not have an effect on the consolidatedfinancial statements.

 

16

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*ContractualObligations*

 

TheCompany 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                 |       | $          | 358        |                       | $          | 99 |   | $ | 189 |   | $ | 70 |   | $ | — |   |
| Operating Lease Obligations               |       | 1,963      |       | 496                        |       | 1,340 |   | 127 |   | — |   |
| Total                                     |       | $          | 2,321      |                       | $          | 595 |   | $ | 1,529 |   | $ | 197 |   | $ | — |   |

 

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

 

**InterestRate Risk**

 

TheCompany’s exposure to market risk associated with changes in interest ratesrelates to its debt obligations. The Company has the following debt facilities,which are all repayable on demand:

 
| **Debt Holder**                 | ** ** | **Facility** | ** ** | **Draw Down** | ** ** | **Interest rate** | ** ** | **At****June 30** | ** ** |
|---------------------------------|------------|--------------|------------|---------------|------------|-------------------|------------|------------------------|------------|
|                            |       |         |       |          |       |              |       |                   |       |
| Asia IT Capital Investments Ltd |       | $            | 20,000,000 |          | $          | 410,000           |       | US Libor + 2%          |       | 4.47 | % |
|                            |       |         |       |          |       |              |       |                   |       |
| Asia IT Capital Investments Ltd |       | $            | 16,000,000 |          | $          | nil               |       | GBP Libor + 2%         |       | 7.28 | % |

 

Ahypothetical 100 basis point increase in interest rates would increase interestcost by approximately $4,000 per annum assuming no further draw downs orrepayments are made.

 

**Foreign Exchange Risk**

 

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

 

## **Item 4.**                     Controls andProcedures

 

*Evaluationof Disclosure Controls and Procedures*

 

Wemaintain controls and procedures designed to ensure that information requiredto be disclosed in this report is recorded, processed, accumulated andcommunicated to our management, including our chief executive officer and ourchief financial officer, to allow timely decisions regarding the requireddisclosure. Management necessarily applied its judgment in assessing the costsand benefits of such controls and procedures, which, by their nature, canprovide only reasonable assurance regarding management’s control objectives. AtJune 30, 2004, our management, with the participation of our chiefexecutive officer and chief financial officer, carried out an evaluation of theeffectiveness of the design and operation of these disclosure controls andprocedures. Our chief executive officer and chief financial officer concludedthat these disclosure controls and procedures are effective.

 

*Changesin Internal Controls*

 

Duringthe quarter ended June 30, 2004 the Company made no significant changes inour internal controls or in other factors that could significantly affect thesecontrols, nor did we take any corrective action, as the evaluation revealed nosignificant deficiencies or material weaknesses.

 

17

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# **PARTII**

 

## **Item 1.**                     LegalProceedings

###  

### There arecurrently no pending legal proceedings.

 

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

###  

### (a)                                  None.

###  

### (b)                                 None.

###  

### (c)                                  None.

###  

### (d)                                 Notapplicable.

## ** **

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

###  

### None.

 

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

###  

### None.

 

## **Item 5.**                       OtherInformation

###  

### None.

## ** **

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

###  

### (a)                                  Exhibits

###  

### 31.1                           Certificationpursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief ExecutiveOfficer - filed herewith).

 

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

 

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

 

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

 

### Reports on Form8-K

###  

### None.

###  

18

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**MEDICSIGHT, INC. AND SUBSIDIARIES**

 

**INDEX TO CONDENSED CONSOLIDATEDFINANCIALSTATEMENTS (UNAUDITED)AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, 2004**

 
| Condensed  Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and  December 31, 2003 (Audited)                                                                      | F-2          |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|
|                                                                                                                                                                                   |         |
| Condensed  Consolidated Statements of Operations for the Three Months Ended  June 30, 2004 (Unaudited) and the Three Months Ended June 30, 2003  (As restated and unaudited) | F-3          |
|                                                                                                                                                                                   |         |
| Condensed  Consolidated Statements of Operations for the Six Months Ended June 30,  2004 (Unaudited) and the Six Months Ended June 30, 2003 (As restated and  unaudited)     | F-4          |
|                                                                                                                                                                                   |         |
| Condensed  Consolidated Statement of Cash Flows for the Six Months Ended June 30,  2004 (Unaudited) and the Six Months Ended June 30, 2003 (As restated and  unaudited)      | F-5          |
|                                                                                                                                                                                   |         |
| Notes  to Condensed Consolidated Financial Statements                                                                                                                                  | F-6  to F-13 |

 

F-1

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In $ thousands)**

 
| ** **                                                                                                                            | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                            | ** ** | **(unaudited)**         | ** ** | **(audited)**               | ** ** |
| ASSETS                                                                                                                                |       |                    |       |                        |       |
| CURRENT ASSETS:                                                                                                                       |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                             |       | $                       | 11,234     |                        | $          | 845 |   |
| Accounts receivable                                                                                                                   |       | 22                      |       | 33                          |       |
| Other receivables                                                                                                                     |       | 65                      |       | 123                         |       |
| Prepaid expenses                                                                                                                      |       | 606                     |       | 539                         |       |
| Sales tax receivable                                                                                                                  |       | 682                     |       | 604                         |       |
| Total current assets                                                                                                                  |       | 12,609                  |       | 2,144                       |       |
|                                                                                                                                  |       |                    |       |                        |       |
| PROPERTY AND EQUIPMENT, at  cost, net of accumulated depreciation of $1,856 and $1,480, respectively                                  |       | 2,865                   |       | 3,033                       |       |
|                                                                                                                                  |       |                    |       |                        |       |
| INVESTMENTS, at cost                                                                                                                  |       | 429                     |       | 429                         |       |
|                                                                                                                                  |       |                    |       |                        |       |
| SECURITY DEPOSITS                                                                                                                     |       | 847                     |       | 843                         |       |
|                                                                                                                                  |       |                    |       |                        |       |
| EXCESS OF PURCHASE PRICE OVER  NET ASSETS ACQUIRED                                                                                    |       | 11,200                  |       | 11,200                      |       |
|                                                                                                                                  |       |                    |       |                        |       |
| Total assets                                                                                                                          |       | $                       | 27,950     |                        | $          | 17,649 |   |
|                                                                                                                                  |       |                    |       |                        |       |
| LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                            |       |                    |       |                        |       |
| CURRENT LIABILITIES:                                                                                                                  |       |                    |       |                        |       |
| Accounts payable                                                                                                                      |       | $                       | 1,936      |                        | $          | 2,342 |   |
| Accrued expenses                                                                                                                      |       | 410                     |       | 700                         |       |
| Accrued professional expenses                                                                                                         |       | 175                     |       | 326                         |       |
| Bank overdraft                                                                                                                        |       | —                  |       | 196                         |       |
| Line of credit – related party                                                                                                   |       | 410                     |       | 2,880                       |       |
| Current portion of obligations  under capital leases                                                                                  |       | 99                      |       | 96                          |       |
| Total current liabilities                                                                                                             |       | 3,030                   |       | 6,540                       |       |
| CAPITAL LEASE                                                                                                                         |       | 259                     |       | 306                         |       |
| Total liabilities                                                                                                                     |       | $                       | 3,289      |                        | $          | 6,846 |   |
|                                                                                                                                  |       |                    |       |                        |       |
| STOCKHOLDERS’ EQUITY:                                                                                                            |       |                    |       |                        |       |
| Common stock, $0.001 par  value, 40,000,000 shares authorized, 32,362,297 and 24,488,858 shares issued  and outstanding, respectively |       | 32                      |       | 24                          |       |
| Additional paid-in capital                                                                                                            |       | 194,733                 |       | 173,810                     |       |
| Cumulative foreign currency  translation adjustment                                                                                   |       | 101                     |       | 123                         |       |
| Accumulated deficit                                                                                                                   |       | (170,205                | )          | (163,468                    | )          |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                                       |       | 24,661                  |       | 10,489                      |       |
| Minority interest                                                                                                                     |       | —                  |       | 314                         |       |
|                                                                                                                                  |       | 24,661                  |       | 10,803                      |       |
| Total liabilities and  stockholders’ equity                                                                                      |       | $                       | 27,950     |                        | $          | 17,649 |   |

 

The accompanying notes are an integral part of these condensedstatements.

 

F-2

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(I****n $ thousands, except per share amounts)**

 
| ** **                                            | ** ** | **Three  Months  Ended  June 30, 2004** | ** ** | **Three  Months  Ended  June 30,2003** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                            | ** ** | **(unaudited)**                              | ** ** | **(as  restated and  unaudited)  Note 3**   | ** ** |
| ** **                                            | ** ** | ** **                                   | ** ** | ** **                                  | ** ** |
| REVENUES                                              |       | $                                            | 136        |                                        | $          | 44 | ** ** |
| ** **                                            | ** ** | ** **                                   | ** ** | ** **                                  | ** ** |
| EXPENSES:                                             |       |                                         |       |                                        |       |
| Selling, general and  administrative charges          |       | 2,959                                        |       | 2,657                                       |       |
| Research and development cost                         |       | 851                                          |       | 515                                         |       |
|                                                  |       |                                         |       |                                        |       |
|                                                  |       | 3,810                                        |       | 3,172                                       |       |
|                                                  |       |                                         |       |                                        |       |
| Net Loss before minority  interest                    |       | (3,675                                       | )          | (3,128                                      | )          |
|                                                  |       |                                         |       |                                        |       |
| MINORITY INTEREST                                     |       | 471                                          |       | 405                                         |       |
|                                                  |       |                                         |       |                                        |       |
| Net loss                                              |       | $                                            | (3,203     | )                                           | $          | (2,723 | ) |
|                                                  |       |                                         |       |                                        |       |
| PER SHARE DATA:                                       |       |                                         |       |                                        |       |
| Basic and diluted loss per  share                     |       | $                                            | (0.10      | )                                           | $          | (0.13 | ) |
|                                                  |       |                                         |       |                                        |       |
| Weighted average number of  common shares outstanding |       | 31,388,185                                   |       | 21,155,189                                  |       |

 

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

 

F-3

----

 
| ** **                                            | ** ** | **Six Months****Ended  June 30, 2004** | ** **   | **Six  Months  Ended  June 30, 2003** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|--------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **(unaudited)**                             | ** **   | **(as  restated and  unaudited)  Note 3**  | ** ** |
| ** **                                            | ** ** | ** **                                  | ** **   | ** **                                 | ** ** |
| REVENUES                                              |       | $                                           | 288          |                                       | $          | 54 | ** ** |
| ** **                                            | ** ** | ** **                                  | ** **   | ** **                                 | ** ** |
| EXPENSES:                                             |       |                                        |         |                                       |       |
| Selling, general and  administrative charges          |       | 6,110                                       |         | 4,587                                      |       |
| Research and development cost                         |       | 1,520                                       |         | 984                                        |       |
|                                                  |       |                                        |         |                                       |       |
|                                                  |       | 7,630                                       |         | 5,571                                      |       |
|                                                  |       |                                        |         |                                       |       |
| Net Loss before minority  interest                    |       | (7,342                                      | )            | (5,517                                     | )          |
|                                                  |       |                                        |         |                                       |       |
| MINORITY INTEREST                                     |       | 605                                         |         | 694                                        |       |
|                                                  |       |                                        |         |                                       |       |
| Net loss                                              |       | $                                           |  (6,737 | )                                          | $          |  (4,823 | ) |
|                                                  |       |                                        |         |                                       |       |
| PER SHARE DATA:                                       |       |                                        |         |                                       |       |
| Basic and diluted loss per  share                     |       | $                                           |  (0.23  | )                                          | $          |  (0.23 | ) |
|                                                  |       |                                        |         |                                       |       |
| Weighted average number of  common shares outstanding |       | 28,762,025                                  |         | 21,155,032                                 |       |

 

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

 

F-4

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOW**

**(In $ thousands)**

 
| ** **                                                                   | ** ** | **Six  Months  Ended  June 30, 2004** | ** ** | **Six  Months  Ended  June 30, 2003**  | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                   | ** ** | **(unaudited)**                            | ** ** | **(as  restated and  unaudited)****Note 3** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                        | ** ** | ** **                                 | ** ** | ** **                                  | ** ** |
| Net loss                                                                     |       | $                                          | (6,737     | )                                           | $          | (4,823 | ) |
| Adjustments  to reconcile net loss to net cash used  in operating activities |       |                                       |       |                                        |       |
| Depreciation                                                                 |       | 376                                        |       | 164                                         |       |
| Minority interest in net loss  of subsidiary                                 |       | (605                                       | )          | (694                                        | )          |
| (Increase)/decrease in assets                                                |       |                                       |       |                                        |       |
| Accounts receivable                                                          |       | 11                                         |       | (12                                         | )          |
| Prepaid expenses and other  current assets                                   |       | (67                                        | )          | (382                                        | )          |
| Sales tax receivable                                                         |       | (21                                        | )          | (230                                        | )          |
| Security deposits                                                            |       | —                                     |       | (743                                        | )          |
| Increase/(decrease) in liabilities                                           |       |                                       |       |                                        |       |
| Accounts payable                                                             |       | (352                                       | )          | 970                                         |       |
| Accrued expenses                                                             |       | (243                                       | )          | (81                                         | )          |
| Accrued professional expenses                                                |       | (106                                       | )          | 6                                           |       |
| Net cash used in operating  activities                                       |       | (7,744                                     | )          | (5,825                                      | )          |
|                                                                         |       |                                       |       |                                        |       |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                       |       |                                       |       |                                        |       |
| Purchase of fixed assets                                                     |       | (121                                       | )          | (526                                        | )          |
| Net cash used in investing  activities                                       |       | (121                                       | )          | (526                                        | )          |
|                                                                         |       |                                       |       |                                        |       |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                       |       |                                       |       |                                        |       |
| Principal payments under capital  lease obligations                          |       | (47                                        | )          | (34                                         | )          |
| Decrease of bank overdraft                                                   |       | (196                                       | )          | 88                                          |       |
| Proceeds from sale of common  stock                                          |       | 20,931                                     |       | 919                                         |       |
| Funds received under vendor  guarantee                                       |       | —                                     |       | 2,259                                       |       |
| (Decrease)/increase in short  term debt – related party                 |       | (2,470                                     | )          | 1,401                                       |       |
| Net cash provided by financing  activities                                   |       | 18,218                                     |       | 4,633                                       |       |
|                                                                         |       |                                       |       |                                        |       |
| Effects of exchange rates on  cash and cash equivalent                       |       | 36                                         |       | (60                                         | )          |
|                                                                         |       |                                       |       |                                        |       |
| NET CHANGE IN CASH & CASH  EQUIVALENTS                                   |       | 10,389                                     |       | (1,778                                      | )          |
|                                                                         |       |                                       |       |                                        |       |
| CASH & CASH EQUIVALENTS,  BEGINNING OF PERIOD                            |       | 845                                        |       | 1,778                                       |       |
|                                                                         |       |                                       |       |                                        |       |
| CASH & CASH EQUIVALENTS,  END OF PERIOD                                  |       | $                                          | 11,234     |                                        | $          | — |   |
|                                                                         |       |                                       |       |                                        |       |
| NON CASH FINANCING ACTIVITIES                                                |       |                                       |       |                                        |       |
| Capital lease obligations for equipment                                      |       | —                                     |       | —                                      |       |

 

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

 

F-5

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIALSTATEMENTS**

 

*(1)*                               *Formation and Business of the Company*

 

Medicsight,Inc. (formerly HTTP Technology, Inc.) and its subsidiaries are collectivelyreferred to in this Report as the “Company”. Our business objective is to conceive, develop and commercialize theMedicsightTM system (our state-of-the-art digital disease detectionsoftware system comprising MedicColon, MedicHeart, and MedicLung) through ourmajority-owned subsidiary, Medicsight PLC (“MS-PLC”).

 

Wewere originally incorporated as a Utah corporation in 1977. OnDecember 19, 2000, we entered into an Agreement and Plan of Merger withour wholly-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 toHTTP Technology, Inc., the Utah corporation and subsidiaries, if the eventoccurred prior to December 19, 2000.

 

*(2)*                               *Basis of Presentation*

 

Theaccompanying unaudited consolidated financial statements of the Company havebeen prepared pursuant to the rules of the Securities and Exchange Commission(the “SEC”). Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples in the United States have been condensed or omitted pursuant to suchrules and regulations. These unaudited consolidated financial statements shouldbe read in conjunction with the audited consolidated financial statements andnotes thereto included in the Company’s Annual Report on Form 10-K for theFiscal years ended December 31, 2003, 2002 (restated), 2001 (restated)filed on April 8, 2004. In the opinion of management, the accompanyingunaudited consolidated financial statements reflect all adjustments, which areof a normal recurring nature, necessary for a fair presentation of the resultsfor the periods presented. All significant inter-company transactions have beeneliminated in consolidation.

 

Theresults of operations presented for the six months and quarter endedJune 30, 2004, are not necessarily indicative of the results to beexpected for any other interim period or any future fiscal year.

 

TheCompany has incurred significant operating losses since inception.  As a result, the Company has generatednegative cash flows from operations, and has an accumulated deficit atJune 30, 2004.  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 currentlyseeking additional funding and are actively developing the technology in orderto bring it to market.  While the Companyis optimistic and believes appropriate actions are being taken, there can be noassurance, however, that the management’s efforts will be successful or thatthe products it markets will be accepted by consumers.

 

F-6

----

 

(3)                                  *Restatement of financial statements*

 

DuringFiscal 2003, the Company identified certain errors in its previously issuedquarterly financial statements relating to the impairment of an intangibleassets and the Company also revised its treatment of software development costsin the third quarter of Fiscal 2003.

 

As aresult, the Company has restated its previously issued financial statements forthe six months and quarter ended June 30, 2003.  A summary of the significant effects of therestatements is set forth below.

 

**MEDICSIGHT,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
| ** **                                           | ** ** | **Three months ended  June 30, 2003** | ** ** | **Three months ended  June 30, 2003** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
|                                                 |       | **(as previously reported)  $000’s**  |       | **(as restated)  $000’s**             |       |
|                                                 |       | ** **                                 |       | ** **                                 |       |
| REVENUES                                             |       | 44                                         |       | 44                                         |       |
|                                                 |       |                                       |       |                                       |       |
| EXPENSES:                                            |       |                                       |       |                                       |       |
| Selling, general and administrative charges          |       | 3,592                                      |       | 2,657                                      |       |
| Research and development cost                        |       | —                                     |       | 515                                        |       |
| Impairment of vendor guarantee                       |       | (697                                       | )          | —                                     |       |
|                                                 |       | 2,895                                      |       | 3,172                                      |       |
|                                                 |       |                                       |       |                                       |       |
| Net loss before minority loss                        |       | (2,851                                     | )          | (3,128                                     | )          |
|                                                 |       |                                       |       |                                       |       |
| MINORITY INTEREST                                    |       | 405                                        |       | 405                                        |       |
|                                                 |       |                                       |       |                                       |       |
| Net loss                                             |       | (2,446                                     | )          | (2,723                                     | )          |
| PER SHARE DATA:                                      |       |                                       |       |                                       |       |
| Basic and diluted loss per share                     |       | $                                          | (0.12      | )                                          | $          | (0.13 | ) |
| Weighted average number of common shares outstanding |       | 21,155,189                                 |       | 21,155,189                                 |       |
|                                                      |            |                                            |            |                                            |            |  |  |

 

F-7

----

 

**MEDICSIGHT,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
| ** **                                           | ** ** | **Six months ended  June 30, 2003**  | ** ** | **Six months ended  June 30, 2003** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                           | ** ** | **(as previously reported)  $000’s** | ** ** | **(as restated)  $000’s**           | ** ** |
| ** **                                           | ** ** | ** **                                | ** ** | ** **                               | ** ** |
| REVENUES                                             |       | $                                         | 54         |                                     | $          | 54 |   |
|                                                 |       |                                      |       |                                     |       |
| EXPENSES:                                            |       |                                      |       |                                     |       |
| Selling, general and administrative charges          |       | 6,569                                     |       | 4,587                                    |       |
| Research and development cost                        |       | —                                    |       | 984                                      |       |
| Impairment of vendor guarantee                       |       | (697                                      | )          | —                                   |       |
|                                                 |       | 5,872                                     |       | 5,571                                    |       |
|                                                 |       |                                      |       |                                     |       |
| Net loss before minority loss                        |       | (5,818                                    | )          | (5,517                                   | )          |
|                                                 |       |                                      |       |                                     |       |
| MINORITY INTEREST                                    |       | 694                                       |       | 694                                      |       |
|                                                 |       |                                      |       |                                     |       |
| Net loss                                             |       | $                                         | (5,124     | )                                        | $          | (4,823 | ) |
| PER SHARE DATA:                                      |       |                                      |       |                                     |       |
| Basic and diluted loss per share                     |       | $                                         | (0.24      | )                                        | $          | (0.23 | ) |
| Weighted average number of common shares outstanding |       | 21,155,032                                |       | 21,155,032                               |       |

 

F-8

----

 

**MEDICSIGHT,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOW**

 
| ** **                                                                  | ** ** | **Six months ended  June 30, 2003**  | ** ** | **Six months ended  June 30, 2003** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                  | ** ** | **(as previously reported)  $000’s** | ** ** | **(as restated)  $000’s**           | ** ** |
| ** **                                                                  | ** ** | ** **                                | ** ** | ** **                               | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                       |       |                                      |       |                                     |       |
|                                                                        |       |                                      |       |                                     |       |
| Net loss                                                                    |       | $                                         | (5,124     | )                                        | $          | (4,823 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities |       |                                      |       |                                     |       |
| Depreciation                                                                |       | 164                                       |       | 164                                      |       |
| Amortization of intangibles                                                 |       | 2,247                                     |       | —                                   |       |
| Impairment of vendor guarantee                                              |       | (697                                      | )          | —                                   |       |
| Minority interest in net earnings of subsidiary                             |       | (694                                      | )          | (694                                     | )          |
| (Increase)/decrease in assets                                               |       |                                      |       |                                     |       |
| Accounts receivable                                                         |       | (12                                       | )          | (12                                      | )          |
| Prepayments                                                                 |       | (382                                      | )          | (382                                     | )          |
| VAT receivable                                                              |       | (230                                      | )          | (230                                     | )          |
| Security deposits                                                           |       | (743                                      | )          | (743                                     | )          |
| Increase/(decrease) in assets                                               |       |                                      |       |                                     |       |
| Accounts payable                                                            |       | 970                                       |       | 970                                      |       |
| Accrued expenses                                                            |       | (81                                       | )          | (81                                      | )          |
| Accrued professional expenses                                               |       | 6                                         |       | 6                                        |       |
| Net cash used in operating activities                                       |       | (4,576                                    | )          | (5,825                                   | )          |
|                                                                        |       |                                      |       |                                     |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                       |       |                                      |       |                                     |       |
|                                                                        |       |                                      |       |                                     |       |
| Purchase of fixed assets                                                    |       | (526                                      | )          | (526                                     | )          |
| Software development costs                                                  |       | (1,249                                    | )          | —                                   |       |
| Net cash used in investing activities                                       |       | (1,775                                    | )          | (526                                     | )          |
|                                                                        |       |                                      |       |                                     |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                       |       |                                      |       |                                     |       |
|                                                                        |       |                                      |       |                                     |       |
| Principal  payments under capital lease obligations                         |       | (34                                       | )          | (34                                      | )          |
| Increase in bank  overdraft                                                 |       | 88                                        |       | 88                                       |       |
| Proceeds sale of  common stock                                              |       | 919                                       |       | 919                                      |       |
| Increase in  short term debt - related party                                |       | 1,401                                     |       | 1,401                                    |       |
| Funds received  under vendor guarantee                                      |       | 2,259                                     |       | 2,259                                    |       |
| Net cash provided by financing activities                                   |       | 4,633                                     |       | 4,633                                    |       |
|                                                                        |       |                                      |       |                                     |       |
| Effects of exchange rates on cash and cash  equivalents                     |       | (60                                       | )          | (60                                      | )          |
|                                                                        |       |                                      |       |                                     |       |
| NET CHANGE IN CASH & CASH EQUIVALENTS                                   |       | $                                         | (1,778     | )                                        | $          | (1,778 | ) |
|                                                                        |       |                                      |       |                                     |       |
| CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD                            |       | 1,778                                     |       | 1,778                                    |       |
|                                                                        |       |                                      |       |                                     |       |
| CASH & CASH EQUIVALENTS, END OF PERIOD                                  |       | $                                         | —     |                                     | $          | — |   |

 

F-9

----

 

**June 30, 2003**

 

***Research and Development*.**

 

Duringthe first six months of Fiscal 2003, inaccordance with Statement of Financial Accounting Standards (FAS) 86, *Accounting for the Costs of Computer Software to beSold, Leased, or Otherwise Marketed*, the Company capitalized certaincomputer software development costs. Technical feasibility was established oncompletion of working models for MedicHeart, MedicLung and MedicColon softwareproducts in January 2003. Subsequently, the Company capitalized costs of$1,249,000 in the six months ended June 30, 2003 under FAS 86. These costscapitalized comprised staff, consultants, regulatory and clinical trial costsspecific to the three products.

 

Subsequently the Company decided that thisaccounting treatment was inappropriate because of the difficulty in assigningcosts accurately to the various software products and versions being developedas technical and development staff are moved from product to product andversion to version on a regular basis. The Company has decided to expend allresearch and development costs in Fiscal 2003. The Company’s research anddevelopment costs for the six months and quarter ended June 30, 2003 of$984,000 and $515,000 respectively are comprised of staff and consultancy costsexpensed on the MedicsightTM system. The regulatory and clinical trial chargesfor the six months and quarter ended June 30, 2003 of $265,000 and$189,000 respectively are expensed in “Selling, general and administrativecharges”.

 

***Depreciation and AmortizationExpense.***

 

During Fiscal 2000, the Company acquired anintangible asset from the former parent of Insights consisting of technologyvalued at $22,470,000. Under SFAS No.142, this is considered an intangibleasset with a definite life of 5 years. Therefore the value of the asset wasamortized on a straight-line basis over this period.

 

The Company evaluates the carrying value oflong-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. TheCompany’s assessment for impairment of an asset involves estimating theundiscounted cash flows expected to result from use of the asset and itseventual disposition. An impairment loss recognized is measured as the amountby which the carrying amount of the asset exceeds the fair value of theasset.  During the third quarter of 2003the Company reviewed the carrying value of the core technology acquired fromInsights and decided that the core technology should be fully impaired.  This was based on the view that there were nofurther software applications apart from the medical imaging applicationscurrently being developed that could be derived from the core technology. TheCompany further decided that the impairment should be recorded as atDecember 31, 2002. In the six months and quarter ended June 30, 2003the Company had an amortization charges of $2,247,000 and $1,124,000respectively expensed in “Selling, general and administrative charges” relatingto the fully impaired technology which is no longer applicable.

 

F-10

----

 

***Impairment of vendor guarantee.***

 

The Vendor Guarantee arose from theacquisition of Core Ventures Limited (“Core”) and relates to an oral agreementbetween the Company and Dr Nill, that the proceeds of the sale of Dr Nill’s1,195,000 shares in the Company would be remitted to the Company under theterms of the Vendor Guarantee. These shares were sold in 2003 and the Companyreceived $3,689,000 net of commissions. At December 31, 2001 andDecember 31, 2002, the fair value attributed to the Vendor Guarantee wasbased on the weighted average share price. The Company reviewed the fair valueat December 31, 2002 and concluded that it would be more appropriate and betterunderstood if the fair value at December 31, 2002 reflected the fundsactually received in 2003. Therefore in the six months and quarter endedJune 30, 2003 the reduction in impairment charge of $697,000 is restatedas nil.

 

*(4)**                               Linesof Credit*

 

On December 15,2000, the Company entered into an unsecured credit facility with Asia IT, whichprovides a $20,000,000 line of credit. Such line of credit originally expiredon December 31, 2001, but has been extended until June 30, 2005. Intereston advances under the credit facility accrues at 2% above US LIBOR. The Companycan draw down on this credit facility for its financing requirements, uponapproval by the Company’s Board of Directors and subject to approval by Asia IT(such approval not to be unreasonably withheld). The Company is restricted fromborrowing funds, directly or indirectly, other than through the credit facilitywith Asia IT, without the consent of Asia IT. The availability of the creditfacility would be reduced upon the Company’s sale of any of its investmentassets. The amounts drawn and interest charged under this facility arerepayable on demand or at the maturity of the facility.

 

OnNovember 20, 2001, MS-PLC entered into a £10,000,000 ($16,000,000) creditfacility with Asia IT.  Such facilitymatures in November 2005 and is secured by a lien on all assets ofMedicsight.  Interest on outstandingamounts accrues at 2% above GBP LIBOR. Pursuant to such credit facility, MS-PLC had covenanted to undertake apublic offering of its ordinary shares in an amount not less than £25,000,000not later than March 2002.  MS-PLCdid not complete such an offering but the facility nevertheless remains inplace. The loan is convertible into ordinary shares in MS-PLC on announcementof an Offer to Subscribe, Placing or other public offering of its ordinaryshares, at the same price per share as the offering price. Due to the privateoffering being undertaken by MS-PLC, the loan is currently convertible.

 

AtJune 30, 2004, the Company had drawn down $410,000 under the $20,000,000facility with Asia IT, and MS-PLC had drawn down $nil under its £10,000,000($16,000,000) facility with Asia IT.

 

*(5)**                               Stockholders’Equity*

 

OnDecember 30, 2002, the Company effected a 1-for-3 reverse split (the“Split”) of its Common Stock.  As such,all share and per share information in the accompanying financial statementshave been restated to reflect the Split. On January 27, 2004 the Companyincreased its authorized share capital from 25,000,000 shares to 40,000,000shares.

 

Duringthe six months ended June 30, 2004 the Company issued approximately7,873,000 restricted shares of stock raising $20.93m as part of a privateplacement.

 

*(6)**                               Accountingfor Stock Based Compensation*

 

OnMarch 20, 2003, the Board of Directors of MS-PLC approved a stock optionplan for its employees and reserved 4,000,000 shares of its common stock forissuance upon exercise of options granted under this plan. On April 19,2003, the Remuneration Committee of MS-PLC also approved the stock option planand implemented it on April 30, 2003 by issuing options over 2,828,600shares to employees of MS-PLC. At June 30, 2004 only 20% of the optionsissued were exercisable under the plan.

 

TheCompany has elected to adopt the disclosure only provisions of Statement ofFinancial Accounting

 

F-11

----

 

 

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

 
| ** **                                     | ** ** | **Six  Months  Ended  June 30, 2004** | ** ** | **Six  Months  Ended  June, 2003**            | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                     | ** ** | **(unaudited)  $’000**                | ** ** | **(as  restated and  unaudited)  $’000** | ** ** |
| Net  loss as reported:                         |       | (6,737                                     | )          | (4,823                                        | )          |
|                                           |       |                                       |       |                                          |       |
| Fair value method of stock  based compensation |       | (44                                        | )          | —                                        |       |
|                                           |       |                                       |       |                                          |       |
| Proforma net loss                              |       | (6,781                                     | )          | (4,823                                        | )          |
|                                           |       |                                       |       |                                          |       |
| Reported earnings per common  share            |       |                                       |       |                                          |       |
| Basic and diluted                              |       | (0.23                                      | )          | (0.23                                         | )          |
| Proforma earnings per common  share            |       |                                       |       |                                          |       |
| Basic and diluted                              |       | (0.23                                      | )          | (0.23                                         | )          |

 

Thefair values of options granted were determined under the intrinsic value methodfor expense determined under the fair value based method, net of related taxeffects.

 

*(7)**                               Goodwilland Other Intangible Assets*

 

Goodwill

 

The Company adopted SFAS No. 142 effectiveJanuary 1, 2002. Under this standard, goodwill will no longer be amortizedover its estimated useful life, but will be tested for impairment on an annualbasis and whenever indicators of impairment arise.

 

The Goodwill of $11,200,000 arose from thefair value attributable to the share swap with General Nominees and Asia ITNominees whereby the Company issued 1,866,666 shares to General Nominees(1,674,894 shares) and Asia IT Nominees (191,772 shares) in return for7,000,000 MS-PLC shares held by General Nominees (6,280,852 shares) and Asia ITNominees (719,148 shares) respectively.

 

Priorto January 1, 2002, goodwill was amortized on a straight-line basis over 5years.

 

*(8)**                               SecurityDeposits*

 

AsMS-PLC occupies approximately 95% of 46 Berkeley Square it acquired thesecurity deposit on the offices for cash from International Cellulose CompanyLtd in February 2003. The value of the security deposit is £470,000($781,000) and is interest-bearing.

 

*(9)**                               LeaseCommitments*

 

TheCompany has entered into property leases for the Westminster and Ravenscourtcenters. Future

 

F-12

----

 

minimumobligations under these lease arrangements are as follows:

 
| **For the 12 months ending  June 30,** | ** ** | **Property  Leases** | ** ** |
|---------------------------------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **($’000)**     | ** ** |
| 2005                                        |       | 496                  |       |
| 2006                                        |       | 506                  |       |
| 2007                                        |       | 509                  |       |
| 2008                                        |       | 325                  |       |
| 2009 and thereafter                         |       | 127                  |       |

 

*(10)**                        MajorCustomers*

 

TheCompany’s revenue in the six months ended June 30, 2004 and 2003 wasderived from the Company’s LifesyneTM scanning operations.

 

*(11)**                        ComprehensiveIncome*

 

As ofJune 30, 2004 and the six months and quarter then ended, comprehensiveincome is comprised of a net loss from operations and the net effect of foreigncurrency translation adjustments. This comprised a net loss of $6,737,000 and$3,203,000 and foreign currency translation adjustments of $22,000 and$190,000, resulting in comprehensive loss of $6,759,000 and $3,393,000, respectively.

 

*(12)**                        RecentAccounting Pronouncements*

 

InJanuary 2003, the FASB issued Interpretation No. 46, “Consolidation ofVariable Interest Entities” (FIN No. 46), which addresses consolidation bybusiness enterprises of variable interest entities (“VIEs”).   FIN No.46 is applicable immediately for VIEscreated after January 31, 2003 and are effective for reporting periods endingafter December 15, 2003, for VIEs created prior to February 1, 2003.In December 2003, the FASB published a revision to FIN 46 (“FIN 46R”) toclarify some of the provisions of the interpretation and to defer the effectivedate of implementation for certain entities. Under the guidance of FIN 46R,public companies that have interests in VIE’s that are commonly referred to asspecial purpose entities are required to applythe provisions of FIN 46R forperiods ending after December 15, 2003. A public company that does nothave any interests in special purpose entities but does have a variableinterest in a VIE created before February 1, 2003, must apply theprovisions of FIN 46R by the end of the first interim or annual reportingperiod ending after March 14, 2004. The adoption of FIN No. 46 did nothave an effect on the consolidated financial statements.

 

F-13

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SIGNATURE

 

Inaccordance with the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                  | MEDICSIGHT, INC. |
|-----------------------|------------------|
|                  |             |   |
|                  |             |   |
|                  | By:              | /s/STEPHEN  FORSYTH |   |
|                  |             | Stephen Forsyth |
|                  |             | Chief Executive  Officer |
|                  |             |   |
|                  | By:              | /s/PAUL GOTHARD |   |
|                  |             | Paul Gothard |
|                  |             | Chief Financial  Officer |
|                  |             |   |
|                  |             |   |
| August 13,  2004 |             |   |

 

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